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.
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"). In addition to
historical information, this discussion includes certain forward-looking
statements regarding events and trends which may affect the Company's future
results. Such statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially. Such factors
include, but are not limited to, those described in this discussion and
analysis.
OVERVIEW
Total net income for 1997 was $403,000 compared to $2,009,000 in 1996 and
$335,000 in 1995. Earnings per share were $.12 in 1997 compared to $.85 in
1996 and $.16 in 1995. The Company's return on average total assets was .13%
in 1997 as compared with .88% in 1996 and .18% in 1995. Included in 1997
earnings is a significant increase in the loan loss provision. This large
increase is primarily attributable to the charge-off of one commercial real
estate loan within the Bank's portfolio, which had previously been considered
a nonperforming asset since December 1995. The charge-off related to this
loan totaled $3,458,000 in 1997. The provision for loan loss also increased
due to a change in the methodology for determining the appropriate levels
maintained as an allowance for loan loss. This change in methodology is
reflected in the second quarter loan loss provision, along with an adjustment
made as a result of a joint examination in the fourth quarter of 1997,
conducted by the California Department of Financial Institutions (DFI) and
the Federal Deposit Insurance Corporation (FDIC). Following the joint
examination, the Company agreed to increase its provision for loan loss in
1997 by $1,574,000 due to a difference in calculation of the loan loss
reserves under the Company's new methodology.
The Company achieved record growth in 1997, reaching total assets at
December 31, 1997 of $421,394,000, up $155,405,000 or 58% from $265,989,000
at December 31, 1996. The purchase of three branches from Bank of America
accounted for a $61,816,000 increase in assets, and a successful stock
offering increased capital and assets by an additional $17,951,000. In
addition, two branches were opened in late 1996 and a third in late 1997,
which also contributed to asset growth in 1997. Net loans grew to
$214,144,000 at year end 1997, a 19% increase and deposits grew to
$356,395,000, a 50% increase over 1996. Total equity capital grew to
$40,248,000, a 92% increase over year end 1996. Equity growth is mainly due
to the stock offering.
RESULTS OF OPERATIONS
Net income in 1997 was $403,000 with earnings per share of $.12 as
compared to $.85 in 1996. The Company's net interest income increased by
$3,236,000, or 26%, to $15,722,000 as compared to $12,486,000 in 1996,
primarily related to a significant growth in average interest-earning assets
as a result of the branches purchased from Bank of America in late 1997, the
stock offering, and growth attributable to the two new branches opened in
late 1996. In 1997 the Company made a provision for loan losses of $5,825,000
and charged-off a commercial real estate loan with a balance of $3,458,000.
The Company reported net income in 1996 of $2,009,000 compared to
$335,000 in 1995. This represents a 500% increase in earnings from 1995 to
1996. Earnings per share in 1996 were $.85 compared to $.16 in 1995. 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 resulted 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 in 1996.
The following table presents, for the periods indicated, the distribution
of average assets, liabilities and shareholders' equity as well as the total
dollar amount of interest income from average interest-earning assets and
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates.
- ------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest rate Balance Interest rate Balance Interest rate
ASSETS:
Federal funds sold $ 6,288 $ 344 5.47% $ 3,920 $ 207 5.28% $ 6,253 $ 358 5.73%
Taxable investment securities 70,024 4,691 6.70 38,331 2,596 6.77 34,095 2,219 6.51
Nontaxable investment
securities(1) 4,358 231 5.30 4,531 246 5.43 5,858 327 5.58
Loans, gross (2) 198,140 20,646 10.42 157,098 16,302 10.38 120,620 12,969 10.75
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Total interest-earning assets 278,810 25,912 9.29 203,880 19,351 9.49 166,826 15,873 9.51
Allowance for loan losses (2,615) (1,913) (1,616)
Cash and due from banks 14,384 10,436 8,832
Premises and equipment, net 9,596 4,775 3,783
Interest receivable and
other assets 14,016 10,946 8,056
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Total assets $314,191 $228,124 $185,881
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Negotiable Orders of
withdrawal $ 38,164 $ 345 .90% $ 29,376 $ 268 .91% $ 26,192 $ 239 .91%
Savings deposits 117,357 4,770 4.06 104,938 4,350 4.15 91,509 4,213 4.65
Time deposits 71,808 3,983 5.55 40,994 2,167 5.29 25,431 1,254 4.93
Other borrowings 18,721 1,092 5.83 1,020 80 7.84 141 11 7.80
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Total interest-bearing
liabilities 246,050 10,190 4.16 176,328 6,865 3.89 143,273 5,717 3.99
Noninterest-bearing deposits 38,023 30,549 26,478
Accrued interest, taxes
and other liabilities 2,583 3,067 641
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Total liabilities 286,656 209,944 170,392
Total shareholders' equity 27,535 18,180 15,489
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Total liabilities and
shareholders' equity $314,191 $228,124 $185,881
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NET INTEREST INCOME AND MARGIN (3) $15,722 5.64% $12,486 6.12% $10,156 6.09%
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(1) INTEREST ON MUNICIPAL SECURITIES IS NOT COMPUTED ON A TAX-EQUIVALENT BASIS.
(2) AMOUNTS OF INTEREST EARNED INCLUDES LOAN FEES OF $1,366,000, $1,106,000,
$901,000 FOR 1997, 1996 AND 1995, RESPECTIVELY.
(3) NET INTEREST MARGIN IS COMPUTED BY DIVIDING NET INTEREST INCOME BY TOTAL
AVERAGE INTEREST-EARNING ASSETS.
The Company's primary source of revenue is net interest income, which is
the difference between interest income and fees derived from earning assets
and interest paid on liabilities obtained to fund those assets. Total
interest and fee income on earning assets increased from $19,351,000 to
$25,912,000, a $6,561,000 or 34% increase in 1997. This compares with an
increase from $15,873,000 to $19,351,000, a $3,478,000 or 22% increase in
1996. 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 primarily of loans, investment securities and federal funds
sold. Average interest-earning assets in 1997 were $278,810,000 as compared
with $203,880,000 in 1996, a $74,930,000 or 37% increase.
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 1997 were $246,050,000 as compared with $176,328,000
in 1996, a $69,722,000 or 40% increase. Total interest expense increased
$3,325,000, $3,376,000 or 48% in 1997.
The Bank's net interest margin, the ratio of net interest income
expressed as a percent of average interest-earning assets for 1997 was 5.64%.
This is a decrease of 48 basis points compared to the 1996 margin of 6.12%.
The net interest margin in 1996 of 6.12% was a 3 basis point increase over
the 1995 margin of 6.09%. The decrease in the net interest margin in 1997 is
mainly due to the change in the assets mix from previous years. Gross loans
made up 71% of total average earning assets in 1997, compared to 77% in 1996.
Securities as a percentage of total average earning assets increased from 21%
in 1996 to 27% in 1997. In the future, the Company plans to redeploy more of
the earning assets into loans, however, no assurance can be given that this
will take place. This will depend on the economy in the Company's market
area, the Company's ability to extend quality loans on a diversified basis
while controlling risk, and the Company's ability to attract borrowers that
will meet the lending standards adhered to by the Company.
The Company's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities. It is
also affected by changes in yields earned on interest-earning assets and
rates paid on interest-bearing deposits and other borrowed funds, referred to
as "rate changes." The following table sets forth changes in interest income
and interest expense for each major category of interest-earning assets and
interest-bearing liabilities, and the amount of change attributable to volume
and rate changes for the years indicated. The changes due to rate and volume
have been allocated to rate and volume in proportion to the relationship of
the absolute dollar amount of the change in each. The effects of
tax-equivalent yields have not been considered because they are not
significant.
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NET INTEREST INCOME VARIANCE ANALYSIS:
(Dollars in thousands) 1997 Compared to 1996 1996 Compared to 1995
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income: Volume Rate Total Volume Rate Total
Loans $ 4,277 $ 67 $ 4,344 $ 3,767 $(434) $ 3,333
Taxable investment securities 2,123 (28) 2,095 276 101 377
Nontaxable investment securities (9) (6) (15) (74) (7) (81)
Federal funds sold 129 8 137 (125) (26) (151)
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Total 6,520 41 6,561 3,844 (366) 3,478
Increase (decrease) in interest expense:
Interest-bearing demand 79 (2) 77 29 - 29
Savings deposits 506 (86) 420 427 (290) 137
Time deposits 1,704 112 1,816 817 96 913
Other borrowings 1,039 (27) 1,012 69 - 69
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Total 3,328 (3) 3,325 1,342 (194) 1,148
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Increase (decrease) in net interest income $ 4,092 $ (856) $ 3,236 $ 2,502 $(172) $ 2,330
- ------------------------------------------------------------------------------------------------------------------------
The increase in total interest income of $6,561,000 in 1997 is comprised
of a $6,520,000 volume increase associated with the $74,930,000 increase in
average interest-earning assets between 1996 and 1997, and a $41,000 rate
increase associated with a decrease in the total yield on earning assets to
9.29% in 1997 from 9.49% in 1996. The increase in total interest expense of
$3,325,000 in 1997 is comprised of a volume increase of $3,328,000 related to
the $69,722,000 increase in average interest-bearing liabilities between 1996
and 1997 and a $3,000 decrease associated with an increase in the cost of
funds rate to 4.16% in 1997 from 3.89% in 1996.
In 1996, the increase in total interest income of $3,478,000 was
comprised of a $3,844,000 volume increase associated with the $37,054,000
increase in average interest-earning assets between 1996 and 1995 and a
$366,000 rate decrease associated with a decrease in the total yield on
interest-earning assets to 9.49% in 1996 from 9.51% in 1995. The increase in
total interest expense of $1,148,000 in 1996 is comprised of a volume
increase of $1,342,000 related to the $33,055,000 increase in average
interest-bearing liabilities between 1996 and 1995 and a $194,000 decrease
due to a decline in the cost of funds rate to 3.89% in 1996 from 3.99% in 1995.
Average loans increased $41,312,000 to $198,140,000 at December 31, 1997.
Average interest-bearing liabilities increased $69,722,000 to $246,050,000 at
December 31, 1997 due primarily to strong internal growth, and partially due
to the purchase of the Bank of America branches in December, 1997. The
increase in rates paid is mainly due to changes in the interest-bearing
liability mix. Savings deposits as a percent of total interest-bearing
liabilities decreased to 48% compared to 60% in 1996. Time deposits as a
percent of total interest-bearing liabilities increased from 23% in 1996 to
29% in 1997. Other borrowings in 1997 represented 8% of total average
interest-bearing liabilities, while borrowings represented less than 1% in
1996. The increase in the volume of average borrowings is related to the
purchase of securities, in which the Company is able to make a spread of
approximately 90 basis points by borrowing funds from the Federal Home Loan
Bank, and using the proceeds to purchase securities. While this leverage
transaction will increase the Banks' contribution to net income in the
future, it will effectively decrease the net interest margin percentage due
to the lower spread received between interest-earning assets and
interest-bearing liabilities.
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.
The provision for loan losses is charged against income and increases the
allowance for loan losses. The provision for loan losses for the year ended
December 31, 1997 was $5,825,000 compared to $1,513,000 in 1996 and $228,000
in 1995. The increase in 1997 was due to the implementation of a new
methodology for determining its allowance for loan losses and the need to
replenish the allowance following the charge-off of a commercial real estate
loan that was determined to be uncollectible in 1997. This loan had
previously been reported as a nonperforming asset for the last two fiscal
years. The provision for loan loss also increased due to a change in the
methodology for determining the appropriate levels maintained as an allowance
for loan loss. This method applies relevant risk factors to the entire loan
portfolio, including nonperforming loans. The methodology is based, in part,
on the Bank's loan grading and classification system. The Bank grades its
loans through internal reviews and periodically subjects loans to external
reviews which then are assessed by the Bank's audit committee. Credit reviews
are performed on a monthly basis and the quality grading process occurs on a
quarterly basis. This change in methodology is also reflected in the 1997
loan loss provision.
As a result of joint examination conducted by the California Department
of Financial Institutions ("DFI") and the Federal Deposit Insurance
Corporation ("FDIC"), the Company's principal banking regulators, the Company
agreed to increase its provision for loan losses by $1,574,000 in the fourth
quarter of 1997. Following the completion of the joint examination of County
Bank by the DFI and the FDIC, the Company was informed that its calculations
of its loan loss reserve under the Company's new methodology were not
consistent with the regulators' calculations. This discrepancy related
primarily to the reserve percentage applied to loans classified as
"substandard" and the percentage applied to the loans classified as "pass".
The Company believes that its implementation of the new methodology provides
adequate reserves for losses based upon the Company's view of the quality of
its assets and its historical losses, however, the Company agreed to conform
to the calculation requested by the DFI and the FDIC for current and future
periods and therefore added the additional provision requested by the
regulators.
The increase from 1995 to 1996 in the loan loss provision was also
primarily related to the real estate loan discussed above as a specific
reserve was provided for this loan when it was recognized as impaired and
placed on nonaccrual status. The increase in loan loss provisions in 1996 and
1997 was also due to support the general loan growth of the Company, as gross
loans increased 37% in 1996 and 19% in 1997.
OTHER INCOME OR LOSS
The following table summarizes other income (or loss) for the years ended
December 31,
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(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------
Other Income:
Deposit service charges $1,709 $1,274 $ 920
Income from real estate held
for sale or development 879 508 88
Loan servicing fees 195 214 117
Gain on sale of loans 153 210 69
Retail investment commissions 218 229 154
Earnings on director and
officer life insurance 181 112 42
Provision for loss on real estate
held for sale or development - - (2,881)
Other 517 338 267
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Total other income (loss) $3,852 $2,935 $(1,224)
- --------------------------------------------------------------------------
Total noninterest income increased to $3,852,000 in 1997, compared to
$2,935,000 in 1996. The increase in 1997 of $917,000 or 31% was due to an
increase in service charge income due primarily to growth of the Company's
deposit base. The increase in gains on sale of real estate held for sale or
development is due to increased sales activities.
Total noninterest income in 1996 was $2,935,000 as compared to a loss of
$1,224,000 in 1995. Service charges increased by $354,000 or 39% in 1996 due
to increased service charges and general growth of the Company's deposit base.
The Company has investments in residential real estate in Merced County
through its wholly owned subsidiary, Merced Area Investment and Development,
Inc. (MAID), which is now considered inactive. MAID had two separate
properties held for sale or development at December 31, 1996. These
investments were completely written-off in 1995, causing a loss of
$2,881,000. As of December 31, 1997, the Bank has 50 unimproved lots
available in one subdivision, and 117
unimproved and 4 improved lots in another subdivision. As these properties
are sold, the income is recognized as other income.
NONINTEREST EXPENSE
Total noninterest expense increased $2,636,000 or 25% in 1997 as compared
with an increase of $2,590,000 or 32% in 1996 as compared to 1995.
Salaries and related benefits increased by $850,000 or 16% in 1997, and
$1,122,000 or 27% in 1996. The salary increases are primarily due to an
increase in full-time equivalent employees to 197 in 1997, compared to 142 in
1996, and 115 in 1995, as well as normal merit increases and related benefit
expenses. The increase in full-time equivalent employees was due primarily to
two new branch openings in December 1996 which incurred a full year of
expenses in 1997, and one new branch opening in April 1996. The purchase of
the thrift was completed in June 1996, thereby the Company incurred the first
full year of expenses related to those four branches in 1997. Employees have
also been added in relation to the general growth of the Company.
Premises and occupancy expenses increased $400,000 or 48% in 1997, and
$223,000 or 36% in 1996, due to the above discussed branch openings and the
purchase of the four thrift branches in 1996.
Equipment expenses increased $424,000 or 42% in 1997, and $233,000 or 30%
in 1996 due to upgraded computer technology, the additional branches as
discussed previously, and the new technology required to make check imaging
available to the Bank's customer base.
Bank assessments by both the FDIC and the DFI totaled $97,000, $48,000
and $183,000 respectively in the years ended December 31, 1997, 1996 and
1995. The increase in 1997 is due to an increase in FDIC premiums paid per
$100 of deposits and to the increased deposit base of the Company. The
decrease from 1995 to 1996 was due to reduced FDIC premiums beginning in May
of 1995.
The Bank's professional fees decreased by $203,000 or 27% in 1997, as
compared with an increase of $351,000 or 87% in 1996, over the same period in
1995. Professional fees include legal, consulting, audit and accounting fees.
The primary reason for the 1996 increase and 1997 decrease, was consulting
fees incurred in conjunction with an re-engineering project undertaken by the
Bank in 1996.
Supplies increased by $246,000 or 84% in 1997, primarily related to the
new branch openings and the purchase of the thrift in mid 1996. Also as
previously discussed, in 1997 the Bank implemented check imaging for
deposit customers, which also increased supplies expense.
Marketing increased $220,000 or 59% in 1997, as compared with an increase
of $158,000 or 75% in 1996, over the same period in 1995. Marketing has
continued to increase as the Company consciously promoted various deposit and
loan products to assist with the general growth of the Company, and incurred
promotional expenses related to branch expansion.
Other expenses increased $650,000 or 31% in 1997 as compared to an
increase of $580,000 or 37% over the same period in 1995. Increases relate
primarily to overall growth of the Company through the purchase of the Thrift
and branch expansion. In 1997 $275,000 in other expenses related to the
branches purchased from Bank of America.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was a benefit of $26,000 in 1997
compared to an expense of $1,163,000 in 1996, and $223,000 in 1995. The
effective income tax rates (computed as income taxes as a percentage of
income before income taxes) were an income tax benefit of 6.9% in 1997, and
income tax expenses of 36.7% and 39.9% for 1996 and 1995, respectively. In
part the effective tax rate of the Company was a benefit in 1997 due to
favorable housing tax credits. Total housing tax credits for 1997 and 1996
were approximately $71,000 and $22,000, respectively. The changes 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.
FINANCIAL CONDITION
Total assets increased 58% to $421,394,000 at December 31, 1997, compared
to $265,989,000 million at December 31, 1996. The purchase of three branches
from Bank of America accounted for a $61,816,000 increase in assets, and a
successful stock offering increased assets by an additional $17,951,000. In
addition, two branches were opened in late 1996, which also contributed to
asset growth in 1997. Net loans grew to $214,144,000 at year end 1997, a 19%
increase and deposits grew to $356,395,000, a 50% increase over 1996. Total
equity capital grew to $40,248,000, a 92% increase over year end 1996.
stockholders' equity.
SECURITIES
The following table sets forth the carrying amount (fair value) of available
for sale securities at December 31,
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(Dollars in thousands) 1997 1996 1995
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Available for Sale Securities:
U.S. Treasury and U.S.
Government agencies $ 1,824 $ 17,711 $ 22,521
State and political subdivisions 9,640 4,271 4,297
Mortgage-backed securities 68,808 20,751 17,932
Collateralized mortgage obligations 51,874 - -
Other securities 3,111 645 552
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Carrying amount and fair value $135,257 $ 43,378 $ 45,302
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The following table sets forth the carrying amount (amortized cost) and fair
value of held to maturity securities at December 31,
- -----------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
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Held to Maturity Securities:
U.S. Treasury and U.S. Government agency $ 9,442 - -
Mortgage-backed securities 3,333 - -
State and political subdivisions - - -
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Carrying amount (amortized cost) $12,775 - -
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Fair value $12,780 - -
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Total carrying value of securities increased to $148,032,000 at December 31,
1997 from $43,378,000 at December 31, 1996, a $104,654,000, or 241% increase.
As shown in the tables above, $12,775,000 of the increase in securities were
placed in the held to maturity category, signifying the company's intention
to hold these securities until maturity. The remainder of the securities
purchased in 1997 were placed in the available for sale category and are
shown at market value.
Available for sale securities increased $91,879,000 at December 31, 1997
over the same period in 1996. The increase in 1997 included $51,874,000 of
collateralized mortgage obligations, and $48,057,000 in mortgage-backed
securities. Of the securities purchased in 1997, most of the purchases were
made in August through November of 1997. These purchases were in anticipation
of the excess cash obtained from the branches purchased from Bank of America,
which added $60,849,000 in deposits to the bank, and from the common stock
offering which generated additional cash to the Company of $17,951,000. The
security purchases were a mixture of variable and fixed rate securities.
The Company purchased a large amount of mortgage-backed securities which
generally have stated maturities in excess of 10 years but are subject to
substantial prepayments which effectively accelerate actual maturities.
Included in these purchases were $29,585,000 in fixed rate collateralized
mortgage obligations that are U.S. agency guaranteed and $19,137,000 in
variable rate agency collateralized mortgage obligations. The Company
purchased one private whole loan collateralized mortgage obligation for
$3,152,000. All of the securities owned by the Company are stress tested on a
monthly basis according to Federal Financial Institutions Examination Council
(FFIEC) guidelines. As of December 31, 1997, one instrument did not pass the
FFIEC stress test due to the average life extension in excess of four years.
This instrument has a fair value of $4,841,000. At December 31, 1997 the
Company had no structured notes. See note 1 and 3 to the Company's
Consolidated Financial Statements for further information concerning the
securities portfolio.
LOANS
Total gross loans increased 19% to $217,977,000 at December 31, 1997,
compared to $183,247,000 at December 31, 1996. The increase in loan volume in
1997 was due to the opening of the new branches in 1996, coupled with the
business development efforts by the Company's loan officers.
The Company concentrates its lending activities in five principal areas:
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans. Interest rates charged for loans made by the Company vary
with the degree of risk, the size and term of the loan, the borrowers'
depository relationships with the Company and prevailing market rates.
The following table presents the composition of the Company's loan portfolio at
December 31, for the years indicated.
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(Dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Dollar Percent Dollar Percent Dollar Percent Dollar Percent Dollar Percent
Loan Categories Amount of loans Amount of loans Amount of loans Amount of loans Amount of loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $ 34,992 16% $27,857 15% $ 20,374 15% $ 15,229 13% $ 16,896 16%
Agricultural 43,558 20 43,929 24 45,189 33 40,598 36 38,029 35
Real estate-construction 12,657 6 13,923 8 12,006 9 11,726 10 9,143 9
Real estate-mortgage 70,802 32 57,098 31 42,128 32 34,743 31 32,984 31
Consumer 55,968 26 40,440 22 14,039 11 11,304 10 10,072 9
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Total 217,977 100% 183,247 100% 133,736 100% 113,600 100% 107,124 100%
Less allowance for loan losses (3,833) (2,792) (1,701) (1,621) (1,747)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans $214,144 $180,455 $132,035 $111,979 $105,377
- ------------------------------------------------------------------------------------------------------------------------------------
The large increase in loans from 1995 to 1996 was due to the purchase of
the Thrift and its $18,203,000 consumer finance operation as of June 1996.
The largest segment within the agriculture portfolio is the Company's dairy
loans. Dairy loans comprised 11% of the Company's loan portfolio as of
December 31, 1997.
The above referenced loan portfolio mix has not materially changed from
the prior year. As a result of the Company's loan portfolio mix, the future
quality of these assets could be affected by adverse trends in its region or
in the broader community. These trends are beyond the control of the Company.
CREDIT RISK MANAGEMENT AND ASSET QUALITY
The Company closely monitors the markets in which it conducts its lending
operations and continues its strategy to control exposure to loans with
higher credit risk. Asset reviews are performed using grading standards and
criteria similar to those employed by bank regulatory agencies. Assets
receiving lesser grades fall under the "classified assets" category, which
includes all nonperforming assets and potential problem loans, and receive
an elevated level of attention to improve the likelihood of collection. The
policy of the Company is to review each loan in the portfolio to identify
problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined weaknesses and are characterized by the distinct possibility that the
Company will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable,
and there is a high possibility of loss. A loan classified loss is considered
uncollectible and its continuance as an asset is not warranted.
The level of nonperforming loans and real estate acquired through
foreclosure are two indicators of asset quality. Nonperforming loans are
those in which the borrower fails to perform under the original terms of the
obligation and are categorized as loans past due 90 days or more, loans on
nonaccrual status and restructured loans. Loans are generally placed on
nonaccrual status and accrued but unpaid interest is reversed against current
year income when interest or principal payments become 90 days past due
unless the outstanding principal and interest is adequately secured and, in
the opinion of management, is 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 to 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, 1997 and 1996, 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 following table summarizes nonperforming assets of the Company at
December 31, for the years indicated:
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Nonaccrual loans $2,611 $4,968 $4,626 $ 653 $1,019
Accruing loans past due 90 days or more 131 600 224 46 64
- --------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,742 5,568 4,850 699 1,083
Other real estate owned 60 1,466 47 - -
- --------------------------------------------------------------------------------------------------------
Total nonperforming assets $2,802 $7,034 $4,897 $ 699 $1,083
- --------------------------------------------------------------------------------------------------------
Nonperforming assets:
To total loans 1.26% 3.71% 3.04% 3.63% .62%
To total assets .66 2.64 2.34 .39 .70
- --------------------------------------------------------------------------------------------------------
The Company had nonperforming loans at December 31, 1997 of $2,742,000 as
compared with $5,568,000 at year end 1996 and $4,850,000 at year end 1995.
Included in the 1997 totals are $1,635,000 of loans secured by real property
as compared with $3,626,000 in 1996 and $3,286,000 in 1995. Impaired loans as
of December 31, 1997 were $2,411,000 which had specific allowances for
possible loss of $598,000 as compared with $7,020,000 as of December 31, 1996
which had specific allowances for possible loss of $1,827,000. 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 $3,458,000 commercial real estate loan
that was completely written off in 1997. As a result of this loan write-off
the allowance was replenished which resulted in a provision in 1997 of
$5,825,000, compared to provisions of $1,513,000 and $228,000 in 1996 and
1995 respectively.
At December 31, 1997, the Bank had $60,000 in one residential real estate
property acquired through foreclosure compared with $1,466,000 as of December
31, 1996 and $47,000 at December 31, 1995.
ALLOWANCE FOR LOAN LOSSES
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 of 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.
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 1997 of
$5,825,000 as compared to $1,513,000 in 1996 and $228,000 in 1995. See
"Results of Operations-Provision for Loan Losses."
The following table summarizes the loan loss experience of the Company for
the years ended December 31,
- ----------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 2,792 $ 1,701 $ 1,621 $ 1,747 $ 1,616
Provision for loan losses 5,825 1,513 228 - 254
Allowance acquired through merger - 148 - - -
Charge-offs:
Commercial and agricultural 1,121 518 160 206 217
Real estate - construction 3,458 - - - -
Real estate - mortgage - - - - -
Consumer 471 140 63 42 83
- ----------------------------------------------------------------------------------------
Total charge-offs 5,050 658 223 248 300
- ----------------------------------------------------------------------------------------
Recoveries:
Commercial and agricultural 155 27 66 99 145
Real estate - construction 1 - - 8 -
Real estate - residential - - - - -
Consumer 110 61 9 15 32
- ----------------------------------------------------------------------------------------
Total recoveries 266 88 75 122 177
- ----------------------------------------------------------------------------------------
Net charge-offs 4,784 570 148 126 123
- ----------------------------------------------------------------------------------------
Balance at end of year $ 3,833 $ 2,792 $ 1,701 $ 1,621 $ 1,747
- ----------------------------------------------------------------------------------------
Loans outstanding at year-end $217,977 $183,247 $133,736 $113,600 $107,124
Average loans outstanding $198,140 $157,098 $120,620 $110,690 $102,236
Net charge-offs to average loans 2.41% .36% .12% .11% .12%
Allowance for loan losses
To total loans 1.76 1.52 1.27 1.43 1.63
To nonperforming assets 137 40 35 232 161
- ----------------------------------------------------------------------------------------
The increase in net charge-offs in 1997 was due to the complete write-off
of one commercial real estate loan as previously discussed. The Company's
charge-offs, net of recoveries, were $4,784,000 in 1997 as compared with
$570,000 in 1996 and $148,000 in 1995. This represents loan loss experience
ratios of 2.41%, .36% and .12% in those respective years stated as a
percentage of average gross loans outstanding for each year. As of December
31, 1997 the allowance for loan losses was $3,833,000 or 1.76% of total loans
outstanding. This compares with an allowance for loan losses of $2,792,000 or
1.52% in 1996 and $1,701,000 or 1.27% in 1995. The increase in net
charge-offs in 1996 was primarily due to the loss recognized on the
foreclosure of a real estate secured agricultural loan.
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, receipts of principal and
interest on loans available for sale 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 $159,291,000 and $63,196,000 at December 31, 1997 and 1996,
respectively, and were 37.8% and 23.8%, respectively, of total assets on
those dates. The increase in liquid assets in 1997 was primarily due to the
purchase of investments in 1997 that were placed in the available for sale
category. Liquidity is also affected by collateral requirements of its public
deposits and certain borrowings. Total pledged securities were $45,812,000 at
December 31, 1997 and $16,678,000 at December 31, 1996, respectively.
Although the Company's primary sources of liquidity include liquid assets
and its stable deposit base, the Company maintains lines of credit with
certain correspondent banks and the Federal Reserve Bank aggregating
$27,405,000 of which
$16,004,000 was outstanding as of December 31, 1997. This compares with lines
of credit of $7,623,000 of which $105,000 was outstanding as of December 31,
1996. The increase in the credit amount outstanding from year-end 1996 to
1997 is primarily due to the Company borrowing against their available credit
line with the Federal Home Loan Bank to purchase securities. At December 31,
1997, management believes that the Company maintains adequate amounts of
liquid assets to meet its liquidity needs.
INTEREST RATE RISK MANAGEMENT
The Company's success is largely dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates.
Although the Company manages other risks, as in credit and liquidity risk, in
the normal course of its business, management considers interest rate risk to
be its most significant market risk and could potentially have the largest
material effect on the Company's financial condition and results of
operations. The Company does not currently engage in trading activities or
use derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
The Company's interest rate risk management is the responsibility of the
Asset/Liability Management Committee (ALCO), which reports to the Board of
Directors. ALCO establishes policies that monitors and coordinates the
Company's sources, uses and pricing of funds. The committee is also involved
in formulating the economic projections for the Company's budget and
strategic plan. The asset/liability management committee (ALCO) sets specific
rate sensitivity limits for the Company. The committee monitors and adjusts
the Company's exposure to changes in interest rates to achieve predetermined
risk targets that it believes are consistent with current and expected market
conditions.
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income. Similarly, when interest-earning assets mature or reprice more
quickly than interest-bearing liabilities, falling interest rates could
result in a decrease in net income.
The primary analytical tool used by the Company to gauge interest rate
sensitivity is an analytical model used by many other financial institutions.
This model is used to estimate, based on the current and projected portfolio
mix, the effects changes in market rates will have on the Company's return on
equity. This model's estimate 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. This test measures the impact
on net interest income and equity of an immediate change in interest rates
(the federal funds rate) in 200 basis point increments.
Following are the estimated impacts of immediate changes in interest rates at
the specified levels at December 31, 1997:
- ------------------------------------------------------------------------------
Change in interest rates Percentage change in :
(In basis points) Net interest income (1) Equity(2)
- ------------------------------------------------------------------------------
+200 -.08% -.32%
- -200 -.11% -.43%
- ------------------------------------------------------------------------------
(1)THE PERCENTAGE CHANGE IN THIS COLUMN REPRESENTS NET INTEREST INCOME FOR 12
MONTHS IN A STABLE INTEREST RATE ENVIRONMENT VERSUS THE NET INTEREST INCOME IN
THE VARIOUS RATE SCENARIOS. (2)THE PERCENTAGE CHANGE IN THIS COLUMN REPRESENTS
EQUITY OF THE COMPANY IN A STABLE INTEREST RATE ENVIRONMENT VERSUS THE EQUITY IN
THE VARIOUS RATE SCENARIOS.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The
company relies primarily on its asset-liability structure to control interest
rate risk.
Based upon the December 31, 1997 mix of interest sensitive assets and
liabilities, given an immediate and sustained increase in the federal funds
rate of 2%, this model estimates the Company's cumulative return on equity
over the next year would decrease by less than 2%. This compares with a
cumulative one year expected decrease in return on equity of less than 1% as
of December 31, 1996. As this measure of interest rate risk indicates, the
Company is not subject to significant risk of change in its net interest
margin as a result of changes in interest rates.
CAPITAL RESOURCES
Capital serves as a source of funds and helps protect depositors against
potential losses. In 1997 the Company successfully completed a common stock
offering which netted the Company $17,951,000 to add to its capital
resources. This addition to capital was necessary to maintain favorable
capital ratios through the Company's purchase of the three branches from Bank
of America, and to support internal growth on the Company's balance sheet.
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, 1997, 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, 1997 was 8.58% as compared with 7.37% as of December 31,
1996. The Company's total risk based capital ratio at December 31, 1997
was 12.78% as compared to 10.20% as of December 31, 1996.
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet the
Company's future needs. All ratios are in excess of the regulatory
definitions of "well capitalized". Management believes that, under the
current regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future.
The company has no formal dividend policy, and dividends are issued
solely at the discretion of the Company's Board of Directors subject to
compliance with regulatory requirements. In order to pay any cash dividends,
the Company must receive payments of dividends or management fees from the
Bank or the Thrift. There are certain regulatory limitations on the payment
of cash dividends by banks and thrift and loan companies.
In March 1997, in response to regulatory concerns about the Bank's level
of nonperforming assets, the Board of Directors of County Bank adopted a
resolution not to pay cash dividends without the prior written consent of the
DFI and the FDIC.
As the result of a joint examination conducted in the last quarter of
1997 by the DFI and FDIC, the Company has been told that a supervisory
agreement will be required with respect to certain matters, including the
maintenance of adequate reserves in the future. The details of the
supervisory agreement have not yet been disclosed to the Company.
Since this time, however, nonperforming assets have significantly
decreased. Notwithstanding these resolutions, the subsidiaries have the
ability to pay cash dividends at December 31, 1997 of $2,453,000.
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.
MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCK MATTERS
Effective January 18, 1996, the Company's stock included for quotation on
the National Market System with a stock quotation symbol of CCOW.
The following table indicates the range of high and low sales prices for
the periods shown, based upon information provided by the Nasdaq National
Market System.
- -------------------------------------------------------------------------------
1997 High Low
- -------------------------------------------------------------------------------
4th quarter $14.00 $10.33
3rd quarter 14.50 12.25
2nd quarter 14.13 10.75
1st quarter $11.08 $ 8.50
1996 High Low
- -------------------------------------------------------------------------------
4th quarter $10.83 $ 9.17
3rd quarter 9.83 8.42
2nd quarter 10.00 8.67
1st quarter $10.00 $ 8.33
- -------------------------------------------------------------------------------
As of December 31, 1997, the number of stockholders of the Company on record
was approximately 2,800, compared to 1,175 at December 31, 1996. Generally, the
Company has retained earnings to support the growth of the Company and has not
paid regular cash dividends. The Company declared a 3 for 2 stock split in 1997
for shareholders on record as of April 11, 1997. This resulted in an additional
869,485 shares of stock being issued in 1997. In 1996 the Company paid a 5%
stock dividend and a $.03 per share cash dividend.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000"problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Sytems that do not properly recognize
such information could generate erroneous data or cause a system to fail.
The Company has a detailed year 2000 compliance plan that has been
approved by their board of directors. The board of directors is updated
monthly on the progress of the plan. The company is utilizing both internal
and external resources to identify, correct or reprogram the systems in order
that they be year 2000 compliant. The Bank's core banking system, Jack Henry &
Associates, Inc. Silverlake, is anticipating a release in August, 1998 that
will be year 2000 compliant. This will allow adequate time for testing to be
completed by mid 1999.
With respect to external systems, the Company is in contact with vendors
and customers in order to monitor the progress with year 2000 compliance
efforts and assess the need for contingency plans, if applicable. To date
most vendors have provided confirmations that they are either compliant or
are making progress toward planned compliance.
Based on a preliminary study, the Company expects to spend approximately
$250,000 to bring its information systems into year 2000 compliance. A
significant proportion of these costs are not likely to be incremental costs to
the Company, but rather will represent the redeployment of existing information
technology resources. The expenditures in 1997 were negligible.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME.
SFAS No. 130 is effective for annual periods beginning after December 15,
1997 and is to be applied retroactively to all periods presented. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. It
does not, however, specify when to recognize or how to measure items that
make up comprehensive income. SFAS No. 130 was issued to address concerns
over the practice of reporting elements of comprehensive income directly in
equity. This statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. Enterprises are required to classify
items of "other comprehensive income"by their nature in the financial
statement and display the balance of other comprehensive income separately in
the equity section of a statement of financial position. It does not require
per share amounts of comprehensive income to be disclosed. Management does
not expect that adoption of SFAS No. 130 will have a material impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 is effective for interim and
annual periods beginning after December 15, 1997 and is to be applied
retroactively to all periods presented. SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE but retains the requirement to report information about major
customers. Management does not expect that adoption of SFAS No. 131 will have a
material impact on the Company's consolidated financial statements.
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, 1997 and 1996 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, 1997.
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, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
Sacramento, California
January 30, 1998
CAPITAL CORP OF THE WEST
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
As of December 31,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------
Assets
Cash & noninterest-bearing deposits in other banks $21,035 $12,982
Federal funds sold 2,400 3,735
Time deposits at other financial institutions 599 3,101
Investment securities available for sale, at fair value 135,257 43,378
Investment securities held to maturity, at cost 12,775 -
Mortgage loans held for sale - 880
Loans, net 214,144 180,455
Interest receivable 2,741 1,879
Premises and equipment, net 12,945 6,266
Goodwill and other intangible assets 6,653 2,346
Other assets 12,845 10,967
- ----------------------------------------------------------------------------------------------
Total assets $421,394 $265,989
- ----------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest-bearing demand $58,836 $39,157
Negotiable orders of withdrawal 54,202 34,303
Savings 143,562 111,285
Time, under $100,000 69,534 46,990
Time, $100,000 and over 30,261 6,610
- ----------------------------------------------------------------------------------------------
Total deposits 356,395 238,345
Borrowed funds 22,049 4,671
Accrued interest, taxes and other liabilities 2,702 1,999
- ----------------------------------------------------------------------------------------------
Total liabilities 381,146 245,015
- ----------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, no par value; 10,000,000 shares authorized;
none outstanding
Common stock, no par value; 20,000,000 shares authorized;
4,376,975 and 2,590,837 shares issued and outstanding 33,928 15,321
Retained earnings 6,125 5,722
Investment securities unrealized gains (losses), net 195 (69)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 40,248 20,974
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $421,394 $265,989
- ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------
As of December 31,
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $20,646 $16,302 $12,969
Interest on deposits with other financial institutions 53 127 -
Interest on investment securities held to maturity:
Taxable 828 60 34
Interest on investment securities available for sale:
Taxable 3,810 2,409 2,185
Nontaxable 231 246 327
Interest on federal funds sold 344 207 358
- ------------------------------------------------------------------------------------------------
Total interest income 25,912 19,351 15,873
Interest expense:
Deposits:
Negotiable orders of withdrawal 345 268 239
Savings 4,770 4,350 4,213
Time, under $100,000 3,174 1,808 950
Time, $100,000 and over 809 359 304
- ------------------------------------------------------------------------------------------------
Total interest on deposits 9,098 6,785 5,706
Other 1,092 80 11
- ------------------------------------------------------------------------------------------------
Total interest expense 10,190 6,865 5,717
- ------------------------------------------------------------------------------------------------
Net interest income 15,722 12,486 10,156
Provision for loan losses 5,825 1,513 228
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,897 10,973 9,928
Other income (loss):
Service charges on deposit accounts 1,709 1,274 920
Income from real estate held for sale or development 879 508 88
Provision for loss on real estate held for sale
or development - - (2,881)
Other 1,264 1,153 649
- ------------------------------------------------------------------------------------------------
Total other income (loss) 3,852 2,935 (1,224)
Other expenses:
Salaries and related benefits 6,133 5,283 4,161
Premises and occupancy 1,235 835 612
Equipment 1,446 1,022 789
Bank Assessments 97 48 183
Professional Fees 552 755 404
Supplies 538 292 234
Marketing 590 370 212
Other 2,781 2,131 1,551
- ------------------------------------------------------------------------------------------------
Total other expenses 13,372 10,736 8,146
- ------------------------------------------------------------------------------------------------
Income before income taxes 377 3,172 558
(Benefit) provision for income taxes (26) 1,163 223
- ------------------------------------------------------------------------------------------------
Net income 403 2,009 335
- ------------------------------------------------------------------------------------------------
Earnings per share $0.12 $0.85 $0.16
- ------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000) 3,302 2,367 2,102
- ------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Common Stock Unrealized
Number Retained Securities Gains
(Amounts in thousands) of Shares Amount Earnings (Losses),net Total
- ----------------------------------------------------------------------------------------------------------------
Balances - December 31, 1994 1,727 $ 7,425 $7,012 (335) $14,082
15% stock dividend, including payment 261 2,430 (2,436) - (6)
for fractional shares 2
Exercise of stock options 15 - - 15
Net change in fair value of investment
securities, net of tax effect of $427,000 - - - 667 667
Net income - - 335 - 335
- ----------------------------------------------------------------------------------------------------------------
Balances - December 31, 1995 1,990 $ 9,870 $4,911 $312 $15,093
- ----------------------------------------------------------------------------------------------------------------
5% stock dividend and $.03 per share
cash dividend, including payment for
fractional shares 123 1,112 (1,198) - (86)
Exercise of stock options 33 208 - - 208
Issuance of shares pursuant to
401K & ESOP plans 18 162 - - 162
Acquisition of Town & Country
Finance & Thrift 427 3,969 - - 3,969
Change in fair value of investment -
securities, net of tax effect of ($247,000) - - - (381) (381)
Net income - 2,009 - 2,009
- ----------------------------------------------------------------------------------------------------------------
Balances - December 31, 1996 2,591 $15,321 $5,722 $69 $20,974
- ----------------------------------------------------------------------------------------------------------------
Three for two stock split, including
fractional shares 870 - (5) - (5)
Exercise of stock options 47 439 - - 439
Issuance of shares pursuant
to 401 K & ESOP plans 14 217 - - 217
Issuance of shares pursuant
to stock offering 1,725 17,951 - - 17,951
Change in fair value of investment
securities, net of tax effect of $172,000 - - - 264 264
Net income - - 403 - 403
- ----------------------------------------------------------------------------------------------------------------
Balances - December 31, 1997 4,377 $33,928 $6,125 $195 $40,248
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL CORP OF THE WEST
CONSOLIDATED STATEMENTS OF CASH FLOW
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31,
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 403 $ 2,009 $ 335
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses 5,825 1,513 228
Depreciation, amortization and accretion, net 1,661 1,023 860
Provision (benefit) for deferred income taxes 499 (327) (1,191)
Gain on sale of real estate held for sale (879) (348) -
Net (increase) decrease in interest receivable & other assets (4,012) (5,044) (3,164)
Net decrease (increase) in mortgage loans held for sale 880 (376) 2,241
Net increase in deferred loan fees 167 54 31
Net increase in accrued interest payable & other liabilities 703 1,330 499
Provision for losses on real estate held for sale or development - - 2,881
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 5,247 (166) 2,720
- -----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Investment security purchases - available for sale securities (23,360) (17,198) (14,836)
Investment security purchases - mortgage-backed securities and collateralized mortgage obligations (119,734) (9,795) (11,786)
Proceeds from maturities of available for sale investment securities 7,433 9,530 12,883
Proceeds from maturities of held to maturity investment securities 2,013 - -
Proceeds from maturities of mortgage-backed securities and collateralized mortgage obligations 13,861 8,069 2,139
Proceeds from sales of investment securities 12,833 14,590 3,012
Proceeds from sales of mortgage-backed securities and collateralized mortgage obligations 2,410 - -
Net decrease in time deposits at other financial institutions 2,502 - -
Proceeds from sales of commercial and real estate loans 5,972 3,230 1,037
Net increase in loans (45,717) (35,017) (21,379)
Purchases of premises and equipment (7,904) (2,768) (1,719)
Proceeds from sale of premises and equipment - 9 71
Construction of real estate held for sale or development - (417) (622)
Proceeds from sale of real estate held for sale or development 1,470 765 1547
Purchase of subsidiary - (183) -
Purchase of intangible assets (4,343) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (152,564) (29,185) (29,653)
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand, NOW and savings deposits 71,856 13,812 26,004
Net increase in certificates of deposit 46,194 9,109 3,397
Net increase in other borrowings 17,378 3,896 -
Issuance of common stock 17,951 - -
Issued shares for benefit plan purchases 217 162 -
Fractional shares purchased (5) (86) (6)
Exercise of stock options 444 208 15
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 154,035 27,101 29,410
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,718 (2,250) 2,477
Cash and cash equivalents at beginning of year 16,717 18,967 16,490
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $23,435 $ 16,717 $18,967
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
Investment securities net unrealized gains (losses), net of taxes $ 264 $ (381) $ 667
Interest paid 10,073 6,244 5,678
Income tax payments 1,185 1,126 1,471
Transfer of securities from available for sale to held to maturity 11,455 - -
Loans transferred to other real estate owned $ 64 $ 1,524 $ 88
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Capital Corp of the West is a registered bank holding Company (the
"Company"), which provides a full range of banking services to individual and
business customers in the Central San Joaquin Valley, through its
subsidiaries operations. The following is a description of the more
significant 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 ("CWG"). CWG, a subsidiary formed in 1996, became inactive in 1997. The
Bank also has one active subsidiary, Merced Area Investment and Development,
Inc. ("MAID"). All significant intercompany balances and transactions are
eliminated.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and prevailing practices in the
financial services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reported period. Actual results could
differ from those estimates applied in the preparation of the consolidated
financial statements. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1997 presentation.
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, 1997, the Company's average cash reserve balances as required by
the Federal Reserve Bank were approximately $2,700,000.
INVESTMENT SECURITIES: Investment securities consist of U.S. treasury,
federal agencies, states and counties municipal securities, mortgage-backed
securities, collateralized mortgage obligations, and equity securities. Under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, securities
are classified into one of three categories upon acquisition. Theses
categories include trading, available for sale, and held to maturity. The
category of each security is determined based on the Company's investment
objectives, operational needs and intent. The Company does not purchase
securities with the intent of actively trading them.
Securities available for sale may be sold prior to maturity and are
available for future liquidity requirements. These securities are carried at
fair value. Realized gains and losses on sale of securities available for sale
are computed on the specific identification method. Unrealized gains and losses
on securities available for sale are excluded from earnings and are reported net
of tax as a separate component of shareholders' equity until realized.
Securities held to maturity are classified as such where the Company has the
ability and positive intent to hold them to maturity. These securities are
carried at cost, adjusted for amortization of premiums and accretion of
discounts. Unrealized losses due to fluctuations in fair value of securities
held to maturity are recognized when it is determined that an other than
temporary decline in value has occurred.
Premiums and discounts are amortized or accredited over the life of the
related investment security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities classified as available for sale or
held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
LOANS: Loans are carried at the principal amount outstanding, net of unearned
income, including deferred loan origination fees and costs. Nonrefundable loan
origination and commitment fees and the direct costs associated with originating
or acquiring the loans are deferred and amortized as an adjustment to interest
income over the life of the related loan.
Interest income on loans is accrued based on principal amounts outstanding.
Loans which are more than 90 days delinquent with respect to interest or
principal, are placed on nonaccrual status, unless the outstanding principal and
interest is adequately secured and, in the opinion of management, remains
collectible. Uncollected accrued interest is reversed against interest income,
and interest is subsequently recognized only as received until the loan is
returned to accrual status. Interest accruals are resumed when such loans are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectable as to
both principal and interest.
A loan is considered impaired, if it is probable that the Company will be
unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Any allowance on
impaired loans 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. In general, these statements
are not applicable to large groups of small balance homogenous loans that are
collectively evaluated for impairment, such as residential mortgage and
consumer installment loans. Income recognition on impaired loans conforms to
the method the Company uses for income recognition on nonaccrual loans.
Interest income on nonaccrual loans is recorded on a cash basis. Payments may
be treated as interest income or return of principal depending upon
management's opinion of the ultimate risk of loss on the individual loan.
Cash payments are treated as interest income when management believes the
remaining principal balance is fully collectible.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level deemed appropriate by management to adequately provide for known and
unidentified losses in the loan portfolio. The allowance is maintained at the
level considered to be adequate for potential loan losses based on
management's assessment of various factors affecting the loan portfolio,
which include growth trends in the portfolio, historical experience,
concentrations of credit risk, delinquency trends, general economic
conditions, and internal and external credit reviews. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's reserve for possible credit losses. Such
agencies may require the Company to recognize additions to the reserve based
on their judgment of information available to them at the time of their
examination. Additions to the allowance, in the form of provisions, are
reflected in current operating results, while charge-offs to the allowance
are made when a loss is determined to have occurred. Management uses the best
information available on which to base estimates, however, ultimate losses
may vary from current estimates.
GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS: The Company services both
sold and retained portions of United States Small Business Administration (SBA)
loans and a portfolio of mortgage loans. In June, 1996, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (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. In addition, it requires that servicing assets and other retained
interests in transferred assets be measured by allocating the previous carrying
amount of the transferred assets between the assets sold, if any, and the
retained interests, if any , based on their relative fair value at the date of
transfer. Liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets are to be initially measured at fair
value. Servicing assets and liabilities are to be subsequently amortized in
proportion to, and over the period of estimated net servicing income or loss and
assessed for asset impairment or increased obligation based on fair value.
The Company recognizes a gain and a related asset for the fair value of
the rights to service loans for others when loans are sold. In accordance
with SFAS No. 125, the fair value of the servicing assets are estimated based
upon the present value of the estimated expected future cash flows. The cash
flows are calculated using a discount rate commensurate with the risk
involved and include estimates of future revenues and expenses, including
assumptions about defaults and prepayments. The Bank measures the impairment
of the servicing asset based on the difference between the carrying amount of
the servicing asset and its current fair value. As of December 31, 1997 and
1996, there was no impairment in mortgage servicing assets.
A gain or loss is recognized to the extent that the sales proceeds and the
fair value of the servicing asset exceed or are less than the book value of the
loan. Additionally, normal cost for servicing the loan is considered in the
determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at the closing
date to the extent that the sales proceeds less costs to complete the sale,
exceed or are less than the carrying value of the servicing rights held.
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. Gains are recognized at the time of sale
and are calculated based on the amounts received and the net book value of
the loans sold.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight line basis over the estimated useful life of each type
of asset. Estimated useful lives range up to 35 years for buildings, up to the
lease term for leasehold improvements, and 3 to 15 years for furniture and
equipment.
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.
INTANGIBLE ASSETS: Goodwill, representing the excess of purchase price over
the fair value of net assets acquired, resulted from the purchase of the
Thrift by the Company. Goodwill is being amortized over 18 years. Core
deposit intangibles resulting from the Thrift and branch purchase (as
discussed in Note 2), are amortized over 10 and 7 years, respectively.
Intangible assets are reviewed on a periodic basis for. If such impairment is
indicated, recoverability of the asset is assessed based upon expected
undiscounted net cash flows.
OTHER REAL ESTATE: Other real estate is comprised of property acquired
through foreclosure proceedings or acceptance of deeds-in-lieu of
foreclosure. Losses recognized at the time of acquiring property in full or
partial satisfaction of debt are charged against the allowance for loan
losses. Other real estate is recorded at the lower of the related loan
balance or fair value less estimated disposition costs. Fair value of other
real estate is generally based on an independent appraisal of the property.
Any subsequent costs or losses are recognized as noninterest expense when
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
INVESTMENT TAX CREDITS: The Company has investments in limited partnerships
which own low income affordable housing that 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 and are accounted for using the cost method and are evaluated at
each reporting period for impairment. The Company had investments in these
partnerships of $4,300,000 and $2,700,000 as of December 31, 1997 and 1996
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 a deferred
compensation plan for certain members of 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. 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 for the salary
continuation plans and the deferred compensation benefits. The balance of
these life insurance policies were $3,389,000 and $3,134,000 as of December
31, 1997 and 1996 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: The Company accounts 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.
PER SHARE EARNINGS: The Company adopted SFAS No. 128, EARNINGS PER SHARE, which
replaces APB Opinion 15, EARNINGS PER SHARE, and simplifies the computation of
earnings per share (EPS) by replacing the presentation of primary EPS with a
presentation of Basic EPS. In addition, the settlement requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common share
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted EPS. Common stock equivalents do not have a dilutive effect on the
earnings per share calculation in any of the years presented. The number of
shares outstanding for 1997, 1996, and 1995 have been restated to reflect the
3 for 2 stock split which occurred in 1997.
COMMON STOCK OUTSTANDING: A minor adjustment to decrease Common Shares
Outstanding by 13,122 shares has been made to the December 31, 1994 Consolidated
Statements of Shareholders' Equity.
NOTE 2: ACQUISITIONS
On December 11, 1997 the Company acquired, for $5,310,000, deposits and
buildings of three former branches of Bank of America. These branches were
merged into County Bank, and added $60,849,000 in deposits and $967,000 in
buildings and equipment. The transaction was accounted for under the purchase
method of accounting. Acquisition costs of $275,000 have been included in other
expenses in the statement of income for 1997. In connection with the
transaction, County Bank recorded a core deposit intangible of $4,343,000. This
intangible will be amortized into expense on the straight line method over 7
years. Amortization expense of $14,000 was recognized in 1997 related to the
branches purchased. The branch operations have been included in these financial
statements since December 11, 1997.
In conjunction with the branch purchase, the Company completed a capital
offering which increased common stock shares outstanding by 1,725,000 and
increased equity by $17,951,000. This capital was used to support the purchase
of the branches and for general Company growth.
Effective June 28, 1996, the Company purchased the Thrift for a total
purchase price of $5,823,000. The purchase was made using a combination of
stock and cash. The transaction was accounted for under the purchase method
of accounting and is operated as a separate subsidiary by the Company. All of
the Thrift's operations have been included in these financial statements
since the effective purchase date. In connection with this transaction,
goodwill was recorded of $2,023,000 which will be amortized over an estimated
18 years. A core deposit intangible of $460,000, to be amortized over 10
years was recorded, along with a fair value adjustment to loans of $185,000
to be amortized over 3 years. These intangibles had combined amortization of
$97,000 and $48,000 in 1997 and 1996, respectively.
NOTE 3: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at
December 31, are summarized below:
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1997 Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
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AVAILABLE FOR SALE SECURITIES:
U.S. Treasury & U.S. government agencies $ 1,819 $ 6 $ 1 $ 1,824
State & political subdivisions 9,484 156 - 9,640
Mortgage-backed securities 68,599 350 141 68,808
Collateralized mortgage obligations 51,924 88 138 51,874
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Total debt securities 131,826 600 280 132,146
Equity securities 3,111 - - 3,111
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Total available for sale investment securities 134,937 600 280 135,257
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HELD TO MATURITY SECURITIES:
U.S. Treasury & U.S. government agencies 9,442 2 10 9,434
Mortgage-backed securities 3,333 13 - 3,346
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Total held to maturity securities 12,775 15 10 12,780
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Total securities $ 147,712 $ 615 $ 290 $ 148,037
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1996
(Dollars in thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury & U.S. government agencies $ 17,926 $ 21 $ 236 $ 17,711
State & political subdivisions 4,196 100 25 4,271
Mortgage-backed securities 20,727 169 145 20,751
Other securities 645 - - 645
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Total securities $ 43,494 $ 290 $ 406 $ 43,378
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At December 31, 1997 and 1996, investment securities with carrying values of
approximately $45,812,000 and $16,678,000, respectively, were pledged as
collateral for deposits of public funds, government deposits, 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 carried balances,
stated at cost, of $2,955,000 and $645,000 of Federal Home Loan Bank stock as of
December 31, 1997 and 1996 respectively. The Bank recognized gross gains on the
sale of securities of $17,000, $68,000, and $0 in 1997, 1996, and 1995,
respectively. Gross losses of $49,000, $57,000 and $3,000 were recognized in
1997, 1996, and 1995, respectively.
In March 1997, U.S. government agency securities with a market value of
$11,455,000 were transferred from the available for sale portfolio to the held
to maturity portfolio at market value. The unrealized holding loss at the date
of transfer shall continue to be reported as a separate component of
shareholders' equity, but shall be amortized over the remaining life of the
securities as an adjustment of yield in a manner consistent with the
amortization of any premium or discount.
The carrying and estimated fair values of debt securities at December 31,
1997 by contractual maturity, are shown on the following table. Actual
maturities may differ from contractual maturities because issuers generally have
the right to call or prepay obligations with or without call or prepayment
penalties.
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December 31, 1997 Amortized Estimated
(Dollars in thousands) Cost Fair Value
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AVAILABLE FOR SALE SECURITIES:
One year or less $ 724 $ 730
One to five years 2,802 2,873
Five to ten years 2,382 2,401
Over ten years 5,395 5,460
Mortgage-backed securities and CMOs 120,522 120,682
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Total debt securities $131,825 $132,146
HELD TO MATURITY SECURITIES:
One year or less $ - $ -
One to five years 1,044 1,037
Five to ten years 5,998 6,001
Over ten years 2,400 2,396
Mortgage-backed securities and CMOs 3,333 3,346
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Total debt securities $ 12,775 $12,780
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NOTE 4: LOANS
Loans at December 31 consisted of the following:
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(Dollars in thousands) 1997 1996
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Commercial $ 34,992 $ 27,857
Agricultural
43,558 43,929
Real estate - mortgage 70,802 57,098
Real estate - construction 12,657 13,923
Consumer 55,968 40,440
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Gross loans 217,977 183,247
Less allowance for loan losses 3,833 2,792
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Net loans $214,144 $180,455
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These loans are net of deferred loan fees of $932,000 in 1997 and $765,000
in 1996.
Nonaccrual loans totaled $2,611,000, $4,968,000 and $4,626,000 at December
31, 1997, 1996 and 1995 respectively. Foregone interest on nonaccrual loans was
approximately $189,000, $497,000 and $25,000 for the years ending December 31,
1997,1996 and 1995, respectively.
Impaired loans are loans for which it is probable that the Company will not
be able to collect all amounts due. At December 31, 1997 and 1996, the recorded
investment in loans for which impairment was recognized totaled $2,411,000 and
$7,020,000 which had valuation allowances of $598,000 in 1997 and $1,827,000 in
1996. The average outstanding balance of impaired loans for the years ended
December 31, 1997, 1996 and 1995 were $4,715,000, $6,248,000, and $2,165,000,
respectively, on which $471,000, $625,000 and $216,000, respectively, was
recognized as interest income.
At December 31, 1997 and 1996, the collateral value method was used to
measure impairment for all loans classified as impaired. The following table
shows the recorded investment in impaired loans by loan category at December 31:
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(Dollars in thousands) 1997 1996
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Commercial $ 1,711 $1,467
Agricultural 630 426
Real estate 5 3,883
Consumer and other 65 1,244
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$ 2,411 $7,020
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Following is a summary of changes in the allowance for loan losses during the
years ended December 31:
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(Dollars in thousands) 1997 1996 1995
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Balance at beginning of year $2,792 $1,701 $1,621
Allowance acquired through Thrift - 148 -
Loans charged-off (5,050) (658) (223)
Recoveries of loans
previously charged-off 265 88 75
Provision for loan losses 5,826 1,513 228
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Balance at end of year $3,833 $2,792 $1,701
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In the ordinary course of business, the Company, through its subsidiaries, has
made loans to certain directors and officers and their related businesses. In
management's opinion, these loans are 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. Changes to loans to, or guaranteed by, directors and
executive officer and their related businesses at December 31, are summarized as
follows:
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(Dollars in thousands) 1997 1996
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Balance at beginning of year $573 $675
Loan advances and renewals 497 511
Loans matured or collected (578) (613)
Other changes (77) -
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Balance at end of year $415 $573
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Other changes in 1997 represent loans to former directors and executive
officers of the Company who are no longer related parties.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
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(Dollars in thousands) 1997 1996
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Land $1,349 $ 1,139
Buildings 7,952 2,979
Leasehold improvements 640 887
Furniture and equipment 8,179 6,363
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18,120 11,368
Less accumulated depreciation
and amortization 5,175 5,102
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$12,945 $ 6,266
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Included in the totals above are construction in progress of $307,000 and
$1,428,000 at December 31, 1997 and 1996 respectively.
NOTE 6: BORROWED FUNDS
At December 31, 1997 the Company's borrowed funds consisted of the following:
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(Dollars in thousands) 1997 1996
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Securities sold under agreements
to repurchase; dated March 17, 1997;
fixed rate of 5.57%; payable on
March 18, 1998 $ 2,459 $ -
Unsecured loan from unaffiliated
bank dated July 26, 1996;
effective interest rate of 9%; interest
payable quarterly at prime + .50%;
principal payable quarterly at
$135,714; final payment due on
April 30, 1998 286 791
FHLB loan, dated December 18, 1997;
effective rate of 5.89%; rate reprices
monthly based on the 1 month
LIBOR; payable on
December 18, 1998 10,900 -
FHLB loan, dated January 16, 1997;
variable rate of 5.75%; rate reprices
monthly based on the 1 month
LIBOR; payable on January 25, 1999 5,000 -
FHLB loan, dated July 15, 1994;
fixed rate of 7.58%; payable on
July 15, 1999 104 105
Short-term note from City Redevelopment Agency
dated June 24, 1996; interest free;
payable on July 8, 1997 - 3,775
Long-term note from unaffiliated
bank dated December 22, 1997;
fixed rate of 7.80%; principal and
interest payable monthly at $25,047;
payments calculated as fully
amortizing over 25 years with a
10 year call 3,300 -
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$22,049 $4,671
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In 1997 the Company actively sold securities under agreements to repurchase.
These transactions averaged $12,277,000 in 1997, with a maximum balance borrowed
of $53,550,000 at November 30, 1997. Interest expense recorded in 1997 for
securities sold under agreements to repurchase was $706,000. Securities under
these repurchase agreements are held in the custody of independent securities
brokers. The repurchase agreement disclosed above is collateralized by a
security with a carrying value of $2,387,000 at December 31, 1997. Repurchase
agreements were not actively entered into during 1996 or 1995.
The Company maintains a line of credit with the Federal Home Loan Bank of
San Francisco. Based on the FHLB stock requirements at December 31, 1997, this
line provided for maximum borrowings of $21,905,000 of which $16,004,000 was
outstanding, leaving $5,901,000 available. At December 31, 1997 this borrowing
line is collateralized by securities with a carrying value of $23,324,000.
Interest expense related to FHLB borrowings totaled $308,000, $8,000, and $8,000
in 1997,1996, and 1995, respectively.
The Company incurred interest expense of $78,000 in 1997, and $72,000 in
1996, related to the notes with unaffiliated banks. The long-term note dated
December 22, 1997 is secured by Company land and buildings.
Interest expense related to federal funds purchased was $3,000 in 1995. No
federal funds were purchased in 1996 or 1997.
The Company also has other available borrowings of $5,500,000, of which none
were outstanding at December 31, 1997.
Principal payments required to service the Companys' borrowings during the
next five years are:
(Dollars in thousands)
1998 $ 13,690
1999 5,152
2000 52
2001 56
2002 61
Thereafter 3,038
------
Total borrowed funds $ 22,049
------
------
NOTE 7: REAL ESTATE OPERATIONS
As of December 31, 1997, MAID held two real estate projects, including
improved and unimproved land. Based on the general state of the local real
estate climate, the Bank had 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.
Summarized below is condensed financial information of MAID:
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(Dollars in thousands) December 31,
CONDENSED BALANCE SHEETS 1997 1996
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ASSETS:
Cash on deposit with County Bank $ 442 $ 481
Notes receivable and other 356 103
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Total assets 798 584
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable and other 301 298
Shareholder's equity 497 286
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Total liabilities and shareholder's
equity $ 798 $ 584
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CONDENSED STATEMENT OF OPERATIONS 1997 1996 1995
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Revenues $ 876 $ 812 $1,643
Expenses 66 287 4,437
Other, net - (81) (94)
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Gain (loss) before income taxes $ 810 $ 424 $(2,888)
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NOTE 8. INCOME TAXES
The provision for income taxes for the years ended December 31 is comprised
of the following:
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(Dollars in Thousands) Federal State Total
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1997
Current $ (484) $ (41) $ (525)
Deferred 456 43 499
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$ (28) $ 2 $ (26)
1996
Current $1,049 $ 441 $1,490
Deferred (283) (44) (327)
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$ 766 $ 397 $1,163
1995
Current $1,020 $ 394 $1,414
Deferred (860) (331) (1,191)
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$ 160 $ 63 $ 223
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The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 consists of the following:
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(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------
Deferred tax assets:
State franchise tax $ - $ 162
Real estate subsidiary 1,336 1,822
Allowance for loan losses 937 804
Investment securities unrealized losses - 47
Non accrual interest 184 335
Fixed assets 11 -
Other 223 131
- ---------------------------------------------------------------------
Total gross deferred tax assets 2,691 3,301
Less valuation allowance (20) (170)
- ---------------------------------------------------------------------
Deferred tax assets $ 2,671 $3,134
- ---------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ - $ 127
State franchise taxes 208 61
Investment in partnerships 30 -
Investment securities unrealized gain 125 -
Other 112 79
- ---------------------------------------------------------------------
Total gross deferred tax liabilities 475 267
- ---------------------------------------------------------------------
Net deferred tax assets $ 2,196 $2,867
- ---------------------------------------------------------------------
The valuation allowance for deferred tax assets decreased by $150,000 for
the year ended December 31, 1997. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 1997 and 1996.
A reconciliation of the provision for income taxes to the statutory federal
income tax rate follows:
- --------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------
Statutory (34%) federal
income tax due $ 128 $ 1,078 $ 190
State franchise tax, net of
federal income tax benefit 14 263 42
Tax exempt interest income, net (60) (86) (99)
Housing tax credits (71) (22) -
Intangible amortization 36 - -
State tax benefit lost due to
net operating loss limitations 20 - -
(Decrease) increase in valuation
allowance for deferred tax assets (150) - 70
Other 51 (70) 20
- --------------------------------------------------------------------
$ (26) $1,163 $ 223
- --------------------------------------------------------------------
NOTE 9. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by 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 judgments by the regulators about
components, risk weighting 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 the 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, 1997, that the Company and the
Bank meet all capital adequacy requirements to which they are subject. As of
December 31, 1997, the most recent notification, the 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
above. There are no conditions or events since that notification that
management believes have changed the institution's classification.
The Company has no formal dividend policy, and dividends are issued
solely at the discretion of the Company's Board of Directors subject to
compliance with regulatory requirements. In order to pay any cash dividends,
the Company must receive payments of dividends or management fees from the
Bank or the Thrift. There are certain regulatory limitations on the payment
of cash dividends by banks and thrift and loan companies.
In March 1997, in response to regulatory concerns about the Bank's level of
nonperforming assets, the Board of Directors of County Bank adopted a resolution
not to pay cash dividends without the prior written consent of the California
DFI and the FDIC.
As the result of a joint examination conducted as of December 31, 1997, by
the DFI and FDIC, the Company has been told that a supervisory agreement will be
required with respect to certain matters, including the maintenance of adequate
reserves in the future. The details of the supervisory agreement have not yet
been disclosed to the Company.
Notwithstanding these resolutions, the subsidiaries have the ability to pay cash
dividends at December 31, 1997 of $2,453,000.
The Company's and Bank's actual capital amounts and ratios as of December 31,
1997 are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated: Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Total capital (to risk weighted assets) $ 36,226 12.85% $ 22,556 8.0% $ 28,195 10.0%
Tier I capital (to risk weighted assets) 32,702 11.60 11,278 4.0 16,917 6.0
Leverage ratio* 32,702 8.58 15,247 4.0 19,058 5.0
The Bank:
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997
Total capital (to risk weighted assets) $ 28,909 11.46% $ 20,178 8.0% $ 25,222 10.0%
Tier I capital (to risk weighted assets) 25,748 10.21 10,089 4.0 15,133 6.0
Leverage ratio* 25,748 7.37 13,980 4.0 17,475 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
* THE LEVERAGE RATIO CONSISTS OF TIER 1 CAPITAL DIVIDED BY QUARTERLY AVERAGE
ASSETS. THE MINIMUM LEVERAGE RATIO IS 3 PERCENT FOR BANKING ORGANIZATIONS THAT
DO NOT ANTICIPATE SIGNIFICANT GROWTH AND THAT HAVE WELL-DIVERSIFIED RISK,
EXCELLENT ASSET QUALITY AND IN GENERAL, ARE CONSIDERED TOP-RATED BANKS.
NOTE 10. COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT
RISK
At December 31, 1997, 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
noncancelable lease agreements having terms in excess of one year at December
31, 1997 are as follows:
- ---------------------------------------------------------------------------------
(Dollars in thousands) 1998 $ 433
1999 387
2000 325
2001 171
2002 173
Thereafter 539
- ---------------------------------------------------------------------------------
Total minimum lease payments $2,028
- ---------------------------------------------------------------------------------
Rent expense was approximately $513,000, $391,000, and $272,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
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
consolidated balance sheets. These transactions may involve, to varying
degrees, credit and interest risk in excess of the amount, if any, recognized
in the consolidated balance sheets.
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.
Financial instruments whose contractual amount represents risk:
- -------------------------------------------------------------------
December 31
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------
Commitments to extend credit $55,238 $46,159
Standby letters of credit 3,243 3,231
- -------------------------------------------------------------------
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. 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.
The Company because of the nature of its business, is subject to various
threatened or filed legal cases. The Company, based on the advice of legal
counsel, does not expect such cases will have a material, adverse effect on its
financial position or results of operations.
NOTE 11: TIME DEPOSITS
At December 31, 1997 the aggregate maturities for time deposits are as follows:
(Dollars in thousands) 1998 $ 81,750
1999 13,866
2000 2,687
2001 884
2002 $ 608
------
Total time deposits $ 99,795
------
------
Deposits of related parties held by the Company totaled $1,423,000 and
$1,831,000 at December 31, 1997 and 1996, respectively.
Interest paid on time deposits in denominations of $100,000 or more was
$809,000, $359,000 and $304,000 in 1997,1996, and 1995 respectively.
NOTE 12. CONCENTRATIONS OF CREDIT RISK
The Bank's business activity is with customers located primarily within
Merced, Stanislaus, Mariposa and Tuolumne 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, Tulare and Fresno 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 13. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory employee stock ownership plan ("ESOP") and
an employee savings plan
covering substantially all employees. During 1997, 1996, and 1995, the
Company contributed approximately $119,000, $114,000, and $100,000,
respectively, to the ESOP and $71,000, $38,000, and $27,000, 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, 1997, 1996, and 1995, the
ESOP owned 158,363, 106,247, 95,263, 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 1997. The Company will match 25% of the employees elective
contribution, as defined, not to exceed 6% of eligible annual compensation.
NOTE 14. STOCK OPTION PLAN In 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 to
450,000.
A summary of the status of the Company's stock options as of December 31,
1997, 1996, and 1995, and changes during the years ended on those dates,
follows:
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Number Weighted average Number Weighted average Number Weighted average
of shares exercise price of shares exercise price of shares exercise price
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 296,504 $ 7.33 269,421 $ 6.99 196,062 $ 6.70
Granted 58,000 8.57 44,250 8.95 44,850 8.56
Exercised (57,908) 5.47 (31,108) 6.67 (2,250) 6.60
Stock dividend declared - - 13,941 6.99 30,759 6.70
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 296,596 8.34 296,504 7.33 269,421 6.99
Options exercisable at end of year 230,916 $ 7.40 234,465 6.98 229,487 6.72
- ------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about options outstanding at
December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 Options outstanding Options exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Range of exercise Number outstanding Weighted average Weighted average Number exercisable Weighted average
prices at 12/31/97 remaining contractual life exercise price at 12/31/97 exercise price
- ---------------------------------------------------------------------------------------------------------------------------------
$5.40-$6.60 165,906 4.4 years $6.55 165,906 $6.55
$8.00-$9.33 68,690 7.5 8.59 49,547 8.56
$11.33-$12.50 42,000 9.2 12.17 10,463 12.12
$13.50 -$14.63 17,000 9.9 14.00 4,250 14.00
$16.12 3,000 9.8 16.12 750 16.12
- ---------------------------------------------------------------------------------------------------------------------------------
$5.40 - $16.12 296,596 6.2 years $8.34 230,916 $7.40
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
1996 Options outstanding Options exercisable
- ---------------------------------------------------------------------------------------------------------------------------------
Range of exercise Number outstanding Weighted average Weighted average Number exercisable Weighted average
prices at 12/31/96 remaining contractual life exercise price at 12/31/96 exercise price
- ---------------------------------------------------------------------------------------------------------------------------------
$5.40-$6.60 185,750 5.4 years $ 6.55 185,750 $ 6.55
$8.00-$9.22 96,766 8.6 8.63 45,219 8.55
$9.33 13,988 9.3 9.33 3,496 9.33
- ---------------------------------------------------------------------------------------------------------------------------------
$5.40-$9.43 296,504 6.6 years $ 7.33 234,465 $ 6.98
- ---------------------------------------------------------------------------------------------------------------------------------
The exercise price per share has been adjusted for stock dividends and
stock splits 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
1997, 1996 and 1995 was $12.96, $8.59, and $5.24 on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions: 1997-1995 expected dividend yield 0%; 1997-1995 expected volatility
of 30 percent, risk free interest rate of 5.72%, 5.45%, and 6.31% respectively;
and an expected life of 7 years.
The Company applies APB Opinion No. 25 in accounting for shares granted
under 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.
- ---------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Net income
As reported $403 $2,009 $335
Pro forma 241 1,930 307
Earnings per share
As reported $.12 $.85 $.16
Pro forma .07 .82 .15
- ---------------------------------------------------------------------------
Pro forma net income reflects only options granted in 1995 through 1997.
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 three years and compensation cost for options granted prior to January
1, 1995 is not considered.
NOTE 15: 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.
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 prepayments. 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 creditworthiness 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.
- ---------------------------------------------------------------------
(Dollars in thousands)
1997
- ---------------------------------------------------------------------
Financial assets: Carrying Amount Fair Value
Cash and cash equivalents $23,435 $ 23,435
Time deposits in other
financial institutions 599 599
Investment securities:
Available for sale 135,257 135,257
Held to maturity 12,775 12,780
Net loans 214,144 214,741
Financial liabilities:
Deposits:
Noninterest-bearing demand 58,836 58,836
Negotiable orders of withdrawal 54,202 54,202
Savings 143,562 143,562
Time deposits 99,795 100,280
Borrowings 22,049 22,049
Off-balance sheet: Contract Amount Fair Value
- ---------------------------------------------------------------------
Commitments $55,238 $ 5,524
Standby letters of credit 3,243 324
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1996 Carrying Amount Fair Value
- ---------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $16,717 $ 16,717
Time deposits in other
financial institutions 3,101 3,101
Investment securities:
Available for sale 43,378 43,378
Net loans 180,455 180,259
Mortgage loans held for sale 880 880
Financial liabilities
Deposits:
Noninterest-bearing demand 39,157 39,157
Negotiable orders of withdrawal 34,303 34,303
Savings 111,285 111,285
Time deposits 53,600 53,753
Borrowings 4,671 4,350
Off balance sheet: Contract Amount
- ---------------------------------------------------------------------
Commitments $46,159 $ 4,615
Standby letters of credit 3,231 323
- ---------------------------------------------------------------------
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996 the Company had no off-balance sheet
derivative financial instruments. The Company held no derivative instruments
as of December 31, 1996.
As of December 31, 1997, the Company had collateralized mortgage obligations
totaling $51,924,000. All of these securities are held as available for sale. As
of December 31, 1997 one collateralized mortgage obligation with a fair value of
$4,841,000 did not pass the FFEIC high risk test and as such is considered a
high risk security.
NOTE 17: 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. The following is the condensed balance sheet of the Company as of
December 31, 1997 and 1996 and the condensed statements of income and cash
flows for the years ended December 31, 1997 and 1996 and 1995:
- ------------------------------------------------------------------------
December 31,
CONDENSED BALANCE SHEETS (Dollars in thousands)
1997 1996
- ------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 2,638 $ 159
Investment in County Bank 30,977 16,574
Investment in Town and Country 5,103 5,061
Investment in Capital West Group - 81
Net premises and equipment 5,245 -
Other assets 381 98
- ------------------------------------------------------------------------
TOTAL ASSETS $44,344 $21,973
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Borrowed funds $ 3,586 $ 791
Other liabilities 510 208
- ------------------------------------------------------------------------
Total liabilities 4,096 999
Shareholders' Equity
Common stock 33,933 15,321
- ------------------------------------------------------------------------
Net unrealized securities
gains (losses), net of income tax 195 (69)
Retained earnings 6,120 5,722
- ------------------------------------------------------------------------
Total shareholders' equity 40,248 20,974
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,344 $21,973
- ------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Years ended December 31,
(Dollars in thousands)
CONDENSED STATEMENTS OF INCOME 1997 1996 1995
- ----------------------------------------------------------------------------
INCOME
Dividends from subsidiaries $ 90 $ 100 $ 125
Interest 52 - -
Management fees from subsidiaries 1,949 693 -
- ----------------------------------------------------------------------------
Total income 2,091 793 125
- ----------------------------------------------------------------------------
EXPENSES
Interest on borrowings 71 28 -
Salaries and related benefits 827 197 -
Other noninterest expense 828 236 -
- ----------------------------------------------------------------------------
Total other expenses 1,726 461 -
- ----------------------------------------------------------------------------
Income before taxes and equity
in undistributed earnings 365 332 125
Income tax (expense) benefit (109) (9) -
Equity in undistributed income of
subsidiaries 147 1,686 210
- ----------------------------------------------------------------------------
Net income $ 403 $ 2,009 $ 335
- ----------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 403 $ 2,009 $ 335
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings (147) (1,686) (219)
of subsidiaries
(Increase) decrease in other assets (305) 9 (116)
Increase in other liabilities 218 175 33
- -----------------------------------------------------------------------------
Net cash (used in) provided by
operating activities 232 507 42
INVESTING ACTIVITIES:
Capital contribution to subsidiary bank (14,000) - -
Purchase of subsidiary bank - (1,574) -
Purchase of premise and equipment (5,245) -
Dividends from subsidiary banks 90 100 -
- -----------------------------------------------------------------------------
Net cash (used in) investing activities (19,155) (1,474) -
FINANCING ACTIVITIES:
Proceeds from stock offering 17,951 - -
Proceeds from issuance of stock
to purchase subsidiary bank - - -
Net additions in other borrowing 2,795 791 -
Issuance of common stock related to exercise
of stock options and employee benefit plans 656 370 15
Cash dividends and fractional shares - (86) (6)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 21,402 1,075 9
- -----------------------------------------------------------------------------
Increase in cash and cash equivalents 2,479 108 51
- -----------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 159 51 -
- -----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,638 $ 159 $ 51
- -----------------------------------------------------------------------------
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------
Quarter Ended 1997
(Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31
- --------------------------------------------------------------------
Interest income $ 7,733 $ 6,622 $ 5,956 $ 5,601
Interest expense 3,210 2,573 2,335 2,072
- --------------------------------------------------------------------
Net interest income 4,523 4,049 3,621 3,529
Provision for loan losses 2,144 205 3,236 240
Other income 1,160 746 1,212 734
Other expenses 3,614 3,338 3,180 3,240
- --------------------------------------------------------------------
(Loss) income before income
taxes (75) 1,252 (1,583) 783
Income taxes benefit (132) 476 (640) 270
- --------------------------------------------------------------------
Net Income (Loss) $ 57 $ 776 $ (943) $ 513
Earnings (loss) per share $ .01 $ .23 $ (.36) $ .20
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Quarter Ended 1996
(Dollars in thousands) Dec 31 Sept 30 June 30 Mar 31
- --------------------------------------------------------------------
Interest income $ 5,562 $ 5,226 $ 4,313 $ 4,250
Interest expense 1,954 1,869 1,530 1,512
- --------------------------------------------------------------------
Net interest income 3,608 3,357 2,783 2,738
Provision for loan losses 1,107 96 150 160
Other income 986 694 684 571
Other expense 2,544 2,986 2,853 2,353
- --------------------------------------------------------------------
Income before income taxes 943 969 464 796
Income taxes 344 356 168 295
- --------------------------------------------------------------------
Net income $ 599 $ 613 $ 296 $ 501
- --------------------------------------------------------------------
Earnings per share $ .23 $ .24 $ .14 $ .25
- --------------------------------------------------------------------
Earnings per share is based upon the weighted average number of shares
outstanding during each period. Full year weighted average shares differ
from quarterly weighted average shares and, therefore, annual earnings per
share may not equal the sum of the quarters.