<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 June 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 ___________
Commission File Number: 0-27384
------------
CAPITAL CORP OF THE WEST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 77-0405791
------------------------- ---------------
(State or other jurisdiction of 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 June 30, 1998 was 4,602,261. No shares of preferred stock, no par value,
were outstanding at June 30, 1998.
1
<PAGE>
CAPITAL CORP OF THE WEST
Table of Contents
PART I. -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of 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 27
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of matters to a vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
2
<PAGE>
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
06/30/98 12/31/97 06/30/97
------------- ------------ ------------
(In thousands)
ASSETS
<S> <C> <C> <C>
Cash and noninterest-bearing deposits in other banks $ 23,144 $ 21,035 $ 13,414
Federal funds sold 4,300 2,400 7,775
Time deposits at other financial institutions 1,250 599 266
Investment securities available for sale, at fair value 133,034 135,257 42,747
Investment securities held to maturity at cost, fair value of
$8,403,000, $12,780,000, and $11,324,000 as of June 30,
1998, December 31, 1997 and June 30, 1997 respectively 8,384 12,775 11,451
Loans, net of allowance for loan losses of $4,246,000,
$3,833,000, and $2,268,000 at June 30, 1998, December
31, 1997 and June 30, 1997 respectively 241,532 214,144 193,092
Interest receivable 2,925 2,741 2,041
Premises and equipment, net 13,467 12,945 9,429
Intangible assets 6,258 6,653 2,401
Other assets 13,278 12,845 10,408
----------- ----------- ----------
Total assets $ 447,572 $ 421,394 $293,024
----------- ----------- ----------
----------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 62,636 $ 58,836 $33,263
Negotiable orders of withdrawal 56,622 54,202 36,829
Savings 153,206 143,562 116,220
Time, under $100,000 77,033 69,534 49,047
Time, $100,000 and over 32,875 30,261 22,319
----------- ----------- ----------
Total deposits 382,372 356,395 257,678
Short term Borrowings 18,020 13,645 14,189
Long term Borrowings 3,388 8,404 105
Accrued interest, taxes and other liabilities 1,828 2,702 88
----------- ----------- ----------
Total liabilities 405,608 381,146 272,060
Common stock, no par value
20,000,000 shares authorized;
4,602,261; 4,595,824; and 2,746,744 issued & outstanding at
June 30, 1998, December 31, 1997, and June 30, 1997
respectively 33,998 33,928 15,664
Retained earnings 7,811 6,125 5,273
Investment securities unrealized gains, net 155 195 27
----------- ----------- ----------
Total shareholders' equity 41,964 40,248 20,964
----------- ----------- ----------
Total liabilities and shareholders' equity $ 447,572 $ 421,394 $ 293,024
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes
3
<PAGE>
Capital Corp of the West
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,081 $ 4,943 $11,780 $ 9,630
Interest on deposits with other financial institutions 23 94 34 181
Interest on taxable investments held to maturity 171 160 369 408
Interest on investments available for sale:
Taxable 1,571 663 3,354 1,138
Non-taxable 146 49 267 108
Interest on federal funds sold 377 47 650 92
------ ------- ------- -------
Total interest income 8,369 5,956 16,454 11,557
INTEREST EXPENSE:
Interest on negotiable orders of withdrawal 123 80 241 158
Interest on savings deposits 1,446 1,150 2,880 2,272
Interest on time deposits, under $100,000 1,201 724 2,251 1,417
Interest on time, $100,000 and over 296 193 661 299
Interest on other borrowings 320 188 656 261
------ ------- ------- -------
Total interest expense 3,386 2,335 6,689 4,407
Net interest income 4,983 3,621 9,765 7,150
Provision for loan losses 738 3,236 990 3,476
------ ------- ------- -------
Net interest income after provision for loan losses 4,245 385 8,775 3,674
------ ------- ------- -------
OTHER INCOME:
Service charges on deposit accounts 690 396 1,338 733
Income from real estate held for sale or development 341 504 363 511
Other 358 312 746 702
------ ------- ------- -------
Total other income 1,389 1,212 2,447 1,946
OTHER EXPENSES:
Salaries and related benefits 1,911 1,487 3,874 3,031
Premises and occupancy 325 297 650 576
Equipment 542 248 1,044 635
Professional fees 211 119 365 260
Marketing 188 152 290 311
Branch purchase - - 101 -
Supplies 161 148 312 251
Other 1040 589 1,777 1,277
------ ------- ------- -------
Total other expenses 4,378 3,180 8,701 6,420
------ ------- ------- -------
Income (loss) before income taxes 1,256 (1,583) 2,521 (800)
Provision (benefit) for income taxes 393 (640) 828 (370)
------ ------- ------- -------
Net income (loss) $ 863 $ (943) $ 1,693 $ (430)
------ ------- ------- -------
------ ------- ------- -------
Comprehensive income:
Change in unrealized gain on securities available
for sale, net (55) 189 (40) 96
------ ------- ------- -------
COMPREHENSIVE INCOME $ 808 $ (754) $ 1,653 $ (334)
------ ------- ------- -------
------ ------- ------- -------
Basic earnings (loss) per share $ 0.19 $ (0.34) $ 0.37 $ (0.16)
------ ------- ------- -------
------ ------- ------- -------
Diluted earnings (loss) per share $ 0.18 $ 0.36
------ -------
------ -------
</TABLE>
See accompanying notes
4
<PAGE>
Capital Corp of the West
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
6 months ended 6 months ended
06/30/98 06/30/97
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,693 $ (430)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 990 3,476
Depreciation, amortization and accretion, net 1,723 713
Benefit for deferred income taxes - (35)
Gain on sale of real estate held for sale 363 511
Net increase in interest receivable & other assets (980) (1,167)
Net increase in deferred loan fees 64 63
Net decrease in accrued interest payable & other liabilities (874) (2,686)
--------- ---------
Net cash provided by operating activities 2,979 445
INVESTING ACTIVITIES:
Investment security purchases (35,612) (24,520)
Proceeds from maturities of investment securities 26,099 10,264
Proceeds from sales of investment securities 15,615 6,155
Net increase in time deposits in other financial institutions (651) -
Proceeds from sales of commercial and real estate loans 5,630 1,250
Net increase in loans (34,550) (16,547)
Purchases of premises and equipment (1,378) (3,680)
Proceeds from sales of real estate held for sale 478 1,050
--------- ---------
Net cash used in investing activities (24,369) (26,028)
FINANCING ACTIVITIES:
Net increase in demand, NOW and deposits 15,864 1,567
Net increase in certificates of deposit 10,113 17,766
Net (decrease) increase in other borrowings (641) 10,398
Exercise of stock options 70 178
Issued shares for benefit plan purchases - 163
Fractional shares purchased (7) (17)
--------- ---------
Net cash provided by financing activities 25,399 30,055
Net increase in cash and cash equivalents 4,009 4,472
Cash and cash equivalents at beginning of year 23,435 16,717
--------- ---------
Cash and cash equivalents at end of quarter $ 27,444 $ 21,189
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Investment securities net unrealized gains (losses); net of tax (40) 96
Interest paid 6,612 4,387
Income tax payments 200 850
Transfer of securities from available for sale to held to maturity - 11,455
Loans transferred to other real estate owned 478 -
</TABLE>
See accompanying notes
5
<PAGE>
Capital Corp of the West
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
(Amount in thousands except number of shares)
Common Stock Unrealized
----------------------------- Securities
Number of Comprehensive Retained Gain
shares Amounts Income earnings (loss), net Total
------------ ----------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 4,595,824 $ 33,928 $ 6,125 $ 195 $ 40,248
Exercise of stock option 6,437 70 - - 70
Common stock cash-in-lieu
Dividends - - (7) - (7)
Change in fair market value of
Investment securities - - (40) - (40) (40)
Net income, June 30, 1998 - - 1,693 1,693 - 1,693
------------ ----------- ------------- ------------- ------------ ------------
Balance,
June 30, 1998 4,602,261 $ 33,998 $ 1,653 $ 7,811 $ 155 $ 41,964
------------ ----------- ------------- ------------- ------------ ------------
------------ ----------- ------------- ------------- ------------ ------------
</TABLE>
See accompanying notes
6
<PAGE>
Capital Corp of the West
Notes to Consolidated Financial Statements
June 30, 1998, December 31, 1997, and June 30, 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 Preferred Stock. As of
June 30, 1998 there were 4,602,261 common shares outstanding, held of record by
approximately 1,800 shareholders. There were no preferred shares outstanding at
June 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 June 28, 1996 for a combination of cash
and stock with an aggregate value of approximately $5.8 million. The Thrift is
an industrial loan company with four offices. It specializes in direct loans to
the public and the purchase of financing contracts. 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 June 30, 1998, December
31, 1997 and at June 30, 1997 and the results of operations and statements of
cash flows for the six month periods ended June 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 period after giving retroactive
effect for the five percent stock dividend declared for shareholders of record
May 7, 1998, payable June 1, 1998, 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 six months ended June 30, 1997 has not been presented due to the
antidilutive 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 six month periods ending June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
--------------------- -----------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data) 1998 1997 1998 1997
---------- -------- ----------- --------
Basic EPS computation:
Net income (loss) $ 863 $ (943) $ 1,693 $ (430)
Average common shares
outstanding 4,602 2,741 4,600 2,733
---------- -------- ----------- --------
Basic EPS $ 0.19 $ (0.34) $ 0.37 $ (0.16)
---------- -------- ----------- --------
---------- -------- ----------- --------
Diluted EPS Computations:
Net income (loss) $ 863 $ (943) $ 1,693 $ (430)
Average common shares
Outstanding 4,602 2,741 4,600 2,733
Stock options 134 128 134 128
---------- -------- ----------- --------
4,736 2,869 4,734 2,861
---------- -------- ----------- --------
Diluted EPS $ 0.18 $ 0.36
---------- -----------
---------- -----------
</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 committment, 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 June 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 SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE AND SIX MONTHS
ENDED JUNE 30, 1997
OVERVIEW. For the three and six months ended June 30, 1998, the Company
reported net income of $863,000 and $1,693,000 compared with a net loss for the
three and six months ended June 31, 1997 of $943,000 and $430,000, an increase
in net income of $1,806,000 and $2,123,000, respectively. Basic earnings per
share were $.19 and $.37 for the three and six months ending June 30, 1998
compared to a net loss per share of $.34 and $.15 for the three and six
months ended June 30, 1997. The annualized return on average assets was .78%
and .79% for the first three and six months of 1998 compared with (1.32)% and
(.31)% for the three and six months ended June 30, 1997. The Company's
annualized return on average equity was 8,32% and 8.31% for the three and six
months ended June 30, 1998 compared with (17.14)% and (3.97)% for the three
and six months ended June 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 six months ended June 30, 1998
totaled $4,983,000 and $9,765,000 compared with $3,621,000 and $7,150,000 for
the same periods in 1997, an increase of $1,362,000 and $2,615,000 or 38% and
37% respectively.
Total interest and fees on earning assets were $8,369,000 and $16,454,000
for the three and six months ended June 30, 1998, an increase of $2,413,000 and
$4,897,000 or 41% and 42% from $5,956,000 and $11,557,000 for the same three
and six 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 in the three and six months ended June 30, 1998 was
primarily the result of an increase in the volume of interest-earning assets.
Average interest-earning assets for the three and six months ended June 30,
1998 were $387,576,000 and $381,797,000 compared with $252,264,000 and
$245,765,000 for the three and six months ended June 30, 1997, an increase of
$135,312,000 and $136,032,000 or 54% and 55% 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 $3,386,000
and $6,689,000 for the three and six months ended June 30, 1998, compared with
$2,335,000 and $4,407,000 for the three and six months ended June 30, 1997, an
increase of $1,051,000 and $2,282,000 or 45% and 52%, respectively. This
increase was primarily the result of an increase in the volume of
interest-bearing liabilities. Average interest-bearing liabilities were
$338,292,000 and $331,759,000 for the three and six months ended June 30, 1998
compared with $228,890,000 and $219,612,000 for the same three and six months
in 1997, an increase of $109,402,000 and $112,147,000 or 48% and 51%
respectively.
10
<PAGE>
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 successful 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 5.14% and 5.12% for the three and six
months ended June 30, 1998 compared with 5.74% and 5.83% 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 decreased from 76% and 77% for the three and six months
ended June 30, 1997 to 60% and 59% for the three and six months ended June 30,
1998, primarily due to the purchase of the three branches of Bank of America.
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>
Six months ended Six months ended
June 30, 1998 June 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 $ 23,845 $ 650 5.45% $ 3,488 $ 92 5.29%
Time deposits at other financial institutions 986 34 6.90 5,344 181 6.77
Taxable investment securities: 122,000 3,723 6.10 44,736 1,546 6.91
Nontaxable investment securities (1) 10,318 267 5.18 3,989 108 5.41
Loans, gross: (2) 224,648 11,780 10.49 188,208 9,630 10.26
---------- ---------- --------- --------- --------- --------
Total interest-earning assets: 381,797 16,454 8.62 245,765 11,557 9.43
Allowance for loan losses (3,946) (2,881)
Cash and due from banks 20,404 10,998
Premises and equipment, net 13,265 8,150
Interest receivable and other assets 22,255 15,294
---------- ---------
Total assets $ 433,755 $ 277,326
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Negotiable order of withdrawal $ 54,392 $ 241 0.89 $ 34,769 $ 158 0.91
Savings deposits 149,855 2,880 3.89 111,588 2,272 4.08
Time deposits 105,849 2,912 5.50 63,305 1,716 5.44
Other borrowings 21,663 656 6.06 9,950 261 5.26
---------- ---------- --------- --------- --------- --------
Total interest-bearing liabilities 331,759 6,689 4.03 219,612 4,407 4.02
Noninterest-bearing deposits 57,921 32,166
Accrued interest, taxes and other liabilities 3,011 3,877
---------- ---------
Total liabilities 392,691 255,655
Total shareholders' equity 41,084 21,671
---------- ---------
Total liabilities and shareholders' equity $ 433,775 $ 277,326
---------- ---------
---------- ---------
Net interest income and margin (3) $ 9,765 5.12% $ 7,150 5.83%
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
11
<PAGE>
(2) Amounts of interest earned includes loan fees of $648,000 and $670,000 for
June 30, 1998 and 1997 respectively.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
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>
June 30, 1998 compared to June 30, 1997
Volume Rate Total
-------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold $ 555 3 558
Time deposits at other financial institutions (150) 3 (147)
Taxable investment securities 2,379 (202) 2,177
Tax-exempt investment securities 164 (5) 159
Loans 1,909 241 2,150
------- ------- ------
Total 4,857 40 4,897
------- ------- ------
------- ------- ------
Increase (decrease) interest expense:
Interest bearing demand 88 (5) 83
Savings deposits 739 (131) 608
Time deposits 1,169 27 1,196
Other borrowings 349 46 395
------- ------- ------
Total 2,345 (63) 2,282
------- ------- ------
------- ------- ------
Increase in net interest income $ 2,512 $ 103 $2,615
------- ------- ------
------- ------- ------
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three
and six months ended June 30, 1998 was $738,000 and $990,000 compared with
$3,236,000 and $3,476,000 in the three and six months ended June 30, 1997.
Also see "ALLOWANCE FOR LOAN LOSSES" contained herein. As of June 30, 1998
the allowance for loan losses was $4,246,000 or 1.72% of total loans. At
June 30, 1998, nonperforming assets totaled $3,205,000 or .72% of total
assets, nonperforming loans totaled $3,007,000 or 1.30% of total loans and
the allowance for loan losses totaled 141.20% 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 $177,000 and
$501,000 or 15% and 26% to $1,389,000 and $2,447,000 for the three and six
months ended June 30, 1998 compared with $1,212,000 and $1,946,000 in the
same period in 1997. Service charges on deposit accounts increased by
$$294,000 and $605,000 or 74% and 80% for the three and six months ended June
30, 1998 compared with this same period in 1997. Income from the sale of real
estate held for sale or development decreased by $163,000 and $148,000 or 32%
and 29% and other income increased by $451,000 and $44,000 or 77% and 6% for
the three and six month period ended June 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 $1,198,000 and
$2,281,000 or 38% and 17% to $4,378,000 and $8,701,000 for the three and six
months ended June 30, 1998 compared with $3,180,000 and $6,420,000 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.
12
<PAGE>
For the three and six months ended June 30, 1998 compared with the three
and six months ended June 30, 1997, salaries and related benefits increased
by $424,000 and $843,000 or 29% and 28%, respectively, equipment expenses
increased by $294,000 and $409,000 or 119% and 64%, respectively, occupancy
expenses increased $28,000 and $74,000 or 9% and 13%, respectively,
professional fees increased by $92,000 and $105,000 or 77% and 40%,
respectively, marketing expenses increased (decreased) by $36,000 and
$(21,000) or 24% and (7)%, respectively, goodwill and intangible amortization
expense increased by $170,000 and 210,000 or 425% and 226%, respectively,
supplies expense increased by $13,000 and $61,000 or 9% and 24%,
respectively, and other expenses increased by $451,000 and $500,000 or 77%
and 39%, 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 $393,000 and
$828,000 tax expense for the three and six months ended June 30, 1998
compared with a benefit for income taxes of $690,000 and $370,000 for the
same period in 1997. Tax rates were positively affected by the purchase of
limited partnership investments in low-income affordable housing projects
providing the investor with affordable housing income tax credits. The
Company had investments in these partnerships of $4,261,000 as of June 30,
1998 and $2,700,000 as of June 30, 1997, resulting in tax credits of $148,000
and $70,000 respectively. The effective tax rate for the three and six months
ended June 30, 1998 was 31% and 33% compared to (40)% and (46)% for the three
and six months ended June 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.
The following tables set forth the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of June
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 JUNE 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 $ 750 $ 500 $ - $ - $ - $ 1,250
Federal funds sold 4,300 - - - - 4,300
Investment securities 6,549 18,925 51,759 64,185 - 141,418
Loans 139,567 32,284 55,326 18,601 - 245,778
---------- -------- -------- ------ - --------
Total earning assets 151,166 51,709 107,085 82,786 392,746
Noninterest-earning assets and
allowances for loan losses - - - - 54,826 54,826
---------- -------- -------- ------ ------- --------
13
<PAGE>
Total assets $ 151,166 $ 51,709 $107,085 $ 82,786 $54,826 $447,572
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings, money market and NOW deposits $ 272,464 $ - $ - $ - $ - $272,464
Time deposits 20,731 68,068 18,793 2,316 - 109,908
Other interest-bearing liabilities - 18,020 103 3,285 - 21,408
Other liabilities and shareholders'
equity - - - - 43,792 43,792
---------- -------- -------- ------ ------- --------
Total liabilities and shareholders'
equity 293,195 86,088 18,896 5,601 43,792 $447,572
Incremental gap (142,029) (34,379) 88,189 77,185 11,034
Cumulative gap $(142,029) $(176,408) $(88,219) $(11,034) $ -
Cumulative gap as a % of earning assets (36.2)% (44.9)% (22.5)% (2.8)%
</TABLE>
The Company was liability-sensitive with a negative cumulative one-year gap
of $176,408,000 or 44.9% of interest-earning assets at June 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.
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 June 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 $388,000
or 2% of net interest income. No assurance can be given that the actual net
interest income would not decrease by more than $388,000 or 2% 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 has contracted
with interest rate sensitivity consultants to provide additional expertise in
the interest rate sensitivity
14
<PAGE>
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 June 30, 1998 were $447,572,000, an increase of
$26,178,000 or 6% compared with total assets of $421,394,000 at December 31,
1997, and an increase of $154,548,000 or 53% compared with total assets of
$293,024,000 at June 30, 1997. Net loans were $241,532,000 at June 30, 1998,
an increase of $27,388,000 or 13% compared with net loans of $214,144,000 on
December 31, 1997, and an increase of $48,440,000 or 25% compared with net
loans of $193,092,000 at June 30, 1997. Deposits were $382,372,000 at June
30, 1998, an increase of $25,977,000 or 7% compared with deposits of
$356,395,000 at December 31, 1997, and an increase of $124,694,000 or 48%
compared with deposits of $257,678,000 at June 30, 1997. The growth of the
Company from June 30, 1997 to June 30, 1998 was primarily the result of the
purchase of three branch offices of Bank of America in December 1997, a
successful capital offering in 1997 and the opening of a branch office of
County Bank in late 1997.
Total shareholders' equity was $41,964,000 at June 30, 1998, an increase
of $1,716,000 or 4% from $40,248,000 at December 31, 1997, and a 100%
increase from $20,964,000 at June 30, 1997. The growth in shareholders'
equity from June 30, 1997 to December 31, 1997 was primarily due to the
issuance of 1,725,000 additional shares of no par common stock which
generated a net addition of $17,951,000 to stockholders' equity. The
additional shares were the result of an equity offering that was completed in
August 1997.
INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair
value) of available for sale investment securities as of June 30, 1998 and 1997
and December 31, 1997.
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
---------------------------------------------------
1998 1997 1997
<S> <C> <C> <C>
(In thousands)
Available for sale securities:
-------------------------------
U.S. Treasury and U.S. Government agencies $ 12,719 $ 1,824 $ 5,673
State and political subdivisions 17,028 9,640 3,379
Mortgage-backed securities 58,208 68,808 32,634
Collateralized mortgage obligations 37,632 51,874
Corporate debt securities 4,272 - -
Other securities 3,175 3,111 1,061
----------- ---------- -----------
Carrying amount and fair value $ 133,034 $ 135,257 $ 42,747
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The following table sets forth the carrying amount (amortized cost) and
fair value of held to maturity securities at June 30, 1998 and 1997, and
December 31, 1997.
<TABLE>
<CAPTION>
June 30 December 31 June 30
(In thousands) 1998 1997 1997
Held To Maturity Securities:
----------------------------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agency $ 5,034 $ 9,442 $ 11,451
Mortgage-backed securities 3,350 3,333 -
----------- ---------- -----------
Carrying amount (amortized cost) $ 8,384 $ 12,775 $ 11,451
----------- ---------- -----------
----------- ---------- -----------
Fair value $ 8,403 $ 12,780 $ 11,324
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
15
<PAGE>
The following table sets forth the maturities of the Company's investment
securities at June 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 JUNE 30, 1998
------------------------------------------------------------------------------------------
WITHIN ONE YEAR FIVE TO TEN YEARS
ONE TO 5 YEARS OVER TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Available for Sale Securities:
Treasury and U.S. Government agency $ 503 5.55% $ 6,008 5.70% $ - - $ 6,208 5.93% $ 12,719
State and political 418 4.08 796 3.81 236 4.33 15,578 4.79 17,028
Mortgage-backed securities 90 5.67 138 6.69 2,425 6.31 55,555 5.99 58,208
Collateralized mortgage obligations 2,034 7.15 22,683 6.44 5,002 6.24 7,913 6.57 37,632
Corporate debt securities - - 4,272 6.09 - - - - 4,272
Other securities - - - - - - 3,175 - 3,175
------------------------------------------------------------------------------------------
Carrying amount and fair value 3,045 6.42 33,897 6.19 7,663 6.21 88,429 5.83 133,034
------------------------------------------------------------------------------------------
Held to maturity securities:
Treasury and U.S. Government agency - - - - 4,021 6.94 1,000 7.06 5,021
Mortgage-backed securities - - - - - - 3,363 7.34 3.363
------------------------------------------------------------------------------------------
Carrying amount (amortized cost) - - - - 4,021 6.94 4,363 7.28 8,384
------------------------------------------------------------------------------------------
Total securities $ 3,045 6.42% $ 33,897 6.19% $ 11,684 6.50% $ 92,792 5.91% $141,418
--------- ----- -------- ----- --------- ----- --------- ------ --------
--------- ----- -------- ----- --------- ----- --------- ------ --------
</TABLE>
In the above table, mortgage-backed securities and collateralized mortgage
obligations are shown repricing at the time of maturity rather than in
accordance with their principal amortization schedules. The Company does not
own securities of a single issuer whose aggregate book value is in excess of 10%
of its total equity. Also see "Memorandum of Understanding" contained herein.
LOAN PORTFOLIO. The following table shows the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31, AT JUNE 30,
---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1997
---- ---- ----
Percent Percent Percent
Loan Categories: Dollar Amount of loans Dollar Amount of loans Dollar Amount of loans
------------- -------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 36,847 15% $ 34,992 16% $ 32,744 17%
Agricultural 46,012 19 43,558 20 39,886 20
Real estate-construction 13,980 6 12,657 6 9,315 5
Real estate-mortgage 83,508 34 70,802 32 67,181 34
Consumer 65,431 26 55,968 26 46,234 24
-------- ----- -------- ----- --------- -----
Total 245,778 100% 217,977 100% $195,360 100%
-------- ----- -------- ----- --------- -----
----- ----- -----
Less allowance for loan losses (4,246) (3,833) (2,268)
-------- -------- ---------
Net loans $241,532 $214,144 $193,092
-------- -------- ---------
-------- -------- ---------
</TABLE>
16
<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 June 30, 1998:
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 AFTER 5 YEARS TOTAL
YEARS
-------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural
Loans with floating interest rates $ 47,949 $ 16,767 $ 3,410 $ 64,451
Loans with fixed interest rates 3,367 7,897 833 14,099
---------- ------------ ---------- ----------
Subtotal 51,316 24,664 6,879 82,859
---------- ------------ ---------- ----------
Real estate-construction
Loans with floating interest rates 8,071 1,667 1,286 11,024
Loans with fixed interest rates 1,560 1,261 135 2,956
---------- ------------ ---------- ----------
Subtotal 9,631 2,928 1,421 13,980
---------- ------------ ---------- ----------
Real estate-mortgage 6,938 42,962 33,608 83,508
Consumer 33,021 31,220 1,190 65,431
---------- ------------ ---------- ----------
Total $ 100,906 $ 101,774 $ 43,098 $ 245,778
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
</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 December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 AFTER 5 YEARS TOTAL
YEARS
------------------------------------------------------
(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>
17
<PAGE>
OFF-BALANCE SHEET COMMITMENTS. The following table shows the distribution
of the Company's undisbursed loan commitments at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Letters of credit $ 3,306 $ 3,233 $ 3,231
Commitments to extend credit 76,764 55,248 42,928
---------- --------- ---------
Total $ 80,070 $ 58,481 $ 46,159
---------- --------- ---------
---------- --------- ---------
</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 JUNE 30, AT DECEMBER 31, AT JUNE 30,
1998 1997 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash surrender value of life insurance $4,019 $3,389 $3,210
</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 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 June
30, 1998 and at December 31, for the years indicated:
18
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in thousands) 1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $1,995 $2,611 $1,568
Accruing loans past due 90 days or more 1,012 131 337
------ ------ ------
Total nonperforming loans 3,007 2,742 1,905
Other real estate owned 60 60 417
Repossessed automobiles 198 - -
------ ------ ------
Total nonperforming assets $3,205 $2,802 $2,322
------ ------ ------
------ ------ ------
Nonperforming assets:
To total loans 1.30% 1.26% .98%
To total assets .72% .66% .79%
</TABLE>
Interest income on loans on nonaccrual status during the six months ended
June 30, 1998, and the six months ended June 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 June 30, 1998, nonperforming assets represented .72% of total assets,
and nonperforming loans represented 1.22% of total loans. Nonperforming loans
that were secured by first deeds of trust on real property were $671,000 at June
30, 1998, $1,635,000 at December 31, 1997, and $5,000 at June 30, 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 June 30,
1998 compared with their levels as of December 31, 1997 and June 30, 1997, was
due primarily to an increase in delinquent agricultural loans coupled with an
increase in repossessed automobiles.
At June 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.
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 two separate properties for sale or
development at June 30, 1998. These investments were completely written off
in 1995, although County Bank still retains title to this property. During
the first six months of 1998, two lots were sold for a pre-tax gain of
$298,000.
Management defines impaired loans, regardless of past due status on loans,
as those on which principal and interest are not expected to be collected under
the original contractual loan repayment terms. An impaired loan is charged off
at the time management believes the collection process has been exhausted. At
June 30, 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 June 30, 1998 were 1,995,000 (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 June
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
19
<PAGE>
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
six months ended June 30, 1998 and 1997, and for year ended December 31, 1997.
<TABLE>
<CAPTION>
JUNE 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 990 3,476 5,825
Charge-offs:
Commercial and agricultural 348 403 1,121
Real estate-construction - 3,456 3,458
Real estate-mortgage - - -
Consumer 479 278 471
---------- ---------- ----------
Total charge-offs 827 4,137 5,050
---------- ---------- ----------
Recoveries
Commercial and agricultural 101 103 155
Real estate construction - - 1
Real estate mortgage - - -
Consumer 149 34 110
---------- ---------- ----------
Total recoveries 250 137 266
Net charge-offs 577 4,000 4,784
---------- ---------- ----------
Balance at end of period $ 4,246 $ 2,268 $ 3,833
---------- ---------- ----------
Loans outstanding at year-end $ 245,043 $ 195,360 $ 217,977
---------- ---------- ----------
---------- ---------- ----------
Average loans outstanding $ 239,862 $ 188,208 $ 198,140
---------- ---------- ----------
---------- ---------- ----------
Net charge-offs to average loans .26% 2.13% 2.41%
Allowance for loan losses
To total loans 1.73% 1.16% 1.76%
To nonperforming assets 132.48% 119.06% 136.80%
</TABLE>
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.
20
<PAGE>
The balance in the allowance is affected by the amounts provided from
operations, amounts charged off and recoveries of loans previously charged off.
The Company recorded provisions for loan losses in the first six months of 1998
of $990,000 compared with $3,476,000 in the same period of 1997. The increase in
loan loss provisions in 1997 was primarily due to increased reserves established
for the 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 $577,000 for the six
months ended June 30, 1998 compared with $4,000,000 for the same six months in
1997. The increase in net charge-offs for the year ended December 31, 1997 was
primarily due to the write-off of the commercial real estate loan with a balance
of $3,458,000.
As of June 30, 1998, the allowance for loan losses was $4,246,000 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 $2,268,000 or 1.16% of total loans
outstanding as of June 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. The "migration" of loans from grade to grade is then tracked
to help predict future losses and thus more accurately set allowance levels.
Risk factors applied to the performing loan portfolio are based on the Company's
past loss history considering the current portfolio's characteristics, current
economic conditions and other relevant factors. General reserves are applied to
various categories of loans at percentages ranging up to 1.5% based on the
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 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.
21
<PAGE>
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>
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
------ ------ -------
AMOUNT AMOUNT AMOUNT
TO TOTAL TO TOTAL TO TOTAL
LOANS IN LOANS IN LOANS IN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
--------- --------- --------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ 2,135 50% $ 1,868 48% $ 1,101 49%
Real estate- construction 72 2 640 17 265 12
Real estate- mortgage 1,679 40 1,058 28 556 24
Consumer 360 8 267 7 346 15
--------- --------- --------- ------ --------- ------
Total $ 4,246 100% $ 3,833 100% $ 2,268 100%
--------- --------- --------- ------ --------- ------
--------- --------- --------- ------ --------- ------
</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 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
22
<PAGE>
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 $161,728,000,
$159,291,000 and $64,202,000 on June 30, 1998, December 31, 1997, and June 30,
1997, respectively, and constituted 36.1%, 37.8% and 21.9%, 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 June 30, 1998 compared with $45,812,000 at
December 31, 1997 and $21,963,000 at June 30, 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 June 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 successfully 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 $1,716,000 or 4% from December 31, 1997 to June 30, 1998.
The Company's shareholders' equity increased $21,000,000 or 100% from June 1997
to June 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 June 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 June 30, 1998 was
8.02% as compared with 8.58% as of December 31, 1997. The Company's total risk
based capital ratio at June 30, 1998 was 12.50% as compared to 12.78% as of
December 31,1997.
The Company's and Bank's actual capital amounts and ratios as of June 30, 1998
are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective
Action Provisions:
Dollars in thousands
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total capital (to risk weighted assets) $ 38,730 12.50% $ 24,786 8.0% $ 30,982 10.0%
Tier 1 capital (to risk weighted assets) 34,853 11.25 12,393 4.0 18,589 6.0
Leverage ratio* 34,853 8.02 17,387 4.0 21,734 5.0
The Bank:
- ----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1998
Total capital (to risk weighted assets) $ 31,017 11.44% $ 21,692 8.0% $ 27,115 10.0%
Tier 1 capital (to risk weighted assets) 27,621 10.19 10,846 4.0 16,269 6.0
Leverage ratio* 27,621 7.03 15,717 4.0 19,646 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 June 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 June 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 March 31, 1998 were approximately $61,281,000.
Maturities of time certificates of deposits of $100,000 or more outstanding
at June 30, 1998 and December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997
-------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Three months or less $ 8,981 $ 8,404
Over three to six months 14,037 7,799
Over six to twelve months 5,319 7,870
Over twelve months 4,538 6,188
-------- ----------
Total $ 32,875 $ 30,261
-------- ----------
-------- ----------
</TABLE>
24
<PAGE>
BORROWED FUNDS
At June 30 1998 and December 31, 1997, the Company's borrowed funds consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 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 $ 2,120 $ 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 3,285 3,300
------- --------
Total $21,408 $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>
Six months ended Six months ended Year ended
June 30 June 30 December 31
1998 1997 1997
------- ------- -------
<S> <C> <C> <C>
Annualized return on average assets .79% (.31)% .13%
Annualized return on average equity 8.31% (3.97)% 1.46%
Average equity to average assets 9.60% 7.81 % 8.76%
</TABLE>
25
<PAGE>
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.
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 June 30, 1998, MAID held two real estate projects including unimproved
land. MAID continues to develop this property and any amount 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 six months of 1998, 51 lots were sold which resulted in the
recognition of approximately $298,000 in noninterest income. Although the
Company expects that sale or disposition of its remaining assets 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 sales or dispositions will be
completed or that the amounts, if any, that the Company will ultimately realize
on such assets or whether such amounts will exceed the future expenses required
to hold and complete development of the projects. The amounts, if any,
realized on future disposition of these properties 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 these assets is
December 31, 2000.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company has a year 2000 compliance plan that has bee approved by their
board of directors. The board of directors is updated monthly on the progress
of the plan. The company is utilizing both internal and external resources to
identify, correct or reprogram the systems in order that they be Year 2000
compliant. The Bank's core banking system, Jack Henry Associates Inc.
Silverlake, is anticipating a release in August 1998 that will be Year 2000
compliant. This will allow adequate time for testing of all other systems to be
completed by mid 1999. Additionally, the Company continues to communicate with
significant customers and vendors to determine the extent of risk created by
those third parties' failure to remediate their own Year 2000 issue. 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.
26
<PAGE>
With respect to external systems, the Company is in contact with vendors
and customers in order to monitor the progress with Year 2000 compliance efforts
and assess the need for contingency plans, if applicable. To date, most vendors
have provided confirmations that they are either compliant or are making
progress toward planned compliance.
Based on a preliminary study, the Company expects to spend approximately
$200,000 to bring its information systems into Year 2000 compliance. A
significant proportion of these costs are not likely to be incremental costs to
the Company, but rather will represent the redeployment of existing information
technology resources. The expenditures to date, in 1998 and 1997 have been
negligible. Also see "Memorandum of Understanding" contained herein.
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
indicated that they intend to require 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.
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 can comply with 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.
27
<PAGE>
On June 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.
(a) Proxies for the Annual Meeting of shareholders held on May 12, 1998,
were solicited pursuant to Regulation 14A of the Securities Exchange
Act of 1934. The Report of the Inspector of election indicates that
the number of shares represented in person or by proxy was 3,574,839,
or 81.58% of the common shares outstanding.
(b) Election of directors VOTES FOR
<TABLE>
<S> <C>
Jack F. Cauwels 3,490,966
John D. Fawcett 3,490,966
Thomas T. Hawker 3,158,150
</TABLE>
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.
28
<PAGE>
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.
29
<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
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,144
<INT-BEARING-DEPOSITS> 1,250
<FED-FUNDS-SOLD> 4,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,034
<INVESTMENTS-CARRYING> 8,384
<INVESTMENTS-MARKET> 8,403
<LOANS> 241,532
<ALLOWANCE> 4,246
<TOTAL-ASSETS> 447,572
<DEPOSITS> 382,372
<SHORT-TERM> 18,020
<LIABILITIES-OTHER> 1,828
<LONG-TERM> 3,388
0
0
<COMMON> 33,998
<OTHER-SE> 7,811
<TOTAL-LIABILITIES-AND-EQUITY> 447,572
<INTEREST-LOAN> 11,780
<INTEREST-INVEST> 3,990
<INTEREST-OTHER> 684
<INTEREST-TOTAL> 16,454
<INTEREST-DEPOSIT> 6,033
<INTEREST-EXPENSE> 6,689
<INTEREST-INCOME-NET> 9,765
<LOAN-LOSSES> 990
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,701
<INCOME-PRETAX> 2,521
<INCOME-PRE-EXTRAORDINARY> 2,521
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,693
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 5.12
<LOANS-NON> 1,995
<LOANS-PAST> 1,012
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,833
<CHARGE-OFFS> 827
<RECOVERIES> 250
<ALLOWANCE-CLOSE> 4,246
<ALLOWANCE-DOMESTIC> 4,246
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
