Exhibit 13
CAPITAL CORP of the WEST
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 16,302,000 $ 12,969,000 $ 10,795,000
Interest on deposits with other financial institutions 127,000 -- --
Interest on investment securities held to maturity:
Taxable 60,000 34,000 413,000
Non-taxable -- -- 272,000
Interest on investment securities available for sale:
Taxable 2,409,000 2,185,000 1,066,000
Non-taxable 246,000 327,000 --
Interest on federal funds sold 207,000 358,000 261,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 19,351,000 15,873,000 12,807,000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Negotiable orders of withdrawal 268,000 239,000 237,000
Savings 4,350,000 4,213,000 2,298,000
Time, under $100,000 1,808,000 950,000 1,040,000
Time, $100,000 and over 359.000 304,000 272,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 6,785,000 5,706,000 3,847,000
- ------------------------------------------------------------------------------------------------------------------------------------
Other 80,000 11,000 3,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,865,000 5,717,000 3,850,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,486,000 10,156,000 8,957,000
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,513,000 228,000 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 10,973,000 9,928,000 8,957,000
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (loss):
Service charges on
deposit accounts 1,274,000 920,000 900,000
Income from real estate held for sale or
development 508,000 88,000 14,000
Provision for loss on real estate held for sale or
development -- (2,881,000) (798,000)
Gain on sale of premises and equipment -- -- 277,000
Other 1,153,000 649,000 412,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (loss) 2,935,000 (1,224,000) 805,000
- ------------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and related benefits 5,283,000 4,161,000 3,540,000
Premises and occupancy 835,000 612,000 587,000
Equipment 1,022,000 789,000 534,000
Bank assessments 48,000 183,000 394,000
Professional fees 755,000 404,000 299,000
Supplies 292,000 234,000 124,000
Marketing 370,000 212,000 250,000
Other 2,131,000 1,551,000 1,195,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 10,736,000 8,146,000 6,923,000
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,172,000 558,000 2,839,000
Provision for income taxes 1,163,000 223,000 1,103,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,009,000 $ 335,000 $ 1,736,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.27 $ .24 $ 1.24
====================================================================================================================================
See accompanying notes to Consolidated Financial Statements.
9
CAPITAL CORP of the WEST
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and noninterest-bearing deposits in other banks $ 12,982,000 $ 18,967,000
Federal funds sold 3,735,000 --
Time deposits at other financial institutions 3,101,000 --
Investment securities available for sale at fair value 43,378,000 45,302,000
Mortgage loans held for sale 880,000 501,000
Loans, net 180,455,000 132,035,000
Interest receivable 1,879,000 1,860,000
Premises and equipment, net 6,266,000 4,138,000
Other assets 13,313,000 6,230,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 265,989,000 $ 209,033,000
====================================================================================================================================
Liabilities
Deposits:
Noninterest-bearing demand $ 39,157,000 $ 39,726,000
Negotiable orders of withdrawal 34,303,000 29,019,000
Savings 111,285,000 95,537,000
Time, under $100,000 46,990,000 21,917,000
Time, $100,000 and over 6,610,000 6,402,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 238,345,000 192,601,000
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued interest, taxes and other liabilities 6,670,000 1,339,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 245,015,000 193,940,000
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares authorized;
none outstanding -- --
Common stock, no par value; 20,000,000 shares authorized;
1,734,474 and 1,334,956 shares issued and outstanding 15,321,000 9,870,000
Retained earnings 5,722,000 4,911,000
Investment securities unrealized (losses) gains, net (69,000) 312,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,974,000 15,093,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 265,989,000 $ 209,033,000
====================================================================================================================================
See accompanying notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY Common Stock
-----------------------------------------------------------------------------
Number Unrealized
of Retained Securities Gains
Shares Amount Earnings (Losses), net Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1993 1,002,360 $ 5,477,000 $ 7,156,000 $ -- $ 12,633,000
====================================================================================================================================
15% stock dividend, including payment
for fractional shares 149,966 1,875,000 1,880,000) -- (5,000)
Exercise of stock options 7,560 73,000 -- -- 73,000
Investment securities unrealized losses,
net of tax effect of $227,000 -- -- -- (355,000) (355,000)
Net income -- -- 1,736,000 -- 1,736,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1994 1,159,886 7,425,000 7,012,000 (355,000) 14,082,000
====================================================================================================================================
15% stock dividend, including payment
for fractional shares 173,570 2,430,000 (2,436,000) -- (6,000)
Exercise of stock options 1,500 15,000 -- -- 15,000
Net change in fair value of investment
securities, net of tax effect of $427,000 -- -- -- 667,000 667,000
Net income -- -- 335,000 -- 335,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1995 1,334,956 9,870,000 4,911,000 312,000 15,093,000
====================================================================================================================================
5% stock dividend and $.05 per share cash dividend,
including payment for fractional shares 82,384 1,112,000 (1,198,000) -- (86,000)
Exercise of stock options 20,739 208,000 -- -- 208,000
Issuance of shares pursuant to 401K & ESOP plans 11,817 162,000 -- -- 162,000
Acquisition of Town & Country Finance & Thrift 284,578 3,969,000 -- -- 3,969,000
Change in fair value of investment
securities, net of tax effect of ($247,000) -- -- -- (381,000) (381,000)
Net Income -- -- 2,009,000 -- 2,009,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balances - December 31, 1996 1,734,474 $ 15,321,000 $ 5,722,000 $ (69,000) $ 20,974,000
====================================================================================================================================
See accompanying notes to Consolidated Financial Statements.
10
CAPITAL CORP of the WEST
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 2,009,000 $ 335,000 $ 1,736,000
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Provision for loan losses 1,513,000 228,000 --
Depreciation, amortization and accretion, net 1,023,000 860,000 707,000
Provision for deferred income taxes (327,000) (1,191,000) (235,000)
Gain on sale of premises and equipment -- -- (277,000)
Gain on sale of real estate held for sale (348,000) -- --
Net increase in interest receivable
and other assets (5,044,000) (3,164,000) (1,015,000)
Net decrease (increase) in mortgage loans held for sale (376,000) 2,241,000 (1,583,000)
Net increase in deferred loan fees 54,000 31,000 63,000
Net increase (decrease) in accrued interest payable and
other liabilities 1,330,000 499,000 (82,000)
Provision for loss on real estate held for
sale or development -- 2,881,000 798,000
Net cash (used) provided by operating activities (166,000) 2,720,000 112,000
Investing activities:
Investment security purchases (26,993,000) (26,622,000) (23,494,000)
Proceeds from maturities of investment securities 17,599,000 15,022,000 9,578,000
Proceeds from sales of investment securities 14,590,000 3,012,000 --
Proceeds from sales of commercial and real estate loans 3,230,000 1,037,000 1,691,000
Net increase in loans (35,017,000) (21,379,000) (8,345,000)
Purchases of premises and equipment (2,768,000) (1,719,000) (1,501,000)
Proceeds from sales of premises and equipment 9,000 71,000 739,000
Construction of real estate held for sale
or development (417,000) (622,000) (916,000)
Proceeds from sale of real estate held for sale
or development 765,000 1,547,000 1,346,000
Purchase of subsidiary (183,000) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (29,185,000) (29,653,000) (20,902,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand, NOW and savings deposits 13,812,000 26,004,000 30,351,000
Net increase (decrease) in certificates of deposit 9,109,000 3,397,000 (8,882,000)
Net increase in other borrowings 3,896,000 -- 107,000
Issued shares for benefit plan purchases 162,000 -- --
Exercise of stock options 208,000 15,000 73,000
Fractional shares from stock dividends (86,000) (6,000) (5,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,101,000 29,410,000 21,644,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net(decrease) increase in cash and cash equivalents (2,250,000) 2,477,000 854,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 18,967,000 16,490,000 15,636,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 16,717,000 $ 18,967,000 16,490,000
====================================================================================================================================
See accompanying notes to Consolidated Financial Statements
11
CAPITAL CORP of the WEST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
1996, 1995, 1994
NOTE 1. Summary of Significant Accounting Policies Principles of Consolidation:
The consolidated financial statements of Capital Corp of the West (the
"Company") include its subsidiaries, County Bank (the "Bank"), Town & Country
Finance and Thrift (the "Thrift") and Capital West Group. Effective June 28,
1996, the Company consummated the purchase of the Thrift. The transaction
resulted in 284,578 shares of stock being issued and $1,493,000 being disbursed
to the shareholders of the Thrift. The total purchase price was $5,823,000. The
Thrift is licensed by the California Department of Corporations as an industrial
loan company, also known as a thrift and loan company. The purchase was
accounted for under the purchase method of accounting. All of the Thrift's
operations since June 28, 1996 have been included in these consolidated
financial statements.
A summary of the net assets acquired is set forth in the following table:
Assets Acquired:
Cash & cash equivalents $ 1,310,000
Time deposits at other financial institutions 6,554,000
Loans, net 18,203,000
Interest receivable 60,000
Premises and equipment 212,000
Other assets 114,000
Total assets acquired $26,453,000
- --------------------------------------------------------------------------------
Liabilities Assumed:
Deposits $22,823,000
Other liabilities 105,000
Total liabilities assumed 22,928,000
Net Assets Acquired $ 3,525,000
- --------------------------------------------------------------------------------
The total purchase price was allocated to the tangible and identifiable
intangible assets and liabilities of the Thrift based on their respective fair
values and the remainder was allocated to goodwill. The following adjustments
were made to allocate the purchase price of the Thrift: equity of the Thrift
$3,525,000; fair value adjustments to loans ($185,000); core deposit intangible
$460,000; and goodwill $2,023,000. The fair value adjustments are amortized
against (accreted to) net income as follows: fair value adjustment to loans: 3
years; core deposit intangible: 10 years; goodwill: 18 years. The amortization
of goodwill will be evaluated periodically in accordance with Statement of
Financial Accounting Standards No.121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
In April of 1996, the Company formed a new subsidiary that engages in
financial institution advisory services, Capital West Group. The Bank has two
wholly owned subsidiaries, Merced Area Investment and Development, Inc. ("MAID")
and another inactive subsidiary. All references herein to the Company include
the Bank, the Thrift, Capital West Group and the Bank's subsidiaries unless the
context otherwise requires. All significant intercompany accounts and
transactions have been eliminated in preparing these consolidated financial
statements.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and prevailing practices in the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenue and
expense for the period. Actual results could differ from those estimates applied
in the preparation of the consolidated financial statements.
Cash and Cash Equivalents: The Company maintains deposit balances with various
banks which are necessary for check collection and account activity charges.
Cash in excess of immediate requirements is invested in federal funds sold or
other short term investments. Generally, federal funds are sold for periods from
one to thirty days. Cash, noninterest-bearing deposits in other banks and
federal funds sold are considered to be cash and cash equivalents for the
purposes of the consolidated statements of cash flows. At December 31, 1996, the
Company's average cash reserve balances as required by the Federal Reserve Bank
were approximately $2,190,000. The Company maintained sufficient balances of
vault cash to satisfy its reserve requirements.
Investment Securities: Investment securities at December 3 1, 1996 and 1995
consist of U.S. Treasury and U.S. Government agency obligations, municipal
securities and mortgage-backed securities. At the time of purchase of a
security, the Company designates the security as held-to-maturity or as
available-for-sale, based on its investment objectives, operational needs and
intent. The Company does not purchase securities with the intent of actively
trading them. Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with unrealized holding
gains and losses, net of the related tax effect, and are reported as a separate
component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security. No such declines have occurred.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using a method which approximates the
effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for deter-mining the cost of securities
sold.
Mortgage Loans Held for Sale: Real estate mortgage loans held for sale are
carried at the lower of cost or market at the balance sheet date or the date on
which investors have committed to purchase such loans.
Loans: Loans are carried at the principal amount outstanding, net of deferred
origination fees, less an allowance for loan losses. During 1995, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for the Impairment of a Loan as amended by Statement No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures (SFAS 114). Under SFAS 114, an impaired loan is measured based upon
the present value of future cash flows discounted at the loan's effective rate,
the loan's observable market price, or the fair value of collateral if the loan
is collateral dependent. Interest on impaired loans is recognized on a cash
basis. SFAS 114 does not apply to large groups of small balance homogenous loans
that are collec-tively evaluated for impairment.
The recognition of interest income on a loan is discontinued, and previously
accrued interest is reversed, 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, remains collectible. Interest is subsequently
recognized only as received until the loan is returned to accrual status.
Nonrefundable fees and related direct costs associated with the origination or
purchase of loans are deferred and are amortized into interest income over the
loan term using a method which approximates the interest method.
Allowance for Loan Losses: The allowance for loan losses represents management's
recognition of the risks assumed when extending credit and its evaluation of
the quality of the loan portfolio. The allowance is maintained at the level
considered to be adequate for potential loan
12
CAPITAL CORP of the WEST
losses based on management's assessment of various factors affecting the loan
portfolio, which include a review of problem loans, business conditions and an
overall evaluation of the quality of the portfolio. The allowance is increased
by provisions for loan losses charged to operations and reduced by loans charged
to the allowance, net of recoveries. The allowance for loan losses is a
subjective estimation and may be adjusted in the future depending on economic
conditions. Also regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgments about information
available to them at the time of an examination.
Loan Servicing Income: The Company services both the sold and retained portions
of United States Small Business Administration (SBA) loans and a portfolio of
mortgage loans. Servicing income is realized through the retention of an ongoing
rate differential between the rate paid by the borrower to the Company and the
rate paid by the Company to the investor in the loan.
Premises and Equipment: Premises and equipment are stated at cost and
depreciated on the straight-line method over the estimated useful lives of the
assets as follows:
Buildings - 35 years Leasehold improvements - term of lease
Furniture and equipment - 3 to 15 years
Real Estate Held for Sale or Development: Real estate held for sale or
development is recorded at the lower of cost or net realizable value.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property sold
and the terms of the sale. Under certain circumstances, revenue recognition may
be deferred until these criteria are met.
Other Real Estate: In accordance with the provisions of the Statement of
Financial Account Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, other real estate acquired
through foreclosure is carried at the lower of cost or fair value less estimated
costs to sell at the date of foreclosure. Fair value of other real estate is
determined based on an appraisal of the property. Credit losses arising from the
acquisition of such properties are charged against the allowance for possible
loan losses. Any subsequent costs or losses are charged against income when
incurred.
Investment Tax Credits: The Company has investments in limited partnerships in
low income affordable housing which provides the investor affordable housing
income tax credits. As an investor in these partnerships, the Company receives
tax benefits in the form of tax deductions from partnership operating losses and
income tax credits. These income tax credits are earned over a 10-year period as
a result of the investment meeting certain criteria and are subject to recapture
over a 15-year period. The expected benefit resulting from the affordable
housing income tax credits is recognized in the period in which the tax benefit
is recognized in the Company's consolidated tax returns. These investments are
accounted for using the cost method. These investments are evaluated at each
reporting period for impairment. The Bank had investments in these partnerships
of $2,700,000 and $1,701,000 as of December 31, 1996 and 1995 respectively.
Deferred compensation: The Company has purchased single premium universal life
insurance policies in conjunction with implementation of salary continuation
plans for certain members of management and the Board of Directors. The Company
is the owner and beneficiary of these plans. The cash surrender value of the
insurance policies is recorded in other assets in accordance with Financial
Accounting Standards Board Technical Bulletin No. 85-4, Accounting For Purchases
of Life Insurance. Income from the policy is recorded in other income and the
load, mortality and surrender charges have been recorded in other expenses. The
accrued liability is recorded to reflect the present value of the expected
retirement benefits. The balance of these life insurance policies was $3,134,000
and $1,290,000 as of December 31, 1996 and 1995 respectively.
Income Taxes: The Company files a consolidated federal income tax return and a
combined state franchise tax return. The provision for income taxes includes
federal income and state franchise taxes. Income tax expense is allocated to
each entity of the Company based upon the analyses of the tax consequences of
each company on a stand alone basis.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Stock Option Plan: Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Per Share Information: Per share information is based on the weighted average
number of shares of common stock outstanding during the periods presented after
giving retroactive effect to stock dividends.
NOTE 2: Investment Securities
The carrying value and estimated fair value for each category of investment
securities at December 31 are as follows:
Gross Gross Estimated
1996 Amortized cost unrealized gains unrealized losses fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury & U.S. government
agencies & corporations $38,653,000 $ 190,000 $ 381,000 $38,462,000
- ------------------------------------------------------------------------------------------------------------------------------------
State & political subdivisions 4,196,000 100,000 25,000 4,271,000
Total debt securities 42,849,000 290,000 406,000 42,733,000
Equity securities 645,000 -- -- 645,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $43,494,000 $ 290,000 $ 406,000 $43,378,000
====================================================================================================================================
1995
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Treasury & U.S. government
agencies & corporations $40,055,000 $ 437,000 $ 39,000 $40,453,000
- ------------------------------------------------------------------------------------------------------------------------------------
States & political subdivisions 4,183,000 133,000 19,000 4,297,000
Total debt securities 44,238,000 570,000 58,000 44,750,000
Equity securities 552,000 -- -- 552,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $44,790,000 $ 570,000 $ 58,000 $45,302,000
====================================================================================================================================
13
CAPITAL CORP of the WEST
The change in the net unrealized holding gain on available for sale
securities during 1996 was $628,000. At December 31, 1996 and 1995, investment
securities with carrying values of approximately $16,678,000 and $18,157,000,
respectively, were pledged as collateral for deposits of public funds and
government deposits and for the Bank's use of the Federal Reserve Bank's
discount window and Federal Home Loan Bank line of credit. The Bank is a member
of the Federal Home Loan Bank and has purchased $645,000 and $552,000 of Federal
Home Loan Bank stock as of December 31, 1996 and 1995 respectively.
For the years ended December 31, 1996 and 1995, the proceeds from the sale of
securities were $14,590,000 and $3,012,000, respectively. There were no
securities sold in 1994. The Bank recognized net gains or losses on the sale of
investment securities of approximately $11,000 in gains in 1996 and $3,000 in
losses in 1995, respectively.
The carrying and estimated fair values of debt securities at December 31,
1996 by contractual maturity, are shown on the following table. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment notice.
Estimated
1996 Amortized Cost Fair Value
- --------------------------------------------------------------------------------
Available-for-Sale Debt Securities:
Due in one year or less $ 981,000 $ 996,000
Due after one year through five years 8,894,000 8,922,000
Due after five years through ten years 7,849,000 7,774,000
Due after ten years 4,400,000 4,290,000
Mortgage-backed securities 20,725,000 20,751,000
- --------------------------------------------------------------------------------
Total Debt securities $42,849,000 $42,733,000
================================================================================
NOTE 3: Loans
Loans outstanding at December 31 consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Commercial, financial and agricultural $ 71,786,000 $ 65,563,000
Real Estate:
Mortgage 57,098,000 42,128,000
Construction 13,923,000 12,006,000
Consumer Loans 40,440,000 14,039,000
- --------------------------------------------------------------------------------
183,247,000 133,736,000
Less allowance for loan losses 2,792,000 1,701,000
- --------------------------------------------------------------------------------
$180,455,000 $132,035,000
================================================================================
These loans are net of deferred loan fees of $765,000 in 1996 and $708,000 in
1995. The amount of nonaccrual loans at December 31, 1996 is $4,968,000
($4,626,000 at December 31, 1995). Impaired loans are loans for which it is
probable that the Company will not be able to collect all amounts due. As of
December 31, 1996, the Company had outstanding balances of $7,020,000 in
impaired loans which had specific allowances for possible loss of $1,827,000.
The average outstanding balance of impaired loans for the year ended December
31, 1996 was approximately $6,248,000. Of these impaired loans, $5,090,000 are
loans that have been restructured. This compares with $4,326,000 in impaired
loans which had specific allowances for possible loss of $605,000 and an average
outstanding balance for the year ending December 31, 1995 of $2,165,000.
Foregone interest on nonaccrual loans was approximately $497,000 and $25,000 for
the years ending December 31, 1996 and 1995 respectively.
Following is a summary of changes in the allowance for loan losses during the
years ended December 31:
1996 1995 1994
- --------------------------------------------------------------------------------
Balance - beginning of year $ 1,701,000 $ 1,621,000 $ 1,747,000
Due to acquisition of Thrift 148,000 -- --
Losses charged to the allowance (658,000) (223,000) (248,000)
Recoveries of amounts charged off 88,000 75,000 122,000
Provision charged to operations 1,513,000 228,000 --
- --------------------------------------------------------------------------------
Balance - end of year $ 2,792,000 $ 1,701,000 $ 1,621,000
================================================================================
In the ordinary course of business, the Company has made loans to certain
directors and officers and their related businesses. In management's opinion,
these loans were granted on substantially the same terms, including interest
rates and collateral, as those prevailing on comparable transactions with
unrelated parties, and do not involve more than the normal risk of
collectibility. These loans are summarized below:
1996 1995
- --------------------------------------------------------------------------------
Balance - beginning of year $ 675,000 $ 497,000
Loan advances and renewals 511,000 633,000
Loans matured or collected (613,000) (455,000)
- --------------------------------------------------------------------------------
Balance - end of year $ 573,000 $ 675,000
================================================================================
NOTE 4. Premises and Equipment Premises and equipment consists of the following
at December 31:
1996 1995
- --------------------------------------------------------------------------------
Land $ 1,139,000 $ 955,000
Buildings 2,979,000 1,744,000
Leasehold improvements 887,000 725,000
Furniture and equipment 6,363,000 4,505,000
- --------------------------------------------------------------------------------
11,368,000 7,929,000
Less accumulated depreciation and
amortization 5,102,000 3,791,000
- --------------------------------------------------------------------------------
$ 6,266,000 $ 4,138,000
================================================================================
14
CAPITAL CORP of the WEST
Included in the totals on the previous page for December 31, 1996 is
construction in progress for the new branch and administrative facilities in
downtown Merced and the branch under construction in Turlock totaling
$1,428,000.
NOTE 5: Real Estate Operations
As of December 31, 1996, MAID held two real estate projects, including
improved and unimproved land. Based on the general state of the local real
estate climate, the Bank reduced its carrying value of its remaining projects to
zero as of December 31, 1995. Total real estate write downs were $2,881,000 in
1995 and $798,000 in 1994.
Summarized below is condensed financial information of MAID:
Condensed December 31,
Balance Sheets 1996 1995
- --------------------------------------------------------------------------------
Assets:
Cash on deposit with the Bank $ 481,000 $1,359,000
Notes receivable and other 103,000 --
- --------------------------------------------------------------------------------
$ 584,000 $1,359,000
Liabilities and Shareholder's equity:
Accounts payable and other $ 298,000 $ 296,000
Shareholder's equity 286,000 1,063,000
- --------------------------------------------------------------------------------
$ 584,000 $1,359,000
================================================================================
Condensed Statement December 31,
of Operations 1996 1995
- --------------------------------------------------------------------------------
Revenues $ 812,000 $ 1,643,000
Expenses 287,000 4,437,000
- --------------------------------------------------------------------------------
505,000 (2,794,000)
Other, net (81,000) 94,000)
Income (loss) before
income taxes $ 424,000 $(2,888,000)
================================================================================
NOTE 6. Income Taxes
The provision for income taxes for the years ended December 31 is comprised of
the following:
1996 Federal State Total
- --------------------------------------------------------------------------------
Current $ 1,049,000 $ 441,000 $ 1,490,000
Deferred (283,000) (44,000) (327,000)
- --------------------------------------------------------------------------------
$ 766,000 $ 397,000 $ 1,163,000
1995
- --------------------------------------------------------------------------------
Current $ 1,020,000 $ 394,000 $ 1,414,000
Deferred (860,000) (331,000) (1,191,000)
- --------------------------------------------------------------------------------
$ 160,000 $ 63,000 $ 223,000
1994
- --------------------------------------------------------------------------------
Current $ 972,000 $ 366,000 $ 1,338,000
Deferred (204,000) (31,000) (235,000)
- --------------------------------------------------------------------------------
$ 768,000 $ 335,000 $ 1,103,000
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 consists of the following:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
State franchise tax $ 162,000 $ 115,000
Real estate subsidiary 1,822,000 2,176,000
Allowance for loan losses 804,000 535,000
Investment securities unrealized losses 47,000 --
Nonaccrual interest 335,000 --
Other 134,000 183,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 3,301,000 3,009,000
Less valuation allowance (170,000) (170,000)
- --------------------------------------------------------------------------------
Deferred tax assets $ 3,134,000 $ 2,839,000
================================================================================
Deferred tax liabilities:
Fixed assets $ 127,000 $ 58,000
State franchise taxes 61,000 187,000
Deferred loan fees -- 65,000
Investment securities unrealized gain -- 200,000
Other 79,000 36,000
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 267,000 546,000
- --------------------------------------------------------------------------------
Net deferred tax assets $ 2,867,000 $ 2,293,000
================================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management believes
that the valuation allowance is sufficient to cover that portion that will not
be fully realized.
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
1996 1995 1994
- --------------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State franchise tax, net of federal income tax benefit 8.3 7.5 7.7
Tax-exempt interest income, net (2.7) (17.7) (3.0)
Housing tax credits (.7) -- --
Other (2.2) 3.5 .1
Increase in valuation allowance for deferred tax assets -- 12.6 --
- --------------------------------------------------------------------------------------
Effective income tax rate 36.7% 39.9% 38.8%
======================================================================================
15
CAPITAL CORP of the WEST
NOTE 7: Lines of Credit
At December 31, 1996, the Company has available lines of credit with
correspondent banks and the Federal Reserve Bank aggregating approximately
$7,623,000 of which $105,000 were outstanding.
NOTE 8. Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below).
First, a bank must meet a minimum Tier I (as defined in the regulations)
capital ratio ranging from 3% to 5% based upon the bank's CAMEL (capital
adequacy, asset quality, management, earnings and liquidity) rating.
Second, a bank must meet minimum total risk-based capital to risk-weighted
assets ratio of 8%. Risk-based capital and asset guidelines vary from Tier I
capital guidelines by redefining the components of capital, categorizing assets
into different risk classes, and including certain off-balance sheet items in
the calculation of the capital ratio. The effect of the risk-based capital
guidelines is that banks with high exposure will be required to raise additional
capital while institutions with low risk exposure could, with the concurrence of
regulatory authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I capital to average assets ratio of 4%.
Management believes, as of December 31, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. As of December
31, 1996, the most recent notification, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as meeting the ratio test for a well
capitalized bank under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized, the Bank must meet the minimum ratios
as set forth below. There are no conditions or events since that notification
that management believes have changed the institution's classification.
The Company's and Bank's actual capital amounts and ratios as of December 31,
1996 are as follows:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated: Amount Ratio Amount Ratio Amount Ratio
(less than (less than (less than (less than
or equal to) (or equal to)(or equal to) (or equal to)
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996
Total capital (to risk weighted assets) $23,670,000 11.2% $16,914,000 8.0% $21,142,000 10.0%
Tier I capital (to risk weighted assets) 21,043,000 9.6 $ 8,407,000 4.0 $12,686,000 6.0
Tier I capital (to average assets) 21,043,000 8.2 $10,293,000 4.0 $12,868,000 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
The Bank:
As of December 31, 1996
Total capital (to risk weighted assets) 19,007,000 10.2 $14,965,000 8.0 $18,707,000 10.0
Tier I capital (to risk weighted assets) 16,667,000 8.9 $ 7,483,000 4.0 $11,224,000 6.0
Tier I capital (to average assets) $16,667,000 7.3% $ 9,150,000 4.0% $11,438,000 5.0%
====================================================================================================================================
NOTE 9. Commitments and Financial Instruments With Off-Balance Sheet Credit Risk
At December 31, 1996, the Company has operating lease rental commitments for
remaining terms of one to ten years. The Company has options to renew one of its
leases for a period of 15 years. The minimum future commitments under
noncancellable lease agreements having terms in excess of one year at December
31, 1996 aggregates approximately $2,469,000 as follows:
1997: $451,000 1998: $427,000 1999: $385,000 2000: $323,000 2001: $171,000
Thereafter: $712,000 = $2,469,000
Rent expense was approximately $391,000, $272,000, and $248,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. 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 Bank with an interest-free loan in the
amount of $3.0 million. The loan matures on August 31, 1997. It is anticipated
that upon completion of the facility, a permanent mortgage loan will be obtained
from an unaffiliated lender.
In addition, the Company has a loan with an unaffiliated lender with an
outstanding balance of $791,000 as of December 31, 1996. The loan matures in
July of 1998. The loan was related to the cash portion of the purchase of the
Thrift.
At December 31, 1996 the aggregate maturities for time deposits in excess of
one year are as follows:
1997: $10,263,000 1998: $863,000 1999: $417,000 2000: --- 2001: ----
= $11,543,000
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheet. These
transactions may involve, to varying degrees, credit and interest risk in excess
of the amount, if any, recognized in the balance sheet.
The Company's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit. The
Company applies the same credit standards to these contracts as it uses in its
lending process. Additionally, commitments to extend credit and standby letters
of credit bear similar credit risk characteristics as outstanding loans (see
note 10).
December 31, 1996 1995
- --------------------------------------------------------------------------------
Financial instruments whose contractual
amount represents risk:
Commitments to extend credit $46,159,000 $28,321,000
Standby letters of credit 3,231,000 2,465,000
================================================================================
Commitments to extend credit are agreements to lend to customers. These
commitments have specified interest rates and generally have fixed expiration
dates but may be terminated by the Company if certain conditions of the contract
are violated. Although currently subject to drawdown, many of these commitments
are expected to expire or terminate without funding. Therefore, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but may include
securities, equipment, inventory and real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of the customer to a third party.
16
CAPITAL CORP of the WEST
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held for
standby letters of credit is based on an individual evaluation of each
customer's credit worthiness, but may include cash, equipment, inventory and
securities.
NOTE 10. Concentrations of Credit Risk
The Bank's business activity is with customers located primarily within
Merced and Stanislaus and Tuolomne counties. The Bank specializes in real
estate, real estate construction, commercial and dairy lending. Although the
Bank has a diversified loan portfolio, a significant portion of its customers'
ability to repay loans is dependent upon economic factors affecting residential
real estate, construction, dairy, agribusiness and consumer goods retailing.
Generally, loans are secured by various forms of collateral. The Bank's loan
policy requires sufficient collateral be secured as necessary to meet the Bank's
relative risk criteria for each borrower. The Bank's collateral consists
primarily of real estate, dairy cattle, accounts receivable, inventory,
equipment and marketable securities. A small portion of the Bank's loans are not
supported by specific collateral but rather by the general financial strength of
the borrower.
The Thrift's business activity is with customers located primarily within
Stanislaus, Fresno and Tulare counties. The Thrift specializes in direct
consumer loans and the purchase of financing contracts principally from
automobile dealerships and furniture stores. Generally, loans are secured by
various forms of collateral. The Thrift's collateral consists primarily of
automobiles and flooring inventory. A small portion of the Thrift's loans are
not supported by specific collateral but rather by the general financial
strength of the borrower. In addition the contracts are purchased from the
dealers with recourse to the dealer and dealer reserves are established for each
borrower.
Although the slowdown in the real estate market has been a factor in the
local economy for the last several years and has played a role in reducing
economic growth in California, it is management's opinion that the underlying
strength and diversity of the Central Valley's economy should mitigate a severe
deterioration in the borrowers' ability to repay their obligations to the
Company.
NOTE 11. Employee Benefit Plans
The Company has a noncontributory employee stock ownership plan ("ESOP") and
an employee savings plan covering substantially all employees. During 1996,
1995, and 1994, the Company contributed approximately $114,000, $100,000, and
$101,000, respectively, to the ESOP and $38,000, $27,000, and $30,000,
respectively, to the employee savings plan.
Under provisions of the ESOP, the Company can make discretionary
contributions to be allocated based on eligible individual annual compensation,
as approved by the Board of Directors. Contributions to the ESOP are recognized
as compensation expense. For the years December 31, 1996, 1995, and 1994, the
ESOP owned 106,247, 95,263, and 86,899 shares, respectively. ESOP shares are
included in the weighted average number of shares outstanding for earnings per
share computations.
The employee savings plan allowed participating employees to contribute up to
$9,500 in 1996. The Company will match 25% of the employees' elective
contribution, as defined, not to exceed 6% of eligible annual compensation.
NOTE 12. Stock Option Plan
During 1992, shareholders approved the adoption of an
incentive stock option plan for bank management and a nonstatutory stock option
plan for directors. The maximum number of shares issuable under the plans was
126,000. Options are available for grant under the plans at prices that
approximate fair market value at the date of grant. Options granted under both
plans become exercisable 25% at the time of grant and 25% each year thereafter
and expire 10 years from the date of grant. In 1995, shareholders approved an
amendment to the stock option plans increasing the number of authorized but
unissued shares available for future grant of the Company's common stock.
Shares Available For Grant Options Outstanding Exercise Price per Share
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 21,122 130,708 $ 8.10-$14.13
Additional shares added to plan 148,170
Options granted (29,000) 29,000 $12.25-$13.50
Options exercised -- (1,500) $ 9.90
Stock dividend declared 24,494 20,506 --
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 163,886 179,614 $ 8.10-$13.86
Options granted (29,500) 29,500 $12.63-$14.00
Options exercised -- (20,739) $ 9.90-$12.25
Stock dividend declared 6,844 9,294 --
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 141,230 197,669 $ 8.10-$14.00
==========================================================================================================
At December 31, 1996, options for 156,310 shares were exercisable at prices
varying from $8.10 to $14.00 per share. The exercise price per share has been
adjusted for stock dividends in periods in which the exercise price exceeded the
then current fair market value.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $8.59 and $5.24 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1995-1996
- - an expected dividend yield of 0%; a risk-free interest rate of 5.48% and 6.31%
respectively; and an expected life of 7 years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
1996 1995 1996 1995
- ---------------------------------------------------------------- ------------------------------------------
Net income As reported $2,009,000 $335,000 Pro forma $1,857,000 $250,000
Net income per share As reported $1.27 $.24 Pro forma $1.17 $ .19
================================================================ ==========================================
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of ten years and compensation cost for options granted prior to January
1, 1995 is not considered.
NOTE 13: Supplementary Cash Flow Information
For the years ended December 31, 1996, 1995 and 1994, the Company paid interest
of $6,244,000, $5,678,000, and $3,906,000 and income taxes of $1,126,000,
$1,471,000, and $1,242,000, respectively.
NOTE 14: Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Financial Assets:
Cash and cash equivalents: For these assets, the carrying amount is a reasonable
estimate for fair value.
17
CAPITAL CORP of the WEST
Investments: Fair values for investment securities available-for-sale are the
amounts reported on the consolidated balance sheets and investment securities
held-to-maturity are based on quoted market prices where available. If quoted
market prices were not available, fair values were based upon quoted market
prices of comparable instruments.
Net loans: The fair value of loans is estimated by utilizing discounted future
cash flow calculations using the interest rates currently being offered for
similar loans to borrowers with similar credit risks and for the remaining or
estimated maturities considering pre-payments. The carrying value of loans are
net of the allowance for possible loan losses and unearned loan fees.
Loans held for sale: The fair value of loans held for sale is the carrying value
as the loans are under commitments to be sold at carrying value.
Financial Liabilities:
Deposits: The fair values disclosed for deposits generally paid upon demand
(i.e., noninterest-bearing and interest-bearing demand, savings and money market
accounts) are considered equal to their respective carrying amounts as reported
on the consolidated balance sheets. The fair value of fixed rate certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.
Borrowings: For these instruments, the fair value is estimated using rates
currently available for similar loans with similar credit risk and for the
remaining maturities.
Commitments to extend credit and standby letters of credit: The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present credit-worthiness of the counter parties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligation with the counter parties at
the reporting date.
Fair values for financial instruments are management's estimates of the values
at which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including, any mortgage banking
operations, deferred tax assets, and premises and equipment. Further, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on the fair value estimates and have not been
considered in any of these estimates.
1996 Carrying Amount Fair Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 16,717,000 $ 16,717,000
Investment securities:
Available-for-sale 43,378,000 43,378,000
Net loans 180,455,000 180,259,000
Mortgage loans held for sale 880,000 880,000
- --------------------------------------------------------------------------------
Financial Liabilities:
Deposits:
Noninterest-bearing demand 39,157,000 39,157,000
Interest-bearing demand 34,303,000 34,303,000
Savings and money market 111,285,000 111,285,000
Time deposits 53,600,000 53,753,000
Borrowings $ 3,896,000 $ 3,575,000
- --------------------------------------------------------------------------------
Contract Amount
------------------------------
Off-balance sheet:
Commitments $ 46,159,000 $ 4,615,900
Standby letters of credit 3,231,000 32,300
================================================================================
1995 Carrying Amount Fair Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 18,967,000 $ 18,967,000
Investment securities:
Available-for-sale 45,302,000 45,302,000
Net loans 132,035,000 131,708,000
Mortgage loans held for sale 501,000 501,000
- --------------------------------------------------------------------------------
Financial Liabilities:
Deposits:
Noninterest-bearing demand 39,726,000 39,726,000
Interest-bearing demand 29,019,000 29,019,000
Savings and money market 95,537,000 95,537,000
Time deposits 28,319,000 28,559,000
Borrowings $ 106,000 $ 106,000
- --------------------------------------------------------------------------------
Contract Amount
------------------------------
Off-balance sheet:
Commitments $ 28,321,000 $ 2,832,100
Standby letters of credit 2,465,000 24,600
================================================================================
NOTE 15: Derivative Financial Instruments
As of December 31, 1996 and 1995 the Company had no off-balance sheet derivative
financial instruments. The Company held one step-up bond, considered a
structured note, with a fair market value of $497,000 as of December 31, 1995
which matured during 1996. The Company held no derivative instruments as of
December 31, 1996.
NOTE 16: Parent Company Only Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements. The parent company was formed November 1,
1995. During the year ended December 31, 1996, the Bank paid the Company
$100,000 in cash dividends and the Thrift paid the Company $825,000 in cash
dividends. The following is the condensed balance sheet of the Company as of
December 31, 1996 and the condensed statement of income and cash flows for the
year ended December 31, 1996:
- --------------------------------------------------------------------------------
Condensed Balance Sheets (In thousands) 1996 1995
Cash deposited in subsidiary bank $ 159 $ 51
Investment in subsidiary, County Bank 16,574 14,968
Investment in subsidiary, Town & Country 5,061 --
Investment in subsidiary, Capital West Group 81 --
Other assets 98 107
- --------------------------------------------------------------------------------
Total Assets $ 21,973 $ 15,126
================================================================================
Accrued expenses and other liabilities $ 999 $ 33
Stockholders' equity 20,974 15,093
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 21,973 $ 15,126
================================================================================
- --------------------------------------------------------------------------------
Condensed Statements of Income (In thousands) 1996 1995
Equity in undistributed income of subsidiary $ 2,094 $ 335
Expenses 85 --
Net income $ 2,009 $ 335
================================================================================
Condensed Statements of Cash Flows (In thousands) 1996 1995
Net cash used by operating activities $ (712) $ (74)
Net cash (used)/provided by investing activities (233) 125
Net cash provided by financing activities 1,053 --
Net increase in cash 108 51
Cash at the beginning of the year 51 --
Cash at the end of the year $ 159 $ 51
================================================================================
NOTE 17: Prospective Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
18
CAPITAL CORP of the WEST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
its subsidiaries' financial condition, operating results, liquidity and capital
resources. The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto. The
consolidated financial statements of Capital Corp of the West (the "Company")
include its subsidiaries, County Bank (the "Bank"), Town & Country Finance and
Thrift (the "Thrift") and Capital West Group. It also includes the Bank's
subsidiary, Merced Area Investment Development, Inc. ("MAID").
Overview Total net income for 1996 was $2,009,000 compared to $335,000 in 1995
and $1,736,000 in 1994. Earnings per share were $1.27 in 1996 compared to $.24
in 1995 and $1.24 in 1994. The return on average assets was .90% in 1996 as
compared with .18% in 1995 and 1.05% in 1994. The Company's return on beginning
equity for the same periods was 13.3%, 2.4% and 13.7%, respectively. Included in
1995 earnings is a complete write-off of the Bank's investment in real estate
held by its real estate subsidiary. This real estate write-off in 1995 totaled
$2,881,000 and resulted in a $1,757,000 reduction in 1995 after tax earnings.
Total assets at December 31, 1996 reached $266 million, up $57 million or 27%
from December 31, 1995. Net loans grew to $180 million at year end 1996, a 37%
increase and deposits grew to $238 million, a 16% increase. Total equity capital
grew to $21 million, a 39% increase over year end 1995. Growth is in part due to
the acquisition of the Thrift as of June 28, 1996. As of December 31, 1996, the
Thrift had $28 million in assets, $20 million in loans and $23 million in
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 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. Management believes
that the Company maintains adequate amounts of liquid assets to meet its
liquidity needs. These assets include cash and deposits in other banks,
available-for-sale securities and federal funds sold. The Company's liquid
assets totaled $63,196,000 and $64,269,000 at December 31, 1996 and 1995,
respectively, and are 23.8% and 30.7%, respectively, of total assets on those
dates. The decrease in liquid assets in 1996 is primarily due to loan growth in
excess of deposit growth during the 1996 year. In analyzing liquidity for the
Company, consideration is also taken for the pledging requirements of the
Company's investment securities. Total pledged securities were $16,678,000 at
December 31, 1996 and $18,157,00 at December 31, 1995, respectively.
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 $7,623,000 of which
$105,000 was outstanding as of December 31, 1996. This compares with lines of
credit of $5,270,000 of which $106,000 was outstanding as of December 31, 1995.
Capital Resources Capital serves as a source of funds and helps protect
depositors against potential losses. The primary source of capital for the
Company has been internally generated capital through retained earnings. The
Company's shareholders' equity had a net increase of $5,881,000 in 1996,
$1,011,000 in 1995, and $1,449,000 in 1994. The increase in 1996 was the result
of net income for the year of $2,009,000, $208,000 in stock options exercised
and $162,000 due to the issuance of shares pursuant to the employee benefit
plans. This is partially offset by a total of $86,000 in cash dividends paid
lieu of fractional shares on stock dividends and the 5 cents per share cash
dividend and a net reduction in the net unrealized value in the
available-for-sale investment portfolio of $381,000. Finally, the purchase of
the Thrift added $3,969,000 to capital for the Company. The 1995 increase was
the result of net income of $335,000, $15,000 on the exercise of stock options
and $667,000 increase in the unrealized gain in the available-for-sale
investment portfolio. This is in part offset by $6,000 in cash dividends paid in
lieu of fractional shares on stock dividends.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by the regulators that, if undertaken, could have a material effect on
the Company's financial statements. Management believes, as of December 31,
1996, that the Company, the Bank and the Thrift meet all capital requirements to
which they are subject. The Company's leverage capital ratio at December 31,
1996 was 8.2% as compared with 7.4% as of December 31, 1995. The Company's
risk-based capital ratio at December 31, 1996 was 11.2% of which 9.6% was common
shareholders' equity as compared to 10.3% (9.2% was common shareholders' equity)
as of December 31, 1995. Management believes that, under the current
regulations, the Company will continue to meet its minimum capital requirements
in the foreseeable future.
Results of Operations Net income in 1996 was $2,009,000 compared to $335,000 in
the prior year and $1,736,000 in 1994. This represents a 500% increase in
earnings compared to 1995, following a 81% decrease in 1995 compared to 1994
results. Earnings per share in 1996 were $1.27 compared to $.24 in 1995 and
$1.24 in 1994. Included in 1995 earnings is a complete write-off of the
Company's investment in real estate held by its real estate subsidiary. This
real estate write-off in 1995 totaled $2,881,000 and result-ed in a $1,757,000
reduction in 1995 earnings.
The increase in earnings in 1996 as compared to 1995 is primarily due to the
complete write-off of the real estate subsidiary in 1995. Excluding that item,
earnings were down approximately $83,000. The areas where the Company showed
earnings improvement include a net interest income increase of $2,330,000 or
23%, and increases in noninterest income, exclusive of the 1995 real estate
writeoff, of $1,278,000 or 77%. This is more than offset by increases in
provisions for loan losses of $1,285,000 or 564% and in noninterest expenses of
$2,591,000 or 32%.
The decrease in earnings in 1995 resulted primarily from the complete
write-off of the Bank's remaining investment in its real estate held by its real
estate subsidiary totaling $2,881,000. This compares with provisions for loss on
real estate held for sale or development of $798,000 in 1994. Net interest
income increased $1,199,000 or 13%. Noninterest income, exclusive of the real
estate provisions increased by $324,000. These increases are partially offset by
increased loan loss provisions of $228,000 and increased noninterest expenses of
$1,223,000 or 18%.
19
CAPITAL CORP of the WEST
When evaluating the earnings performance of banking organizations, two
measures of profitability commonly used are return on average assets and return
on beginning equity. Return on average assets measures a bank's ability to
profitably employ its resources. Return on average assets in 1996 was .90%. This
compares with .18% in 1995 and 1.05% in 1994. Return on beginning equity is a
measure of a bank's ability to generate income on the capital invested in the
company by its shareholders. Return on beginning equity was 13.3% in 1996 as
compared to 2.4% in 1995 and 13.7% in 1994. The decrease in return on average
assets and beginning equity in 1996, exclusive of the real estate write-off, was
generally attributed to a moderate increase in the net interest income and
increases in noninterest income which was more than offset by increases in
noninterest expenses and loan loss provisions.
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.
Total interest and fee income on earning assets increased from $15,873,000 to
$19,351,000, a $3,478,000 or 22% increase in 1996. This compares with an
increase from $12,807,000 to $15,873,000, a $3,066,000 or 24% increase in 1995.
The level of interest income is affected by changes in the volume (growth) and
the rates earned on interest earning assets. Interest-earning assets consist
pri-marily of loans, investment securities and federal funds sold. Average
interest-earning assets in 1996 were $203,046,000 as compared with $166,826,000
in 1995, a $36,220,000 or 22% increase. Of the 1996 increase in interest income
of $3,478,000, $3,451,000 was the result of growth in these assets and $27,000
was a result of increases in yields on these assets. Of the 1995 increase in
interest income of $3,066,000, $1,663,000 was the result of growth in these
assets and $1,403,000 was as a result of increases in yields on these assets.
Interest expense is a function of the volume (growth) of and rates paid for
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total average interest-bearing liabilities
in 1996 were $176,333,000 as compared with $143,131,000 in 1995, a $33,202,000
or 23% increase. Total interest expense increased $1,148,000 or 20% and
increased $1,867,000 or 48% in 1995. Of the 1996 increase in interest expense of
$1,148,000, $1,289,000 was the result of growth in these liabilities and was
partially offset by $141,000 as a result of decreased costs of these
liabilities. Of the 1995 increase of $1,867,000, $568,000 was the result of
growth in these liabilities and $1,299,000 was the result of increases in costs
of these liabilities.
The Bank's net interest margin, the ratio of net interest income expressed as
a percent of average interest-earning assets for 1996 was 6.16%. This is an
increase of .07% compared to the 1995 margin of 6.09% and .06% compared to the
1994 margin of 6.03%. This provides a measurement of the Bank's ability to
purchase and employ funds profitably during the period being measured. The
mod-est improvement in net interest margin is due to increases in loan volume as
a percentage of earning assets, which was partially off-set by the increase in
nonearning loans.
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 and include maturing time certificates, certain savings and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and liabilities that are repricing 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" 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.
As of December 31, 1996 the Company was moderately "liability-sensitive" with
a cumulative negative one-year gap of $42,922,000 or 16% of total assets. This
compares with the Company being moderately "liability-sensitive" with a
cumulative negative one-year gap of $14,718,000 or 7% of total assets at
December 31, 1995. In general, based upon the Company's mix of deposits, loans
and investments, declines in interest rates would be expected to moderately
increase the Company's net interest margin. Increases in interest rates would be
expected to have the opposite effect. The increase in the cumulative negative
one year gap is due primarily to the purchase of the Thrift and its
"liability-sensitive" profile as of December 31, 1996.
The change in net interest income may not, however, always follow the general
expectations of an "asset-sensitive" or "liability-sensitive" balance sheet
during periods of changing interest rates. This results from interest rates paid
changing by differing increments and at different time intervals for each type
of interest-sensitive asset and liability.
An additional measure of interest rate sensitivity that the Company monitors
is its expected change in earnings. This model's esti-mate of interest rate
sensitivity takes into account the differing time intervals and differing rate
change increments of each type of interest-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 December 31, 1996 mix of
interest-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. As both of these measures of interest
rate risk indicate, the Company is not subject to significant risk of change in
its net interest margin as a result of changes in interest rates.
Allowance and Provision for Loan Losses The 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 the growth trend in the
portfolio, examinations of financial institution supervisory authorities,
internal and external credit reviews, prior loan loss experience for the
Company, 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.
20
CAPITAL CORP of the WEST
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 had provisions to the allowance in 1996 of $1,513,000 as compared to
228,000 in 1995 and none in 1994.
The Company's charge-offs, net of recoveries, were $570,000 in 1996 as
compared with $148,000 in 1995 and $126,000 in 1994. This represents loan loss
experience ratios of .32%, .12% and .12% in those respective years stated as a
percentage of average net loans outstanding for each year. As of December 31,
1996 the allowance for loan losses was $2,792,000 or 1.5% of total loans
outstanding. This compares with an allowance for loan losses of $1,701,000 or
1.3% in 1995 and $1,621,000 or 1.5% in 1994. The increase in loan loss provision
in 1996 was primarily due to increased reserves established for a large
commercial real estate loan that was deemed impaired, reserves required for a
portfolio of lease receivables purchased in 1994 and to support the general loan
growth of the Company. The increase in net chargeoffs in 1996 was primarily due
to the loss recognized on the foreclosure of a real estate secured agricultural
loan currently held as other real estate owned.
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
cat-egorized 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 deemed to
be in the process of collection. Additional loans which are not 90 days past due
may also be placed on nonaccrual status if Management reasonably believes the
borrower will not be able to comply with the contractual loan repayment terms
and the collection of principal or interest is in question.
Management defines impaired loans as those loans, regardless of past due
status, in which principal and interest 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 December 31, 1996 and 1995, impaired loans were measured
based upon the present value of future cash flows discounted at the loan's
effective rate, the loan's observable market price, or the fair value of
collateral if the loan is collateral dependent.
The Company had nonperforming loans at December 31, 1996 of $5,568,000 as
compared with $4,850,000 at year end 1995 and $699,000 at year end 1994.
Included in the 1996 totals, $3,626,000 are loans secured by first deeds of
trust on real property as compared with $3,286,000 in 1995 and $422,000 in 1994.
Impaired loans as of December 31, 1996 were $7,020,000 which had specific
allowances for possible loss of $1,827,000 as compared with $4,326,000 as of
December 31, 1995 which had specific allowances for possible loss of $605,000.
Other forms of collateral, such as inventory, chattel and equipment, secure the
remaining nonperforming loans as of each date. Included in the nonperforming and
impaired loans in 1996 and 1995 was a $3.4 million commercial real estate loan
that has been restructured but is still shown as a nonperforming loan. The loan
is expected to remain on nonaccrual status until substantial performance on the
loan occurs. The restructured loan matures in 1998.
In addition, the Bank purchased a portfolio of lease receivables in 1994. 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 Exchange Commission with participating in securities
fraud. More than 360 banks nationwide had acquired similar lease receivable
contracts. The Bank has $1,281,000 of these leases on nonaccrual status as of
December 31, 1996. The Bank has retained counsel jointly with other California
banks and is monitoring its position to ascertain the extent of loss the Bank
may incur. As of December 31, 1996 specific reserves of $385,000 have been
established for this portfolio. As of February 12, 1997, the Bank signed a
settlement agreement in regards to this portfolio of leases that established the
projected recovery rate at 78.5% or approximately $1,006,000.
At December 31, 1996 the Bank had $1,466,000 in two real estate properties
acquired through foreclosure compared with $47,000 as of December 31, 1995 and
at year end 1994 the Company had no real estate acquired through foreclosure.
Total nonperforming assets represented 30% of the allowance for loan losses
and shareholders' equity as of December 31, 1996. This compares with
nonperforming assets of 29% and 5% of the allowance for loan losses and total
equity as of December 31, 1995 and December 31, 1994, respectively.
Net loans grew to $180,455,000 at December 31, 1996, a $48,420,000 or 37%
increase from the end of the prior year. The Company's loan portfolio consists
primarily of commercial, agricultural, real estate mortgage, real estate
construction and consumer installment loans. Loan growth was principally in
agricultural, real estate mortgage, real estate construction and consumer loans.
In addition, the Company purchased the Thrift and its approximately $20 million
consumer finance operation as of June 1996. As of December 31, 1996, the loan
portfolio mix was comprised as follows: commercial loans (15%), agriculture
loans (24%), real estate construction loans (8%), real estate mortgage loans
(31%) and consumer loans (22%). The largest segment within the agriculture
portfolio is the Company's dairy loans. Dairy loans comprised 15% of the
Company's loan portfolio as of December 31, 1996.
The above referenced loan portfolio mix has not materially changed from the
prior year. There have been moderate increases in consumer loans as a percentage
of the portfolio due primarily to the purchase of the Thrift.
As a result of the Company's loan portfolio mix, the future quality of these
assets could be affected by adverse trends in these local or regional economic
sectors. There have been significant floods throughout parts of California
occurring in January 1997. The Company has done an analysis of its collateral as
a result of the recent floods. Current estimates indicate that there were no
mate-rial adverse effects to the collateral position of the Company as of the
date of this report.
Additionally, the Company has investments in residential real estate in
Merced County through its wholly owned subsidiary, Merced Area Investment and
Development, Inc. (MAID). MAID held two separate properties held for sale or
development at December 31, 1996. These investments were completely written-off
in 1995, although the Bank still retains title to these properties. This
compares with a carrying value of $3,853,000 at December 31, 1994. These
properties consist of residential lots in varying stages of development.
Other Income or Loss Total noninterest income in 1996 increased by $4,159,000 or
340%. Total noninterest income in 1995 includes a complete write-off of its
remaining real estate held by the Bank's real estate subsidiary of $2,881,000.
In 1996, service charges increased $354,000 or 38%, other income increased by
$504,000 or 78% and gains on the sale of real estate increased by $420,000 or
474%. Increases in service charge income are due to Company's growth as well as
increased service charges implemented in 1996.
21
CAPITAL CORP of the WEST
Other income has increased primarily due to increased revenues on retail
investment products, loan servicing income, gains on the sale of Small Business
Administration loans and gains on the sale of securities.
In 1995, service charge income showed increases of $20,000 or 2%, income from
the sale of real estate held for sale or development show increases of $74,000
and other income shows an increase of $237,000 or 57%. Other income increases in
1995 are due to the addition of commission fees earned on investment product
sales and increases in loan servicing fee income.
The Company recognized $508,000 in gains on the sale of real estate held for
sale in 1996. This was the result of the sale of 40 improved lots and four
single family homes in two real estate projects. This compares with $88,000 in
gains on the sale of real estate held for sale or development in 1995. This is
the result of sales of 8 single family homes and 56 improved lots in three real
estate projects. This compares with gains of $14,000 in 1994 on the sale of 9
single family homes and 2 improved lots in three real estate projects.
The Company records its investment in real estate held for sale or
development at the lower of cost or net realizable value, based on management's
best estimate of the local real estate market, along with appraised values and
prospects for sales in the future. In 1995, the Bank decided to take a complete
write-off of its remaining investment of its real estate held by MAID. This
resulted in provisions for loss of $2,881,000 in 1995. The Bank provided
$798,000 for future losses on the sales of certain of its real estate projects
in 1994.
Other Expense Total noninterest expense increased $2,590,000 or 32% in 1996 as
compared with an increase of $1,223,000 or 18% in 1995 as compared to 1994.
Salaries and related benefits increased by $1,122,000 or 27% in 1996 as
compared with an increase of $621,000 or 17% in 1995. The salary increase in
1996 was primarily due to two factors. First, the purchase of Town & Country and
the establishment of Capital West Group added $473,000 to total salaries. In
addition, the Bank underwent a reengineering project in 1996, whereby Bank
operations were streamlined and voluntary separation packages were offered to
all employees. A total of 23 employees accepted the package, and total
separation expenses were $286,000. Current projections are that the project
resulted in salary savings in existing branch operations of approximately
$114,000 per quarter with benefits being realized starting in the third and
fourth quarters of 1996. Other increases relate to overall Bank growth in new
branches in late 1995 through 1996. The salary and related benefits increase in
1995 was primarily due to an increase in full time equivalents. This was in part
due to the opening of a new branch and two new loan production offices in 1995.
Full time equivalents were 115 on average in 1995, compared to 103 in 1994, a
11.7% increase. Normal merit increases and related benefit expenses also
contributed to the overall increase.
Premises and occupancy expenses increased $223,000 or 36% in 1996 and $25,000
or 4% in 1995 as compared with an increase of $50,000 or 9% in 1994. The 1996
and 1995 increases are primarily due to the purchase of the Thrift and its four
branch offices as of June 1996 and the opening of branches of the Bank in
November 1995, April 1996 and two in December 1996.
Bank assessments by both the FDIC and the California State Banking Department
totaled $48,000, $183,000 and $394,000 respectively in the years ended December
31, 1996, 1995 and 1994. The decreases in 1995 and 1996 are due to reduced FDIC
premiums beginning in May of 1995. FDIC assessment levels for the Company were
$2,000 in 1996 as compared with $.04 cents per $100 in deposits in 1995 and $.26
cents per $100 in deposits in 1994.
The Bank's professional fees increased by $351,000 or 87% in 1996 as compared
with an increase of $105,000 or 35% in 1995 over the same period in 1994.
Professional fees include legal, consulting, audit and accounting fees. The
primary reason for the 1996 increase was consulting fees incurred in conjunction
with the reengineering project undertaken by the Bank in 1996. The increases in
1995 were primarily due to legal fees increases which related to corporate
matters such as the bank holding company formation and the expanded proxy
statement.
Other noninterest expenses changed as follows: equipment expenses increased
by $233,000 or 30% in 1996 as compared with $48,000 or 10% in 1995; supplies
increased by $58,000 or 25% in 1996 as compared with increases of $110,000 or
89% in 1995; marketing expenses increased by $158,000 or 75% in 1996 as compared
with increases of $38,000 or 16% in 1995; and other operating expenses increased
by $280,000 or 32% in 1996 as compared with $356,000 in 1995. Increases relate
primarily to overall growth of the Company through the purchase of the Thrift,
branch expansion in late 1995 and 1996, and the establishment of Capital West
Group.
Provision for Income Taxes The Company's provision for income taxes was
$1,163,000 in 1996, $223,000 in 1995 and $1,103,000 in 1994. The effective
income tax rate was 36.7% in 1996 as compared with 39.9% in 1995 and 38.8% in
1994. In part the effective tax rate of the Company has been reduced in 1996 due
to the tax credits earned by the purchase of housing tax credits in late 1995
and 1996. Total housing tax credits for 1996 were approximately $67,000. The
change in the effective tax rate for the three years was also impacted by the
effective tax benefit derived from interest income on loans and securities
exempt from federal taxation. The tax benefit from such income as a percentage
of income before taxes was 2.7% in 1996, 17.7% in 1995 and 3.0% in 1994.
Impact of Inflation The primary impact of inflation on the Company is its effect
on interest rates. The Company's primary source of income is net interest income
which is affected by changes in interest rates. The Company attempts to limit
inflation's impact on its net interest margin through management of
rate-sensitive assets and liabilities and the analysis of interest rate
sensitivity. The effect of inflation on premises and equipment as well as
noninterest expenses has not been significant for the periods covered in this
report.
22
CAPITAL CORP of the WEST
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCK MATTERS
Effective January 18, 1996, the Company's stock was listed on NASDAQ, a national
market symbol with a stock quotation symbol of CCOW. During 1995, the Company's
common stock was not listed on any stock exchange nor quoted on NASDAQ, it was
traded through the electronic bulletin board.
The following table indicates the range of high and low sales prices,
excluding brokers' commissions, for the periods shown, based upon information
provided by the NASDAQ for 1996 and the Company's market makers and known to
management for 1995.
1996 High Low
- --------------------------------------------------------------------------------
4th quarter $ 16.25 $ 13.75
3rd quarter 14.75 12.63
2nd quarter 15.00 13.00
1st quarter $ 15.00 $ 12.50
================================================================================
1995 High Low
- --------------------------------------------------------------------------------
4th quarter $ 12.25 $ 12.00
3rd quarter 13.25 12.00
2nd quarter 14.00 12.50
1st quarter $ 13.50 $ 12.00
================================================================================
As of December 31, 1996, the number of stockholders of the Company on record
was approximately 1,175. A California corporation may pay a cash dividend or
other shareholder distribution only if (i) the distribution would not exceed its
retained earnings or (ii) either (a) the sum of its assets (net of goodwill,
capitalized research and development expenses and deferred charges) would be
less than 125% of its liabilities (net of deferred taxes, income and other
credits), or (b) current assets would not be less than current liabilities
(except that if its average earnings before taxes for the last two years had
been less than average interest expenses, current assets must be not less than
125% of current liabilities).
Under the California Financial Code, a state licensed bank may declare cash
dividends in an amount not to exceed the lesser of the bank's retained earnings
or net income for its last three fiscal years (less any distributions to
shareholders made during the such period) or, with the prior approval of the
California Superintendent of Banks, in an amount not to exceed the greatest of
(i) retained earnings of the bank; (ii) the net income of the bank for its last
fiscal year; or (iii) the net income of the bank for its current fiscal year. If
the Superintendent finds that the shareholders' equity in a bank is not adequate
or that the payment of a dividend would be unsafe or unsound, the Superintendent
may order the bank not to pay a dividend to shareholders.
Federal law also restricts the payment of dividends under certain
circumstances. The FDIC Improvement Act prohibits a bank from paying dividends
if after making such payment, the bank would fail to meet any of its capital
requirements. Also, under the Financial Institution Supervisory Act, the FDIC
has the authority to prohibit a bank from engaging in business practices which
the FDIC considers unsafe or unsound. It is possible, depending on the
financial condition of the bank and other factors, that the FDIC could assert
that the payment of dividends or other payments in some circumstances might be
such an unsafe or unsound practice and therefore prohibit such payment.
Generally, the Company has retained earnings to support the growth of the
Company and has not paid regular cash dividends. The Company declared a 5% stock
dividend and a $.05 per share cash dividend in August of 1996 for shareholders
of record as of September 15, 1996. This resulted in the issuance of an
additional 82,384 shares in 1996 and cash dividends to shareholders of $86,000.
In addition in 1996, the Bank paid $100,000 and the Thrift paid $825,000 in cash
dividends to the holding company. The Thrift dividend was due to the cash
portion of the purchase price of the Thrift and was in accordance with its
dividend authority as defined by the Department of Corporations.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Capital Corp of the West: We
have audited the accompanying consolidated balance sheets of Capital Corp of the
West and subsidiaries (the Company) as of December 31, 1996 and 1995 and the
related consolidated statements of income, cash flows, and shareholders' equity
for each of the years in the three year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Capital Corp
of the West and subsidiaries as of December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for impaired loans in 1995 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by Statement No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures.
/s/ KPMG Peat Marwick LLP
Sacramento, California
January 31, 1997
23
CAPITAL CORP of the WEST
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of operations
Total interest income $ 19,351,000 $ 15,873,000 $ 12,807,000 $ 11,483,000 $ 11,370,000
Total interest expense 6,865,000 5,717,000 3,850,000 3,061,000 3,948,000
Net interest income 12,486,000 10,156,000 8,957,000 8,422,000 7,422,000
Provision for loan losses 1,513,000 228,000 -- 254,000 162,000
Net interest income after provision
for loan losses 10,973,000 9,928,000 8,957,000 8,168,000 7,260,000
Total other income 2,935,000 (1,224,000) 805,000 679,000 884,000
Total other expense 10,736,000 8,146,000 6,923,000 6,459,000 6,302,000
Income before income taxes 3,172,000 558,000 2,839,000 2,388,000 1,842,000
Provision for income taxes 1,163,000 223,000 1,103,000 905,000 676,000
Cumulative effect of change
in accounting for income taxes -- -- -- (300,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,009,000 $ 335,000 $ 1,736,000 $ 1,783,000 $ 1,166,000
- ------------------------------------------------------------------------------------------------------------------------------------
Per share
Weighted average number of
shares outstanding 1,578,198 1,333,923 1,333,456 1,332,414 1,332,414
Net income $ 1.27 $ .24 $ 1.24 $ 1.27 $ .84
Cash dividends $ .05 -- -- -- --
Shareholders' equity (book value) $ 12.09 $ 10.74 $ 10.03 $ 9.01 $ 7.74
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet
Cash and noninterest-bearing
deposit in other banks $ 12,982,000 $ 18,967,000 $ 14,190,000 $ 10,936,000 $ 5,539,000
Time deposits and federal 6,836,000 -- 2,300,000 4,700,000 5,300,000
funds sold
Investment securities 43,378,000 45,302,000 35,826,000 22,823,000 21,980,000
Loans, net 180,455,000 132,035,000 111,979,000 105,377,000 95,719,000
Other assets 22,338,000 12,729,000 13,826,000 11,342,000 13,450,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 265,989,000 209,033,000 178,121,000 155,178,000 141,988,000
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 39,157,000 39,726,000 31,924,000 29,392,000 24,041,000
Interest-bearing deposits 199,188,000 152,875,000 131,275,000 112,338,000 106,467,000
Other liabilities 6,670,000 1,339,000 840,000 815,000 627,000
Shareholders' equity 20,974,000 15,093,000 14,082,000 12,633,000 10,853,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 265,989,000 $ 209,033,000 $ 178,121,000 $ 155,178,000 $ 141,988,000
====================================================================================================================================
See accompanying notes to Consolidated Financial Statements.
24