<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
---
of 1934 for the Quarterly Period Ended September 30, 1998
------------------
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934 for the Transition Period from to
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Commission File Number: 0-27384
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CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
California 77-0405791
(State or other jurisdiction of IRS Employer ID Number
incorporation or organization)
550 West Main, Merced, CA 95340
(Address of principal executive offices)
Registrant's telephone number, including area code: (209) 725-2200
-----------------
Former name, former address and former fiscal year, if changed since last
report: Not applicable
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock, no par value,
as of September 30, 1998 was 4,606,602. No shares of preferred stock, no par
value, were outstanding at September 30, 1998.
1
<PAGE>
CAPITAL CORP OF THE WEST
Table of Contents
PART I. -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statement of Changes in Stockholders Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of matters to a vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</TABLE>
2
<PAGE>
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
09/30/98 12/31/97
--------- --------
(In thousands)
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits in other banks $ 21,774 $ 21,035
Federal funds sold 30,800 2,400
Time deposits at other financial institutions 500 599
Investment securities available for sale, at fair value 121,224 135,257
Investment securities held to maturity at cost,
fair value of $15,798,000, and $12,780,000
at September 30, 1998 and December 31, 1997,
respectively 15,715 12,775
Loans, net of allowance for loan losses of
$4,545,000, and $3,833,000 at September 30, 1998 and
December 31, 1997, respectively 255,569 214,144
Interest receivable 3,188 2,741
Premises and equipment, net 13,574 12,945
Intangible assets 6,060 6,653
Other assets 13,103 12,845
--------- ---------
Total assets $ 481,507 $ 421,394
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 68,328 $ 58,836
Negotiable orders of withdrawal 56,991 54,202
Savings 167,552 143,562
Time, under $100,000 80,186 69,534
Time, $100,000 and over 40,818 30,261
--------- ---------
Total deposits 413,875 356,395
Short term borrowings 18,103 13,645
Long term borrowings 3,274 8,404
Accrued interest, taxes and other liabilities 2,794 2,702
--------- ---------
Total liabilities 438,046 381,146
Preferred Stock, no par value; 10,000,000 shares
authorized;
None outstanding
Common stock, no par value; 20,000,000 shares
authorized;
4,606,602 and 4,595,824 issued & outstanding at 34,033 33,928
September 30, 1998, and December 31, 1997
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net 622 195
Retained earnings 8,806 6,125
--------- ---------
Total shareholders' equity 43,461 40,248
--------- ---------
Total liabilities and shareholders' equity $ 481,507 $ 421,394
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
3
<PAGE>
Capital Corp of the West
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,708 $ 5,455 $ 18,488 $ 15,085
Interest on deposits with other financial institutions 16 59 50 240
Interest on taxable investments held to maturity 182 192 551 600
Interest on investments available for sale:
Taxable 1,642 731 4,996 1,869
Non-taxable 216 42 483 150
Interest on federal funds sold 257 143 907 235
Total interest income 9,021 6,622 25,475 18,179
INTEREST EXPENSE:
Interest on negotiable orders of withdrawal 131 87 372 245
Interest on savings deposits 1,436 1,215 4,316 3,487
Interest on time deposits, under $100,000 1,063 897 3,314 2,314
Interest on time deposits, $100,000 and over 497 157 1,158 456
Interest on other borrowings 321 217 977 478
Total interest expense 3,448 2,573 10,137 6,980
Net interest income 5,573 4,049 15,338 11,199
Provision for loan losses 700 205 1,690 3,681
Net interest income after provision for loan 4,873 3,844 13,648 7,518
losses
OTHER INCOME:
Service charges on deposit accounts 734 462 2,072 1,195
Income from real estate held for sale or development 56 89 419 600
Other 430 195 1,176 897
Total other income 1,220 746 3,667 2,692
OTHER EXPENSES:
Salaries and related benefits 2,055 1,612 5,929 4,643
Premises and occupancy 330 311 980 887
Equipment 581 335 1,625 970
Professional fees 381 153 746 413
Marketing 173 152 463 463
Goodwill and intangible amortization 195 94 584 118
Branch purchase - - 101 -
Supplies 143 131 455 382
Other 993 550 2,669 1,882
Total other expenses 4,851 3,338 13,552 9,758
Income before income taxes 1,242 1,252 3,763 452
Provision for income taxes
248 476 1,076 106
------ ------ ------ -----
Net income $ 994 $ 776 $2,687 $ 346
- --------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Change in unrealized gain on securities
available for sale 467 9 427 158
------ ------ ------ -----
Comprehensive Income $1,461 $ 785 $3,114 $ 504
------ ------ ------ -----
------ ------ ------ -----
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.22 $ .20 $ 0.58 $0.12
Diluted earnings per share $ 0.21 $ 0.56
</TABLE>
See accompanying notes
4
<PAGE>
Capital Corp of the West
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
9 months ended 9 months ended
09/30/98 09/30/97
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,687 $ 346
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,690 3,681
Depreciation, amortization and accretion, net 2,541 1,124
Benefit for deferred income taxes - 735
Gain on sale of real estate held for sale 363 (600)
Net increase in interest receivable & other assets (1,068) (2,000)
Net increase in deferred loan fees 85 59
Net increase (decrease) in accrued interest payable & other liabilities 92 (1,130)
-------- --------
Net cash provided by operating activities 6,390 2,215
INVESTING ACTIVITIES:
Investment security purchases (40,745) (60,707)
Proceeds from maturities of investment securities 25,381 10,264
Proceeds from sales of AFS investment securities 26,219 7,718
Net decrease in time deposits in other financial institutions 99 -
Proceeds from sales of commercial and real estate loans 6,410 1,415
Net increase in loans (50,088) (29,989)
Purchases of premises and equipment (1,912) (5,645)
Proceeds from sales of real estate held for sale 478 1,470
-------- --------
Net cash used in investing activities (34,158) (75,474)
FINANCING ACTIVITIES:
Net increase in demand, NOW and deposits 36,271 15,497
Net increase in certificates of deposit 21,209 25,054
Net (decrease) increase in other borrowings (672) 18,738
Exercise of stock options 105 234
Issuance of common stock - 17,992
Issued shares for benefit plan purchases - 208
Fractional shares purchased (6) (10)
-------- --------
Net cash provided by financing activities 56,907 77,713
Net increase in cash and cash equivalents 29,139 4,454
Cash and cash equivalents at beginning of period 23,435 16,717
-------- --------
Cash and cash equivalents at end of period $ 52,574 $ 21,171
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Investment securities net unrealized gains; net of tax 427 158
Interest paid 10,127 6,921
Income tax payments 200 850
Transfer of securities from available for sale to held to maturity 9,636 11,455
Loans transferred to other real estate owned 478 60
</TABLE>
See accompanying notes
5
<PAGE>
Capital Corp of the West
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
(Amounts in thousands except number of shares)
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number Unrealized
of Retained Securities
shares Amounts earnings Gain, net Total
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 4,595,824 $ 33,928 $ 6,125 $ 195 $ 40,248
Exercise of stock option 10,778 105 - - 105
Common stock dividends - - (6) - (6)
Change in fair market value of
investment securities - - - 427 427
Net income - - 2,687 - 2,687
------------ ----------- ----------- ----------- -----------
Balance, September 30, 1998 4,606,602 $ 34,033 $ 8,806 $ 622 $ 43,461
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes
6
<PAGE>
Capital Corp of the West
Notes to Consolidated Financial Statements
September 30, 1998 and December 31, 1997
(Unaudited)
GENERAL - COMPANY
Capital Corp of the West (the "Company" or "Capital Corp") is a bank
holding company incorporated under the laws of the State of California on
April 26, 1995. On November 1, 1995, the Company became registered as a bank
holding company, and is a holder of all of the capital stock of County Bank
(the "Bank") and all of the capital stock of Town and Country Finance and
Thrift (the "Thrift"). During 1997, the Company formed Capital West Group, a
new subsidiary that engages in the financial institution advisory business
but is currently inactive. The Company's primary asset is the Bank and the
Bank is the Company's primary source of income. The Company's securities
consist of 20,000,000 shares of Common Stock, no par value, and 10,000,000
shares of Authorized Preferred Stock. As of September 30, 1998 there were
4,606,602 common shares outstanding, held of record by approximately 1,800
shareholders. There were no preferred shares outstanding at September 30,
1998. The Bank has two wholly owned subsidiaries, Merced Area Investment &
Development, Inc. ("MAID") and County Asset Advisors ("CAA"). CAA is
currently inactive. All references herein to the "Company" include the Bank,
and the Bank's subsidiaries, Capital West Group and the Thrift, unless
context otherwise requires.
GENERAL - BANK
The Bank was organized on August 1, 1977, as County Bank of Merced, a
California state banking corporation. The Bank commenced operations on December
22, 1977. In November 1992, the Bank changed its legal name to County Bank. The
Bank's securities consist of one class of Common Stock, no par value and is
wholly owned by the Company. The Bank's deposits are insured under the Federal
Deposit Insurance Act, by the Federal Deposit Insurance Corporation ("FDIC") up
to applicable limits stated therein. Like most state-chartered banks of its size
in California, it is not a member of the Federal Reserve System.
GENERAL - THRIFT
The Company acquired the Thrift on September 28, 1996 for a combination
of cash and stock with an aggregate value of approximately $5.8 million. The
Thrift is an industrial loan company with four offices. It specializes in direct
loans to the public and the purchase of financing contracts. It was originally
incorporated in 1957. Its deposits (technically known as investment certificates
or certificates of deposit rather than deposits) are insured by the FDIC up to
applicable limits.
BANK'S INDUSTRY AND MARKET AREA
The Bank engages in general commercial banking business primarily in
Merced, Tuolumne, Mariposa, Madera and Stanislaus counties. The Bank has
thirteen branch offices: two in Merced with the branch located in downtown
Merced located within the Bank's administrative office building, offices in
Atwater, Turlock, Hilmar, Sonora, Los Banos, Mariposa, Livingston, Dos Palos,
Madera and two offices in Modesto. The Bank relocated its existing
administrative office and existing branch in downtown Merced to a new facility
constructed in 1997. The Thrift engages in the general consumer lending business
primarily in Stanislaus, Fresno, and Tulare counties from its main office in
Turlock; and branch offices located in Modesto, Visalia, and Fresno.
7
<PAGE>
OTHER FINANCIAL NOTES
All adjustments, in the opinion of Management, which are necessary for
a fair presentation of the Company's financial position at September 30, 1998
and December 31, 1997 and the results of operations for the three and nine
month periods ended September 30, 1998 and 1997, and the statements of cash
flows for the nine month periods ended September 30, 1998 and 1997, have been
included. These interim statements are not necessarily indicative of the
results for a full year.
The accompanying unaudited financial statements have been prepared on a
basis consistent with the generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X.
Per share information is based on weighted average number of shares
of common stock outstanding during each three-month and nine-month period
after giving retroactive effect for the five percent stock dividend declared
for shareholders of record May 7, 1998, payable September 1, 1998, and the
three-for-two stock split declared for shareholders of record on April 11,
1997, payable on May 2, 1997. Basic earnings per share (EPS) is computed by
dividing net income available to shareholders by the weighted average common
shares outstanding during the period. Diluted earnings per share is computed
by dividing net income available to shareholders by the weighted average
common shares outstanding during the period plus potential common shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. An EPS
adjustment for potential common stock dilution for the three and nine months
ended September 30, 1997 has not been presented due to the neutral nature of
the adjustment during this time period.
The following table provides a reconciliation of the numerator and
denominator of the basic and diluted earnings per share computation of the three
and nine month periods ending September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In thousands, except per share data) 1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS computation:
Net income $ 994 $ 776 $ 2,687 $ 346
Average common shares
outstanding 4,603 3,944 4,601 2,733
------------ ------------ ------------ ------------
Basic EPS $ 0.22 $ .20 $ 0.58 $ 0.12
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted EPS Computations:
Net income $ 994 $ 2,687
Average common shares
outstanding 4,603 4,601
Stock options 155 155
------------ ------------
4,758 4,756
------------ ------------
Diluted EPS $ 0.21 $ 0.56
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 is effective for
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.
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which amends the disclosure
requirements of Statement No. 52, "Foreign Currency Translations" and of
Statement No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS
133 supersedes Statements No. 80 "Accounting for Future Contracts", No. 105
"Disclosure of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk" and No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." Under the provisions of SFAS 133, the Company is required to
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting operation. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning September 15, 1999, with early application
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after the issuance of the statement. SFAS 133 should not be applied
retroactively to financial statements of prior periods. The Company does not
expect that the adoption of SFAS 133 will have a material impact on its
financial condition.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS. THESE FACTORS INCLUDE GENERAL RISKS INHERENT TO
COMMERCIAL LENDING; RISKS RELATED TO ASSET QUALITY; RISKS RELATED TO THE
COMPANY'S DEPENDENCE ON KEY PERSONNEL AND ITS ABILITY TO MANAGE EXISTING AND
FUTURE GROWTH; RISKS RELATED TO COMPETITION; RISKS POSED BY PRESENT AND FUTURE
GOVERNMENT REGULATION AND LEGISLATION; AND RISKS RESULTING FROM FEDERAL MONETARY
POLICY.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
its subsidiaries' financial condition, operating results, asset and liability
management, liquidity and capital resources and should be read in conjunction
with the Consolidated Financial Statements of the Company and the Notes thereto.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997
OVERVIEW. For the three and nine months ended September 30, 1998, the
Company reported net income of $994,000 and $2,687,000 compared with $776,000
and $346,000 for the same periods in 1997, an increase in net income of $218,000
and $2,341,000 respectively. Basic earnings per share were $.22 and $.58 for the
three and nine months ending September 30, 1998 compared to net income per share
of $.20 and $.12 for the three and nine months ended September 30, 1997. The
annualized return on average assets was .85% and .81% for the first three and
nine months of 1998 compared with .33% and .16% for the three and nine months
ended September 30, 1997. The Company's annualized return on average equity was
9.27% and 8.59% for the three and nine months ended September 30, 1998 compared
with 3.57% and 1.91% for the three and nine months ended September 30, 1997.
NET INTEREST INCOME. The Company's primary source of income is the
difference between interest income and fees derived from earning assets and
interest paid on liabilities. The difference between the two is net interest
income. Net interest income for the three and nine months ended September 30,
1998 totaled $5,573,000 and $15,338,000 compared with $4,049,000 and $11,199,000
for the same periods in 1997, an increase of $1,524,000 and $4,139,000 or 38%
and 37% respectively.
Total interest and fees on earning assets were $9,021,000 and
$25,475,000 for the three and nine months ended September 30, 1998, an increase
of $2,399,000 and $7,296,000 or 36% and 40% from $6,622,000 and $18,179,000 for
the same three and nine months in 1997. The level of interest income is affected
by changes in volume of and rates earned on interest-earning assets.
Interest-earning assets consist primarily of loans, investment securities and
federal funds sold. The increase in interest income for the three and nine
months ended September 30, 1998 was primarily the result of an increase in the
volume of interest-earning assets. Average interest-earning assets for the three
and nine months ended September 30, 1998 were $414,457,000 and $392,812,000
compared with $275,584,000 and $256,254,000 for the three and nine months ended
September 30, 1997, an increase of $138,873,000 and $136,558,000 or 50% and 53%
respectively.
Interest expense is a function of the volume of and the rates paid on
interest-bearing liabilities. Interest-bearing liabilities consist primarily of
certain deposits and borrowed funds. Total interest expense was $3,448,000 and
$10,137,000 for the three and nine months ended September 30, 1998, compared
with $2,573,000 and $6,980,000 for the three and nine months ended September 30,
1997, an increase of $875,000 and $3,157,000 or 34% and 45%, respectively. This
increase was primarily the result of an increase in the volume of
interest-bearing liabilities. Average interest-bearing liabilities were
$354,752,000 and $339,532,000 for the three and nine months ended September 30,
1998 compared with
10
<PAGE>
$247,863,000 and $229,029,000 for the same three and nine months in 1997,
an increase of $106,889,000 and $110,503,000 or 43% and 48%, respectively.
The increase in interest-earning assets and interest-bearing
liabilities is primarily the result of the Company's purchase of three
branches of Bank of America in December 1997 and the completion of a stock
offering in August 1997. The branch purchase increased deposits by
$60,849,000 (there were no loans purchased) and the stock offering increased
capital by $17,951,000. In addition, two branch offices opened in late 1996
and a third in late 1997 which also contributed to growth.
The Company's net interest margin, the ratio of net interest income
to average interest-earning assets, was 5.33% and 5.22% for the three and
nine months ended September 30, 1998 compared with 5.85% and 5.84% for the
same period in 1997. Net interest margin provides a measurement of the
Company's ability to employ funds profitably during the period being
measured. The Company's decrease in net interest margin was primarily
attributable to a moderate change in the mix of interest-earning assets.
Loans as a percentage of average interest-earning assets were 62% and 60% for
the three and nine months ended September 30, 1998 compared to 60% and 62%
for the three and nine months ended September 30, 1997. The lower loans as a
percentage of average interest-earning assets for the nine months ending
September 30, 1998 was primarily due to the purchase of the three branches
of Bank of America in December of 1997.
11
<PAGE>
AVERAGE BALANCES AND RATES EARNED AND PAID. The following table
presents condensed average balance sheet information for the Company, together
with interest rates earned and paid on the various sources and uses of its funds
for each of the periods indicated. Nonaccruing loans are included in the
calculation of the average balances of loans, but the nonaccrued interest on
such loans is excluded.
AVERAGE BALANCE SHEET & ANALYSIS OF NET INTEREST EARNINGS
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 22,115 $ 907 5.48% $ 5,770 $ 235 5.45%
Time deposits at other financial institutions 1,072 50 6.24 5,499 240 5.84
Taxable investment securities: 121,378 5,547 6.11 47,613 2,469 6.93
Nontaxable investment securities (1) 12,734 483 5.07 3,727 150 5.38
Loans, gross: (2)
235,513 18,488 10.50 193,645 15,085 10.42
------- ------ ----- ------- ------ -----
Total interest-earning assets: 392,812 25,475 8.67% 256,254 18,179 9.48
Allowance for loan losses (4,028) (2,730)
Cash and due from banks 20,155 13,528
Premises and equipment, net 13,356 8,909
Interest receivable and other assets 22,390 15,056
------- -------
Total assets $444,685 $291,017
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Negotiable order of withdrawal 55,721 372 $0.89 $ 36,196 245 0.90
Savings deposits 153,461 4,316 3.76 114,256 3,487 4.08
Time deposits 108,607 4,472 5.51 67,271 2,770 5.51
Other borrowings 21,743 977 6.01 11,306 478 5.65
------- ------ ----- ------- ------ -----
Total interest-bearing liabilities 339,532 10,137 3.99 229,029 6,980 4.07
Noninterest-bearing deposits 60,420 35,096
Accrued interest, taxes and other liabilities 2,921 2,762
------- -------
Total liabilities 402,873 266,887
Total shareholders' equity 41,812 24,130
------- -------
Total liabilities and shareholders' equity $444,685 $291,017
------- -------
------- -------
Net interest income and margin (3) $15,338 5.22% $11,199 5.84%
------- ----- ------ -----
------- ----- ------ -----
</TABLE>
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
(2) Amounts of interest earned includes loan fees of $971,000 and
$1,043,000 for September 30, 1998 and 1997 respectively.
(3) Net interest margin is computed by dividing net interest income by
total average interest-earning assets.
12
<PAGE>
NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE. The following table
sets forth, for the periods indicated, a summary of the changes in average asset
and liability balances and interest earned and interest paid resulting from
changes in average asset and liability balances (volume) and changes in average
interest rates and the total net change in interest income and expenses. The
changes in interest due to both rate and volume have been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.
Net Interest Income Variance Analysis:
<TABLE>
<CAPTION>
September 30, 1998 compared to September 30, 1997
Volume Rate Total
------ ------ -------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold $ 670 $ 2 $ 672
Time deposits at other financial institutions (195) 5 (190)
Taxable investment securities 3,220 (142) 3,078
Tax-exempt investment securities 336 (3) 333
Loans 3,286 117 3,403
------ ------ ------
Total 7,317 (21) 7,296
------ ------ ------
------ ------ ------
Increase (decrease) interest expense:
Interest bearing demand 128 (1) 127
Savings deposits 970 (141) 829
Time deposits 1,702 - 1,702
Other borrowings 467 32 499
------ ------ ------
Total 3,267 (110) 3,157
------ ------ ------
------ ------ ------
Increase in net interest income $ 4,050 $ 89 $4,139
------ ------ ------
------ ------ ------
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three
and nine months ended September 30, 1998 was $700,000 and $1,690,000 compared
with $205,000 and $3,681,000 for the three and nine months ended September 30,
1997. Also see "Allowance for Loan Losses" contained herein. As of September 30,
1998 the allowance for loan losses was $4,545,000 or 1.75% of total loans. At
September 30, 1998, nonperforming assets totaled $2,071,000 or .43% of total
assets, nonperforming loans totaled $1,988,000 or .76% of total loans and the
allowance for loan losses totaled 228% of nonperforming loans. No assurance can
be given that nonperforming loans will not increase or that the allowance for
loan losses will be adequate to cover losses inherent in the loan portfolio.
Also see "Memorandum of Understanding" contained herein.
NONINTEREST INCOME. Noninterest income increased by $474,000 and
$975,000 or 64% and 36% to $1,220,000 and $3,667,000 for the three and nine
months ended September 30, 1998 compared with $746,000 and $2,692,000 in the
same period in 1997. Service charges on deposit accounts increased by $272,000
and $877,000 or 59% and 73%, income from the sale of real estate held for sale
or development decreased by $33,000 and $181,000 or 37% and 30% and other income
increased by $235,000 and $279,000 or 121% and 31% for the three and nine month
period ended September 30, 1998 when compared to the same period in 1997. The
increases in service charges are primarily due to general growth of the Company
and the purchase of three branches from Bank of America in December of 1997.
NONINTEREST EXPENSE. Noninterest expenses increased by $1,513,000 and
$3,794,000 or 45% and 39% to $4,851,000 and $13,552,000 for the three and nine
months ended September 30, 1998 compared with $3,338,000 and $9,758,000 for the
same period in 1997. The primary components of noninterest expenses were
salaries and employee benefits, furniture and equipment expenses, occupancy
expenses, and other operating expenses.
13
<PAGE>
For the three and nine months ended September 30, 1998 compared with
the three and nine months ended September 30, 1997, salaries and related
benefits increased by $443,000 and $1,286,000 or 27% and 28%, respectively,
equipment expenses increased by $246,000 and $655,000 or 73% and 68%,
respectively, occupancy expenses increased $19,000 and $93,000 or 6% and 10%,
respectively, professional fees increased by $228,000 and $333,000 or 149% and
81%, respectively, marketing expenses increased by $21,000 and $0 or 14% and 0%,
respectively, goodwill and intangible amortization expense increased by $101,000
and $466,000 or 107% and 395%, respectively, supplies expense increased by
$12,000 and $73,000 or 9% and 19%, respectively, and other expenses increased by
$443,000 and $787,000 or 81% and 42%, respectively. The expense increases were
primarily the result of expansion, including expenses associated with
acquisition of the branches purchased from Bank of America in December, 1997 and
the opening of a new branch in Madera in late 1997.
PROVISION FOR INCOME TAXES. The Company recorded a $248,000 and
$1,076,000 income tax provision for the three and nine months ended September
30, 1998 compared with an income tax provision of $476,000 and $106,000 for the
same period in 1997. During the third quarter of 1998, a state Enterprise Zone
tax credit of approximately $180,000 was recorded. This credit is the result of
certifying eligible employees that work within the Merced-Atwater Enterprise
Zone. Income tax expense was further reduced by federal low income housing
credits that were obtained from investments in limited partnerships in
low-income affordable housing projects. The Company had investments in these
partnerships of $4,238,000 as of September 30, 1998 and $4,299,000 as of
September 30, 1997, resulting in tax credits of $213,000 and $105,000
respectively. The effective tax rate for the three and nine months ended
September 30, 1998 was 20% and 29% compared to 38% and 23% for the three and
nine months ended September 30, 1997.
INTEREST RATE RISK
Interest rate risk is an integral part of managing a banking
institution's primary source of income, net interest income. The Company manages
the balance between rate-sensitive assets and rate-sensitive liabilities being
repriced in any given period with the objective of stabilizing net interest
income during periods of fluctuating interest rates. The Company considers its
rate-sensitive assets to be those which either contain a provision to adjust the
interest rate periodically or mature within one year. These assets include
certain loans and investment securities and federal funds sold. Rate-sensitive
liabilities are those which allow for periodic interest rate changes within one
year and include maturing time certificates, certain savings deposits and
interest-bearing demand deposits. The difference between the aggregate amount of
assets and liabilities that reprice at various time frames is called the "gap."
Generally, if repricing assets exceed repricing liabilities in a time period the
Company would be deemed to be asset-sensitive. If repricing liabilities exceed
repricing assets in a time period the Company would be deemed to be
liability-sensitive. Generally, the Company seeks to maintain a balanced
position whereby there is no significant asset or liability sensitivity within a
one-year period to ensure net interest margin stability in times of volatile
interest rates. This is accomplished through maintaining a significant level of
loans, investment securities and deposits available for repricing within one
year.
14
<PAGE>
The following tables set forth the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of
September 30,1998, using the interest rate sensitivity gap ratio. For purposes
of the following table, an asset or liability is considered rate-sensitive
within a specified period when it can be repriced or matures within its
contractual terms.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------
AFTER 3 AFTER 1
BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER NONINTEREST-
3 MONTHS 12 MONTHS 5 YEARS 5 YEARS BEARING TOTAL
-------- --------- ------- ------- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits at other banks $ 500 $ - $ - $ - $ - $ 500
Federal funds sold 30,800 - - - - 30,800
Investment securities 33,570 15,726 39,137 48,506 - 136,939
Loans 147,772 34,075 58,551 19,716 - 260,114
--------- --------- -------- ------- -------
Total earning assets 212,642 49,801 97,688 68,222 428,353
Noninterest-earning assets and
allowances for loan losses - - - - 53,154 53,154
--------- --------- -------- ------- ------- -------
Total assets $ 212,642 $ 49,801 $ 97,688 $68,222 $53,154 $481,507
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings, money market and NOW
deposits $ 292,871 $ - $ - $ - $ - $292,871
Time deposits 36,312 67,676 16,804 212 - 121,004
Other interest-bearing liabilities 13,000 5,103 - 3,274 - 21,377
Other liabilities and shareholders'
equity - - - - 46,255 46,255
--------- --------- -------- ------- ------- -------
Total liabilities and shareholders'
equity 342,183 72,779 16,804 3,486 46,255 $481,507
Incremental gap (129,541) (22,978) 80,884 64,736 6,899
Cumulative gap $(129,541) $(152,519) $(71,635) $(6,899) $ -
Cumulative gap as a % of earning
assets (30.24)% (35.60)% (16.72)% (1.6)%
</TABLE>
The Company was liability-sensitive with a negative cumulative one-year gap
of $152,519,000 or 35.60% of interest-earning assets at September 30, 1998. In
general, based upon the Company's mix of deposits, loans and investments,
increases in interest rates would be expected to result in a decrease in the
Company's net interest margin.
The interest rate gaps reported in the tables arise when assets are
funded with liabilities having different repricing intervals. Since these gaps
are actively managed and change daily as adjustments are made in interest rate
views and market outlook, positions at the end of any period may not be
reflective of the Company's interest rate sensitivity in subsequent periods.
Active management dictates that longer-term economic views are balanced against
prospects for short-term interest rate changes in all repricing intervals. For
purposes of the analysis above, repricing of fixed-rate instruments is based
upon the contractual maturity of the applicable instruments. Actual payment
patterns may differ from contractual payment patterns. The change in net
interest income may not always follow the general expectations of an
asset-sensitive or liability-sensitive balance sheet during periods of changing
interest rates, because interest rates earned or paid may change by differing
increments and at different time intervals for each type of interest-sensitive
asset and liability. As a result of these factors, at any given time, the
Company may be more sensitive or less sensitive to changes in interest rates
than indicated in the above tables. Greater sensitivity would have a more
adverse effect on net interest margin if market interest rates were to increase,
and a more favorable effect if rates were to decrease.
15
<PAGE>
An additional measure of interest rate sensitivity that the Company
monitors through a detailed model is its expected change in net interest income.
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. It then measures the projected impact of
changes in market interest rates on the Company's net interest income. Based
upon the September 30, 1998 mix of interest-sensitive assets and liabilities,
given an immediate and sustained increase in the market interest rates of 2%,
this model estimates the Company's cumulative change in net interest income over
the next year would decrease by $179,000 or 1% of net interest income. No
assurance can be given that the actual net interest income would not decrease by
more than $179,000 or 1% in response to a 2% increase in market interest rates
or that actual net interest income would not decrease substantially if market
interest rates increased by more than 2%. Also see "Memorandum of Understanding"
contained herein. At the Bank's most recent examination, the regulators felt
that the then current model that was used by the Bank was not adequate for a
bank of its current size and complexity. During the second quarter of 1998, the
Company contracted with interest rate sensitivity consultants to provide
additional expertise in the interest rate sensitivity modeling process and has
updated the model it uses for interest rate risk analysis.
The estimates stated above were derived from this updated model.
FINANCIAL CONDITION
Total assets at September 30, 1998 were $481,507,000, an increase of
$60,113,000 or 14% compared with total assets of $421,394,000 at December 31,
1997. Net loans were $255,569,000 at September 30, 1998, an increase of
$41,425,000 or 19% compared with net loans of $214,144,000 on December 31, 1997.
Deposits were $413,875,000 at September 30, 1998, an increase of $57,480,000 or
16% compared with deposits of $356,395,000 at December 31, 1997. The growth of
the Company from December 31, 1997 to September 30, 1998 was primarily the
result of increased market penetration, particularly in the case of the purchase
of three branch offices of Bank of America in December 1997, and the opening of
a branch office of County Bank in late 1997.
Total shareholders' equity was $43,461,000 at September 30, 1998, an
increase of $3,213,000 or 8% from $40,248,000 at December 31, 1997. The growth
in shareholders' equity from December 31, 1997 to September 30, 1998 was
achieved primarily through the retention of accumulated earnings.
INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair
value) of available for sale investment securities as of September 30, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
--------------------------------------
1998 1997
(In thousands)
<S> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and U.S.
Government agencies $ 12,468 $ 1,824
State and political subdivisions 19,783 9,640
Mortgage-backed securities 44,930 68,808
Collateralized mortgage obligations 33,980 51,874
Corporate debt securities 4,344 -
Other securities 5,719 3,111
--------- ---------
Carrying amount and fair value $ 121,224 $ 135,257
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
The following table sets forth the carrying amount (amortized cost)
and fair value of held to maturity securities at September 30, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
September 30 December 31
------------------------------
(In thousands) 1998 1997
<S> <C> <C>
HELD TO MATURITY SECURITIES:
U.S. Treasury and U.S.
Government agency $ 3,029 $ 9,442
Mortgage-backed securities 12,686 3,333
-------- --------
Carrying amount (amortized cost) $ 15,715 $ 12,775
-------- --------
-------- --------
Fair value $ 15,798 $ 12,780
-------- --------
-------- --------
</TABLE>
The following table sets forth the maturities of the Company's
investment securities at September 30, 1998 and the weighted average yields of
such securities calculated on the basis of the cost and effective yields based
on the scheduled maturity of each security. Maturities of mortgage-backed
securities are stipulated in their respective contracts. However, actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call prepayment penalties.
Yields on municipal securities have not been calculated on a tax-equivalent
basis.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
----------------------------------------------------------------------------------------
WITHIN ONE YEAR ONE TO 5 YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale Securities:
Treasury and U.S. Government agency $ 504 4.97% $ 6,098 4.99% - - $ 8,895 5.99% $ 15,497
State and political 267 3.26 793 3.61 241 4.06 18,482 4.61 19,783
Mortgage-backed securities 66 5.77 126 6.41 2,086 5.77 39,624 6.15 41,902
Collateralized mortgage obligations 3,008 6.34 19,970 5.99 3,034 6.01 7,967 6.38 33,979
Corporate debt securities - - 4,344 5.47 - - - - 4,344
Other securities 2,500 4.25 - - - - 3,219 5,719
-------------------------------------------------------------------------------------------
Carrying amount and fair value 6,345 5.27 31,331 5.66 5,361 5.82 78,187 5.53 121,224
-------------------------------------------------------------------------------------------
Held to maturity securities:
Treasury and U.S. Government agency - - - - 2,029 6.41 1,000 7.07 3,029
Mortgage-backed securities - - - - - - 12,686 6.78 12,686
-------------------------------------------------------------------------------------------
Carrying amount (amortized cost) - - - - 2,029 6.41 13,686 6.80 15,715
-------------------------------------------------------------------------------------------
Total securities $6,345 5.27% $31,331 5.66% $7,390 5.99% $91,873 5.73% $136,939
------ ----- ------- ----- ------ ----- ------- ----- --------
------ ----- ------- ----- ------ ----- ------- ----- --------
</TABLE>
In the above table, mortgage-backed securities and collateralized
mortgage obligations are shown maturing at the contractual maturity date
rather than in accordance with their principal amortization schedules. The
Company does not own securities of a single issuer whose aggregate book value
is in excess of 10% of its total equity. Also see "Memorandum of
Understanding" contained herein.
17
<PAGE>
LOAN PORTFOLIO. The following table shows the composition of the Company's
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------------------------------------------------
(In thousands) 1998 1997
---- ----
PERCENT PERCENT
DOLLAR AMOUNT OF LOANS DOLLAR AMOUNT OF LOANS
<S> <C> <C> <C> <C>
Loan Categories:
Commercial $ 38,475 15% $ 34,992 16%
Agricultural 49,783 19 43,558 20
Real estate construction 13,863 5 12,657 6
Real estate mortgage 87,734 34 70,802 32
Consumer 70,259 27 55,968 26
--------- ---- --------- ----
Total 260,114 100% 217,977 100%
--------- ---- --------- ----
----
Less allowance for loan losses (4,545) (3,833)
--------- --------- ----
Net loans $ 255,569 $ 214,144
--------- ---------
--------- ---------
</TABLE>
The table that follows shows the maturity distribution of the
portfolio of commercial, agricultural, real estate construction, real estate
mortgage, and consumer loans at September 30, 1998:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------------------------------
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL
------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural:
Loans with floating interest rates $ 52,689 $ 13,316 $ 6,154 $ 72,159
Loans with fixed interest rates 5,402 7,950 2,747 16,099
-------- -------- -------- --------
Subtotal 58,091 21,266 8,901 88,258
-------- -------- -------- --------
Real estate construction:
Loans with floating interest rates 7,935 1,773 833 10,541
Loans with fixed interest rates 2,219 968 135 3,322
-------- -------- -------- --------
Subtotal 10,154 2,741 968 13,863
-------- -------- -------- --------
Real estate mortgage 8,601 40,923 38,210 87,734
Consumer 24,546 37,879 7,834 70,259
-------- -------- -------- --------
Total $101,392 $102,809 $ 55,913 $260,114
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
18
<PAGE>
The table that follows shows the maturity distribution of the portfolio of
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans at December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------------------
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL
------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural:
Loans with floating interest rates $ 44,792 $ 16,249 $ 3,410 $ 64,451
Loans with fixed interest rates 6,916 6,350 833 14,099
-------- -------- -------- --------
Subtotal 51,708 22,599 4,243 78,550
Real estate-construction:
Loans with floating interest rates 6,394 1,602 2,100 10,096
Loans with fixed interest rates 1,433 989 139 2,561
-------- -------- -------- --------
Subtotal 7,827 2,591 2,239 12,657
-------- -------- -------- --------
Real estate-mortgage 7,654 39,829 23,319 70,802
Consumer 33,609 21,450 909 55,968
-------- -------- -------- --------
Total $100,798 $ 86,469 $ 30,710 $217,977
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
OFF-BALANCE SHEET COMMITMENTS. The following table shows the
distribution of the Company's undisbursed loan commitments at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Letters of credit $ 2,806 $ 3,233
Commitments to extend credit 78,306 55,248
------- -------
Total $81,112 $58,481
------- -------
------- -------
</TABLE>
OTHER INTEREST-EARNING ASSETS. The following table relates to other
interest-earning assets not disclosed previously for the dates indicated. This
item consists of a salary continuation plan for the Company's executive
management and deferred retirement benefits for participating board members. The
plan is informally linked with universal life insurance policies for the salary
continuation plan. Income from these policies is reflected in noninterest
income.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash surrender value of life insurance $4,063 $3,389
------ ------
------ ------
</TABLE>
NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, loans 90
days or more past due, restructured loans and other real estate owned.
Nonperforming loans are those which the borrower fails to perform in
accordance with the original terms of the obligation and include loans on
nonaccrual status, loans past due 90 days or more and restructured loans. The
Company generally places loans on nonaccrual status and accrued but unpaid
interest is reversed against the current year's income when interest or
principal payments become 90 days or more past due unless the outstanding
principal and interest is adequately secured and, in the opinion of
19
<PAGE>
management, is deemed in the process of collection. Interest income on
nonaccrual loans is recorded on a cash basis. Payments may be treated as
interest income or return of principal depending upon management's opinion of
the ultimate risk of loss on the individual loan. Cash payments are treated as
interest income where management believes the remaining principal balance is
fully collectible. Additional loans not 90 days past due may also be placed on
nonaccrual status if management reasonably believes the borrower will not be
able to comply with the contractual loan repayment terms and collection of
principal or interest is in question.
A "restructured loan" is a loan on which interest accrues at a below
market rate or upon which certain principal has been forgiven so as to aid the
borrower in the final repayment of the loan, with any interest previously
accrued, but not yet collected, being reversed against current income. Interest
is reported on a cash basis until the borrower's ability to service the
restructured loan in accordance with its terms is established. The Company had
no restructured loans as of the dates indicated in the above table.
The following table summarizes nonperforming assets of the Company at
September 30, 1998 and December 31, for the years indicated:
<TABLE>
September 30, December 31,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 1,494 $ 2,611
Accruing loans past due 90 days or more 494 131
------- -------
Total nonperforming loans 1,988 2,742
Other real estate owned 60 60
Repossessed automobiles 23 -
------- -------
Total nonperforming assets $ 2,071 $ 2,802
------- -------
------- -------
Nonperforming assets:
To total loans .80% 1.26%
To total assets .43% .66%
</TABLE>
Interest income on loans on nonaccrual status during the nine months
ended September 30, 1998, and the nine months ended September 30, 1997, that
would have been recognized if the loans had been current in accordance with
their original terms was approximately $143,000 and $111,000, respectively.
At September 30, 1998, nonperforming assets represented .43% of total
assets, and nonperforming loans represented .80% of total loans. Nonperforming
loans that were secured by first deeds of trust on real property were $671,000
at September 30, 1998 and $1,635,000 at December 31, 1997. Other forms of
collateral such as inventory and equipment secured the remaining nonperforming
loans as of each date. No assurance can be given that the collateral securing
nonperforming loans will be sufficient to prevent losses on such loans.
The increase in nonperforming loans and nonperforming assets as of
September 30, 1998 compared with their levels as of December 31, 1997, was due
primarily to an increase in delinquent agricultural loans coupled with an
increase in repossessed automobiles.
At September 30, 1998, the Company had $60,000 in one property acquired
through foreclosure. The property is carried at the lower of its estimated
market value, as evidenced by an independent appraisal, or the recorded
investment in the related loan, less estimated selling expenses. At foreclosure,
if the fair value of the real estate is less than the Company's recorded
investment in the related loan, a charge is made to the allowance for loan
losses. The Company does not expect to sell this property during 1998. No
assurance can be given that the Company will sell such property during 1998 or
at any time or the amount for which such property might be sold.
20
<PAGE>
In addition to property acquired through foreclosure, the Company has
investments in residential real estate lots in various stages of development in
Merced County through MAID. MAID held one property for sale or development at
September 30, 1998. This investment was completely written off in 1995, although
County Bank still retains title to this property. During the first nine months
of 1998, fifty-three lots were sold for a pre-tax gain of $354,000.
Management defines impaired loans, regardless of past due status on
loans, as those on which principal and interest are not expected to be collected
under the original contractual loan repayment terms. An impaired loan is charged
off at the time management believes the collection process has been exhausted.
At September 30, 1998 and December 31, 1997, impaired loans were measured based
on the present value of future cash flows discounted at the loan's effective
rate, the loan's observable market price or the fair value of collateral if the
loan is collateral-dependent. Impaired loans at September 30, 1998 were
1,494,000 (all of which were also nonaccrual loans), on account of which the
Company had made provisions to the allowance for loan losses of $502,000.
Except for loans that are disclosed above, there were no assets as of
September 30, 1998, where known information about possible credit problems of
borrower causes management to have serious doubts as to the ability of the
borrower to comply with the present loan repayment terms and which may become
nonperforming assets. Given the magnitude of the Company's loan portfolio,
however, it is always possible that current credit problems may exist that may
not have been discovered by management.
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the loan loss experience of the Company for the
nine months ended September 30, 1998 and 1997, and for the year ended December
31,1997.
<TABLE>
SEPTEMBER 30 DECEMBER 31
----------------------- ------------
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 3,833 $ 2,792 $ 2,792
Provision for loan losses 1,690 3,681 5,825
Charge-offs:
Commercial and agricultural 667 500 1,121
Real estate construction - 3,458 3,458
Real estate mortgage 4 - -
Consumer 727 406 471
-------- -------- --------
Total charge-offs 1,398 4,364 5,050
-------- -------- --------
Recoveries
Commercial and agricultural 119 123 155
Real estate-construction - 1 1
Real estate-mortgage - - -
Consumer 301 63 110
-------- -------- --------
Total recoveries 420 187 266
-------- -------- --------
Net charge-offs 978 4,177 4,784
-------- -------- --------
Balance at end of period $ 4,545 $ 2,296 $ 3,833
-------- -------- --------
-------- -------- --------
Loans outstanding at period-end $260,114 $208,465 $217,977
-------- -------- --------
-------- -------- --------
Average loans outstanding $235,513 $193,645 $198,140
-------- -------- --------
-------- -------- --------
Net charge-offs to average loans .26% 2.16% 2.41%
Allowance for loan losses
To total loans 1.75% 1.08% 1.76%
To nonperforming assets 219.46% 105.27% 136.80%
</TABLE>
21
<PAGE>
The Company maintains an allowance for loan losses at a level
considered by management to be adequate to cover the inherent risks of loss
associated with its loan portfolio under prevailing and anticipated economic
conditions. In determining the adequacy of the allowance for loan losses,
management takes into consideration growth trends in the portfolio, examination
of financial institution supervisory authorities, prior loan loss experience for
the Company, concentrations of credit risk, delinquency trends, general economic
conditions, the interest rate environment and internal and external credit
reviews. In addition, the risks management considers vary depending on the
nature of the loan. The normal risks considered by management with respect to
agricultural loans include the fluctuating value of the collateral, changes in
weather conditions and the availability adequate water resources in the
Company's local market area. The normal risks considered by management with
respect to real estate construction loans include fluctuation in real estate
values, the demand for improved commercial and industrial properties and
housing, the availability of permanent financing in the Company's market area
and borrowers' ability to obtain permanent financing. The normal risks
considered by management with respect to real estate mortgage loans include
fluctuations in the value of real estate. Additionally, the Company relies on
data obtained through independent appraisals for significant properties to
determine loss exposure on nonperforming loans.
The balance in the allowance is affected by the amounts provided from
operations, amounts charged off and recoveries of loans previously charged off.
The Company recorded provisions for loan losses in the first nine months of 1998
of $1,690,000 compared with $3,681,000 in the same period of 1997. The increase
in loan loss provisions in 1997 was primarily due to increased reserves
established for a commercial real estate development loan that was charged off
in 1997 and, to a lesser extent, reserves to support the general loan growth of
the Company.
The Company's charge-offs, net of recoveries, were $978,000 for the
nine months ended September 30, 1998 compared with $4,177,000 for the same nine
months in 1997. The increase in net charge-offs for the year ended December 31,
1997 was primarily due to the write-off of a commercial real estate loan with
a balance of $3,458,000.
As of September 30, 1998, the allowance for loan losses was $4,545,000
or 1.72% of total loans outstanding, compared with $3,833,000 or 1.76% of total
loans outstanding as of December 31, 1997 and $2,296,000 or 1.08% of total loans
outstanding as of September 30, 1997.
From 1992 to 1996, loan losses were relatively low and stable. In 1997,
the Company experienced loan problems and made provisions at levels not
previously experienced. As a result, the Company concluded that its historical
method of determining the appropriate levels for its allowance and provisions
for loan losses should be revised. The Company therefore adopted a new
methodology of determining the appropriate level of its allowance for loan
losses. This method applies relevant risk factors to the entire loan portfolio,
including nonperforming loans. The methodology is based, in part, on the
Company's loan grading and classification system. The Company grades its loans
through internal reviews and periodically subjects loans to external reviews
which then are assessed by the Company's audit committee. Credit reviews are
performed on a monthly basis and the quality grading process occurs on a
quarterly basis. Risk factors applied to the performing loan portfolio are
based on the Company's pastloss history considering the current portfolio's
characteristics, current economic conditions and other relevant factors.
General reserves are applied to various categories of loans at percentages
ranging up to 1.8% based on the Company's assessment of credit risks for each
category. Risk factors are applied to the carrying value of each classified
loan: (i) loans internally graded "Watch" or "Special Mention" carry a risk
factor from 1.0% to 2.0%; (ii) "Substandard" loans carry a risk factor from
15% to 40% depending on collateral securing the loan, if any; (iii) "Doubtful"
loans carry a 50% risk factor; and (iv) "Loss" loans are charged off 100%. In
addition, a portion of the allowance is specially allocated to identified
problem credits. The analysis also includes reference to factors such as the
delinquency status of the loan portfolio, inherent risk by type of loans,
industry statistical data, recommendations made by the Company's regulatory
authorities and outside loan reviewers, and current
22
<PAGE>
economic environment. Important components of the overall credit rating process
are the asset quality rating process and the internal loan review process.
The allowance is based on estimates and ultimate future losses may vary
from current estimates. It is always possible that future economic or other
factors may adversely affect the Company's borrowers, and thereby cause loan
losses to exceed the current allowance. In addition, there can be no assurance
that future economic or other factors will not adversely affect the Company's
borrowers, or that the Company's asset quality may deteriorate through rapid
growth, failure to enforce underwriting standards, failure to maintain
appropriate underwriting standards, failure to maintain an adequate number of
qualified loan personnel, failure to identify and monitor potential problem
loans or for other reasons, and thereby cause loan losses to exceed the current
allowance.
The following table summarizes a breakdown of the allowance for loan
losses by loan category and the allocation in each category as a percentage of
total loan allowance in each category at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
AMOUNT AMOUNT
TO TOTAL TO TOTAL
LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 2,278 50% $ 1,868 48%
Real estate- construction 63 2 640 17
Real estate- mortgage 1,556 34 1,058 28
Consumer 648 14 267 7
------- ---- ------- ----
Total $ 4,545 100% $ 3,833 100%
------- ---- ------- ----
------- ---- ------- ----
</TABLE>
The allocation of the allowance to loan categories is an estimate by
management of the relative risk characteristics of loans in those categories. No
assurance can be given that losses in one or more loan categories will not
exceed the portion of the allowance allocated to that category or even exceed
the entire allowance.
EXTERNAL FACTORS AFFECTING ASSET QUALITY. As a result of the Company's
loan portfolio mix, the future quality of its assets could be affected by
adverse economic trends in its region or in the agricultural community. These
trends are beyond the control of the Company.
California is an earthquake-prone region. Accordingly, a major
earthquake could result in material loss to the Company. At times the Company's
service area has experienced other natural disasters such as floods and
droughts. The Company's properties and substantially all of the real and
personal property securing loans in the Company's portfolio are located in
California. The Company faces the risk that many of its borrowers face uninsured
property damage, interruption of their businesses or loss of their jobs from
earthquakes, floods or droughts. As a result these borrowers may be unable to
repay their loans in accordance with their terms and the collateral for such
loans may decline significantly in value. The Company's service area is a
largely agricultural region and therefore is highly dependent on a reliable
supply of water for irrigation purposes. The area obtains nearly all of its
water from the run-off of melting snow in the mountains of the Sierra Nevada to
the east. Although such sources have usually been available in the past, water
supply can be adversely affected by light snowfall over one or more winters or
by any diversion of water from its present natural courses. Any such natural
disaster could impair the ability of many of the Company's borrowers to meet
their obligations to the Company.
Parts of California experienced significant floods in early 1998. The
Company has completed an analysis of its collateral as a result of the recent
floods. Current estimates indicate that there were no material adverse effects
to the collateral position of the Company as a result of these events. No
assurance can be given that future flooding will not have an adverse impact on
the Company and its
23
<PAGE>
borrowers and depositors. During the second quarter of 1998, an additional
$200,000 was added to the loan loss reserve for possible losses to
agricultural loans due to adverse weather conditions.
LIQUIDITY. In order to maintain adequate liquidity, the Company must
have sufficient resources available at all times to meet its cash flow
requirements. The need for liquidity in a banking institution arises principally
to provide for deposit withdrawals, the credit needs of its customers and to
take advantage of investment opportunities as they arise. A company may achieve
desired liquidity from both assets and liabilities. The Company considers cash
and deposits held in other banks, federal funds sold, other short term
investments, maturing loans and investments, payments of principal and interest
on loans and investments and potential loan sales as sources of asset liquidity.
Deposit growth and access to credit lines established with correspondent banks
and market sources of funds are considered by the Company as sources of
liability liquidity.
The Company reviews its liquidity position on a regular basis based
upon its current position and expected trends of loans and deposits. These
assets include cash and deposits in other banks, available-for-sale securities
and federal funds sold. The Company's liquid assets totaled $174,298,000 and
$159,291,000 on September 30, 1998 and December 31, 1997, respectively, and
constituted 36.2% and 37.8%, respectively, of total assets on those dates.
Liquidity is also affected by the collateral requirements of its public deposits
and certain borrowings. Total pledged securities were $75,478,000 at September
30, 1998 compared with $45,812,000 at December 31, 1997.
When the Company acquired three Bank of America branches in December
1997, it acquired approximately $60,849,000 in deposits and no loans. In
addition, the capital offering raised additional cash of $17,951,000. The
Company initially invested this cash in liquid assets but intends over time to
invest a larger portion of these funds in higher yielding assets such as loans.
Although the Company's primary sources of liquidity include liquid
assets and a stable deposit base, the Company maintains lines of credit with the
Federal Reserve Bank of San Francisco, Federal Home Loan Bank of San Francisco
and Pacific Coast Bankers' Bank aggregating $27,379,000, of which $16,003,000
was outstanding as of September 30, 1998 and $16,004,000 was outstanding as of
December 31, 1997. Management believes that the Company maintains adequate
amounts of liquid assets to meet its liquidity needs. The Company's liquidity
might be insufficient if deposit withdrawals were to exceed anticipated levels.
Deposit withdrawals can increase if a company experiences financial difficulties
or receives adverse publicity for other reasons, or if its pricing, products or
services are not competitive with those offered by other institutions.
CAPITAL RESOURCES. Capital serves as a source of funds and helps
protect depositors against potential losses. The primary source of capital for
the Company has been internally generated capital through retained earnings. In
1997, the Company completed a common stock offering which netted the Company
approximately $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's shareholders'
equity increased by $3,213,000 or 8% from December 31, 1997 to September 30,
1998.
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 September
30, 1998, that the Company, the Bank and the Thrift meet all capital
requirements to which they are subject. The Company's leverage capital ratio
at September 30, 1998 was 8.15% as compared with 8.58% as of December 31,
1997. The Company's total risk based capital ratio at September 30, 1998 was
12.37% as compared to 12.78% as of December 31,1997.
The Company's and Bank's actual capital amounts and ratios as of
September 30, 1998 are as follows:
24
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective
Dollars in thousands Action Provisions:
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
Total capital (to risk weighted assets) $ 40,833 12.37% $ 26,400 8.0% $ 33,000 10.0%
Tier 1 capital (to risk weighted assets) 36,703 11.12 13,200 4.0 19,800 6.0
Leverage ratio* 36,703 8.15 18,403 4.0 23,004 5.0
The Bank:
- ---------------------------------------------------------------------------------------------------------------------------
As of September 30, 1998
Total capital (to risk weighted assets) $ 32,426 11.32% $ 22,925 8.0% $ 27,115 10.0%
Tier 1 capital (to risk weighted assets) 28,836 10.06 11,463 4.0 16,269 6.0
Leverage ratio* 28,836 6.90 16,710 4.0 20,888 5.0
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The leverage ratio consist 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.
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.
DEPOSITS. Deposits are the Company's primary source of funds. At
September 30, 1998, the Company had a deposit mix of 40% in savings deposits,
29% in time deposits, 15% in interest-bearing checking accounts and 16% in
noninterest-bearing demand accounts. Noninterest-bearing demand deposits
enhance the Company's net interest income by lowering its costs of funds.
The Company obtains deposits primarily from the communities it serves.
No material portion of its deposits has been obtained from or is dependent on
any one person or industry. The Company's business is not seasonal in nature.
The Company accepts deposits in excess of $100,000 from customers. These
deposits are priced to remain competitive. At September 30, 1998, the Company
had no brokered deposits.
In December 1997, the Company acquired three branches of Bank of
America. It acquired $60,849,000 in deposits. Deposits in these three
acquired branches as of September 30, 1998 were approximately $62,364,000.
Maturities of time certificates of deposits of $100,000 or more
outstanding at September 30, 1998 and December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 AT DECEMBER 31, 1997
--------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less $ 11,041 $ 8,404
Over three to six months 17,928 7,799
Over six to twelve months 6,714 7,870
Over twelve months 5,135 6,188
-------- --------
Total $ 40,818 $ 30,261
-------- --------
-------- --------
</TABLE>
25
<PAGE>
BORROWED FUNDS
At September 30 1998 and December 31, 1997, the Company's borrowed funds
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
------------ -----------
(Dollars in thousands) 1998 1997
<S> <C> <C>
Securities sold under agreements to repurchase; dated
March 25, 1998; fixed rate of 5.74%; payable on
March 25, 1999 $ 2,100 $ 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
FHLB loan, dated December 18, 1997; effective rate of 5.61%; rate
reprices monthly based on the 1 month
LIBOR; payable on December 18, 1998 10,900 10,900
FHLB loan, dated January 16, 1997; variable rate of 5.68%; rate
reprices monthly based on the 1 month
LIBOR; payable on January 25, 1999 5,000 5,000
FHLB loan, dated July 15, 1994; fixed rate of 7.58%
payable on July 15, 1999 103 104
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 3,274 3,300
------- -------
Total $21,377 $22,049
------- -------
------- -------
</TABLE>
The decrease in the borrowings are primarily due to amortized principal
payments on available lines of credit with the Federal Home Loan Bank to
purchase securities and the origination of a loan to assist in financing the new
administrative building and main branch.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Nine months ended Nine months ended Year ended
September 30 September 30 December 31
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Annualized return on average assets .81% .16% .13%
Annualized return on average equity 8.59% 1.91% 1.46%
Average equity to average assets 9.40% 8.29% 8.76%
</TABLE>
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 on
interest expenses, has not been significant for the periods covered in this
report.
26
<PAGE>
REAL ESTATE DEVELOPMENT ACTIVITIES
California law allows state-chartered banks to engage in real estate
development activities. The Bank established MAID in 1987 pursuant to this
authorization. After changes in federal law effectively required that these
activities be divested as prudently as possible but in any event before 1997,
MAID reduced its activities and embarked on a plan to liquidate its real estate
holdings. In 1995, the uncertainty about the effect of the investment in MAID on
the results of future operations caused management to write off its remaining
investment of $2,881,000 in real property development.
At September 30, 1998, MAID held one real estate project including
improved and unimproved land in various stages of development. MAID continues to
develop this project, and any amounts realized upon sale or other disposition of
this asset above its current carrying value of zero will result in noninterest
income at the time of such sale or disposition. During the first nine months of
1998, 53 lots were sold which resulted in the recognition of approximately
$354,000 in noninterest income. Although the Company expects that the sale or
disposition of its remaining project will result in some positive contribution
to noninterest income at some time in the future, no assurance can be given as
to whether or when such sale or disposition will be completed or that the
amount, if any, that the Company will ultimately realize on such asset or
whether such amount will exceed the future expenses required to hold and
complete development of the project. The amounts, if any, realized on future
disposition of this property will depend on conditions in the local real estate
market and the demand, if any, for new development. The Company's regulatory
deadline for completing its divestiture of this asset is December 31, 2000.
YEAR 2000
General
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. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The impact of Year 2000 issues on the Company will depend not only
on corrective actions that the Company takes, but also on the way in which
Year 2000 issues are addressed by governmental agencies, businesses, and
other third parties that provide services or data to, or receive services or
data from, the Company, or whose financial condition or operational capability
is important to the Company.
State of Readiness
The Company has a Year 2000 (Y2K) compliance plan that has been
approved by the 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, issued a new software release in August 1998 that
is Year 2000 compliant.
In addition to a review and testing of the Jack Henry Associates Inc.
Silverlake product, Capital Corp of the West's Year 2000 (Y2K) plan also
addresses internal systems, customer systems, and vendor systems which might be
effected by the century date change. The Company is on schedule to meet all
internal deadlines set in the plan. The regulatory agencies have identified
several areas within the Y2K plan that need additional review. These areas
include, but are not limited to, improvement in Y2K communication between
subsidiaries, increased focus on core and other similarly important "mission
critical" systems, and the need to establish firm test dates for the most
important systems. The Company is in the process of insuring these additional
concerns are addressed within the Y2K plan. The Y2K plan takes a systematic
approach to identifying and resolving the hardware and software problems
inherent with this date change.
The Company's Y2K plan is broken into six phases. The awareness
phase is ongoing throughout the project. This started with an internal
training program to raise the awareness of employees to the Y2K problems and
the steps being taken by the Company to resolve these. These training efforts
are now being expanded to include customers and the general community through
meetings with civic organizations and Chambers of Commerce. The inventory
phase, which is completed, included such actions as creating a master
inventory of all systems within the Company which might be affected by Y2K.
The evaluation phase, completed as well, consisted of
27
<PAGE>
rating each inventoried system's importance to the day-to-day operation of
the organization. The most important systems were rated as "mission
critical." The renovation phase is in progress and is 80% completed. During
this phase, the vendors for each software and hardware system have been
contacted and either (a) notified the Company that their product is Y2K
compliant, (b) notified the Company as to when a Y2K compliant product will
be available or, (c) notified the Company that their product is not Y2K
compliant and they have no intention of making it so. The fifth phase is the
testing phase, which is 30% complete. This is by far the costliest and most
time consuming part of the project. Each mission critical system must be
tested for Y2K compliance. This includes the Company's core application
software and its data communications systems. Additionally, the Company is
testing many of its other systems which have been deemed non-mission
critical. Implementation is the last phase and involves putting the new Y2K
compliant software into production. This phase is 20% complete.
The Company continues to have ongoing communication with significant
customers and vendors to determine the extent, and provide risk mitigation
strategies for those risks created by third parties' failure to remediate their
own Year 2000 issues. However, it is not possible, at present, to determine the
financial effect if significant customer and vendor remediation efforts are not
resolved in a timely manner.
Costs
The estimated cost to the Company of the Y2K project is projected to be
approximately $400,000. Hard costs consist of 30% of this amount, while the
remainder is made up of soft costs such as meeting time. No major projects have
been delayed or canceled due to these costs. During the first nine months of
1998, the Company has incurred approximately $75,000 in plan expenses.
Risks
Failure to address all Y2K issues could result in substantial
interruptions to the Company's normal business activities. These
interruptions could in turn affect the organizations financial condition as
well as the business activities of its customers. Through the efforts
involved in its Year 2000 project, no major interruptions are expected.
However, due to the uncertainty involved in the Year 2000 problem, all of the
effects of the century date change to the organization cannot be absolutely
determined. Although at this time it is not possible to determine the extent
of the adverse financial effects, with any specificity, the Company is
preparing contingency plans if disruptions occur. Given the Y2K project
progress to date and with successful implementation of the remaining phases
of the project, management believes that the Company is well positioned to
significantly reduce potential negative effects that may exist.
Contingency Plan
A contingency plan is in the process of being developed in order to
structure a methodology that would allow the Company to continue operations in
the event the Company, or its key suppliers, customers, or third party service
providers will not be year 2000 compliant, and such noncompliance is expected to
have a material adverse impact on the Company's operations.
Also see "Memorandum of Understanding" contained herein.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company.
28
<PAGE>
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while it believes such assumptions or bases to be reasonable and
makes them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending on the circumstances. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important risk factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
company:
The ability to meet financial and human resources requirements,
including the funding of the Company's capital program from operations, is
subject to changes in the deposit base, which the company has only limited
control and to a lesser extent its ability to consistently; and the effect of
domestic legislation of federal, state and municipal governments that have
jurisdiction in regard to taxes, the environment and human resources.
The dates on which the Company believes the Year 2000 Project will be
completed and implemented are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain financial resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with the implementation of the Year 2000 Project. Specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to locate and correct all relevant computer code, timely responses to
and corrections by third-parties and suppliers, the ability to implement
interfaces between the new systems and the systems not being replaced, and
similar uncertainties. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-parties and the interconnection of global businesses, the company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
MEMORANDUM OF UNDERSTANDING
As a result of a joint examination of the Bank conducted as of January
12, 1998 by the Federal Deposit Insurance Corporation (the "FDIC") and the
Department of Financial Institutions (the "DFI"), the FDIC and the DFI have
required the Bank to enter into a Memorandum of Understanding requiring the Bank
to do the following:
1) Conduct a comprehensive management review of the Bank's executive
management to maintain a management structure suitable to its needs in
light of its recent rapid growth.
2) Have and retain qualified management with qualifications and experience
commensurate with their duties and responsibilities at the Bank.
3) Develop a plan to reduce the Bank's economic value of equity exposure to
loss from interest rate changes to acceptable levels.
4) Formulate, adopt and implement a comprehensive risk management process
that will strengthen management expertise and improve securities portfolio
management and management information and measurement systems.
5) Establish and maintain an adequate reserve for loan losses and develop
and revise, adopt and implement a comprehensive policy to ensure the
adequacy of the allowance.
6) Develop, adopt and implement a plan to control overhead and restore the
Bank's profitability.
29
<PAGE>
7) Correct deficiencies relating to the Year 2000 project.
8) Furnish written progress reports.
As of the date of this report, the Company believes it is in
substantial compliance with all the terms of the agreement.
A Memorandum of Understanding is an enforceable agreement. Failure to
comply with its terms can lead to further enforcement action by bank regulators,
including cease-and-desist orders, imposition of a receiver or conservator,
termination of deposit insurance, imposition of civil money penalties and
removal and prohibition orders against institution-affiliated parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk
which includes both price and liquidity risk. Price risk is created from
fluctuations in interest rates and the mismatch in repricing characteristics of
assets, liabilities, and off balance sheet instruments at a specified point in
time. Mismatches in interest rate repricing among assets and liabilities arise
primarily through the interaction of the various types of loans versus the types
of deposits that are maintained as well as from management's discretionary
investment and funds gathering activities. Liquidity risk arises from the
possibility that the Company may not be able to satisfy current and future
financial commitments or that the Company may not be able to liquidate financial
instruments at market prices. Risk management policies and procedures have been
established and are utilized to manage the Company's exposure to market risk.
On September 30, 1998, the interest rate position of the Company was
relatively neutral as the impact of a gradual parallel 100 basis-point rise or
fall in interest rates over the next 12 months was estimated to be approximately
1-2% of net interest income when compared to stable rates. See "BUSINESS -
Selected Statistical Information - Interest Rate Sensitivity" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk Management."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. In the opinion of management, pending and threatened litigation is not
likely to have a material adverse effect on the financial condition or results
of operations of the Company. Also see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Memorandum of Understanding."
contained herein.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None
30
<PAGE>
ITEM 5. OTHER INFORMATION.
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibits Description of Exhibits
<S> <C> <C>
3.1 Articles of Incorporation, incorporated by reference from (filed as *
Exhibit 3.1 of the Company's September 30, 1996 Form 10Q filed with
the SEC on or about November 14, 1996).
3.2 Bylaws (filed as Exhibit 3.2 of the Company's September 30, 1996 Form *
10Q filed with the SEC on or about November 14, 1996.)
10 Employment agreement between Thomas T. Hawker and Capital Corp. *
10.1 Administration Construction Agreement (filed as Exhibit 10.4 of *
the Company's 1995 Form 10K filed with the SEC on or about
March 31, 1996).
10.2 Stock Option Plan (filed as Exhibit 10.6 of the Company's 1995 Form 10K *
filed with the SEC on or about March 31, 1996).
10.3 401 (k) Plan (filed as Exhibit 10.7 of the Company's 1995 Form 10K *
filed with the SEC on or about March 31, 1996
10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the Company's *
1995 Form 10K filed with the SEC on or about March 31, 1996).
</TABLE>
(b) REPORTS ON FORM 8-K
None
* DENOTES DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL CORP OF THE WEST
(Registrant)
By /s/ Thomas T. Hawker
-----------------------------------
Thomas T. Hawker
President and
Chief Executive Officer
By /s/ Janey E. Boyce
-----------------------------------
Janey E. Boyce
Principal Financial Officer
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,774
<INT-BEARING-DEPOSITS> 500
<FED-FUNDS-SOLD> 30,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,224
<INVESTMENTS-CARRYING> 15,715
<INVESTMENTS-MARKET> 15,798
<LOANS> 260,114
<ALLOWANCE> 4,545
<TOTAL-ASSETS> 481,507
<DEPOSITS> 413,875
<SHORT-TERM> 18,103
<LIABILITIES-OTHER> 2,794
<LONG-TERM> 3,274
0
0
<COMMON> 34,033
<OTHER-SE> 9,428
<TOTAL-LIABILITIES-AND-EQUITY> 481,507
<INTEREST-LOAN> 18,488
<INTEREST-INVEST> 6,030
<INTEREST-OTHER> 957
<INTEREST-TOTAL> 25,475
<INTEREST-DEPOSIT> 9,160
<INTEREST-EXPENSE> 10,137
<INTEREST-INCOME-NET> 15,338
<LOAN-LOSSES> 1,690
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,552
<INCOME-PRETAX> 3,763
<INCOME-PRE-EXTRAORDINARY> 3,763
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,687
<EPS-PRIMARY> .58
<EPS-DILUTED> .56
<YIELD-ACTUAL> 8.67
<LOANS-NON> 1,494
<LOANS-PAST> 494
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,833
<CHARGE-OFFS> 1,398
<RECOVERIES> 420
<ALLOWANCE-CLOSE> 4,545
<ALLOWANCE-DOMESTIC> 4,545
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
