<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 MARCH 31, 1999
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 March 31, 1999 was 4,607,102. No shares of preferred stock, no par value,
were outstanding at March 31, 1999.
1
<PAGE>
CAPITAL CORP OF THE WEST
Table of Contents
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statement of Changes in Stockholders Equity 5
Consolidated Statements of Cash Flows 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 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of matters to a vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 33
2
<PAGE>
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
03/31/99 12/31/98
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
Cash and noninterest-bearing deposits in other banks $ 23,833 $ 25,771
Federal funds sold 11,400 19,125
Time deposits at other financial institutions 1,850 600
Investment securities available for sale, at fair value 126,289 141,357
Investment securities held to maturity at cost, fair value of
$16,140,000, and $13,584,000 at March 31, 1999 and
December 31, 1998, respectively 15,935 13,510
Loans, net of allowance for loan losses of $5,383,000, and
$4,775,000 at March 31, 1999 and December 31, 1998, respectively 276,439 264,158
Interest receivable 3,069 3,272
Premises and equipment, net 13,199 13,319
Intangible assets 5,664 5,865
Other assets 15,857 12,882
----------- ----------
Total assets $ 493,535 $ 499,859
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 68,972 $ 80,290
Negotiable orders of withdrawal 64,099 71,526
Savings 181,338 165,781
Time, under $100,000 85,506 84,011
Time, $100,000 and over 42,813 42,602
----------- ----------
Total deposits 442,728 444,210
Short term borrowings 503 7,203
Long term borrowings 3,251 3,263
Accrued interest, taxes and other liabilities 3,257 2,379
----------- ----------
Total liabilities 449,739 457,055
Preferred Stock, no par value; 10,000,000 shares authorized;
None outstanding
Common stock, no par value; 20,000,000 shares authorized;
4,607,102 issued & outstanding at March 31, 1999, and December 31, 1998 37,142 37,142
Retained earnings 6,785 5,634
Accumulated other comprehensive (loss) income (131) 28
----------- ----------
Total shareholders' equity 43,796 42,804
----------- ----------
Total liabilities and shareholders' equity $ 493,535 $ 499,859
----------- ----------
----------- ----------
</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
ended March 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,712 $ 5,687
Interest on deposits with other financial institutions 10 12
Interest on investments held to maturity:
Taxable 184 205
Non-taxable 22 -
Interest on investments available for sale:
Taxable 1,533 1,794
Non-taxable 324 121
Interest on federal funds sold 158 273
----------- -----------
Total interest income 8,943 8,092
INTEREST EXPENSE:
Interest on negotiable orders of withdrawal 110 118
Interest on savings deposits 1,358 1,434
Interest on time deposits, under $100,000 1,064 1,050
Interest on time deposits, $100,000 and over 537 365
Interest on other borrowings 137 336
----------- -----------
Total interest expense 3,206 3,303
Net interest income 5,737 4,789
Provision for loan losses 507 252
----------- -----------
Net interest income after provision for loan losses 5,230 4,537
NONINTEREST INCOME:
Service charges on deposit accounts 733 648
Income from real estate held for sale or development 250 22
Other 396 388
----------- -----------
Total noninterest income 1,379 1,058
NONINTEREST EXPENSES:
Salaries and related benefits 2,214 1,963
Premises and occupancy 330 325
Equipment 491 502
Professional fees 331 154
Marketing 166 102
Goodwill and intangible amortization 198 198
Branch purchase - 101
Supplies 140 151
Other 926 827
----------- -----------
Total noninterest expenses 4,796 4,323
Income before income taxes 1,813 1,272
Provision for income taxes 662 435
----------- -----------
Net income $ 1,151 $ 837
- ------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Unrealized (loss) gain on securities arising during the period (167) (31)
Less: reclassification adjustment for (gains) losses included in net income - 46
----------- -----------
Comprehensive Income $ 984 $ 852
----------- -----------
----------- -----------
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.25 $ .18
Diluted earnings per share $ 0.24 $ .18
</TABLE>
See accompanying notes
4
<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 Accumulated
------------------------- Other
Number of Retained Comprehensive
shares Amounts earnings Income Total
--------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 4,607,102 $ 37,142 $ 5,634 $ 28 $ 42,804
Net Change in fair market value
of investment securities, net of
tax effect of $(102) - - - (159) (159)
Net income - - 1,151 - 1,151
--------- ---------- --------- -------- ----------
Balance, March 31, 1999 4,607,102 $ 37,142 $ 6,785 $ (131) $ 43,796
--------- ---------- --------- -------- ----------
--------- ---------- --------- -------- ----------
</TABLE>
See accompanying notes
5
<PAGE>
Capital Corp of the West
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
3 months ended 3 months ended
03/31/99 03/31/98
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,151 $ 837
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Provision for loan losses 507 252
Depreciation, amortization and accretion, net 803 752
Gain on sale of real estate held for sale 250 22
Net increase in interest receivable & other assets (3,951) (367)
Net decrease in deferred loan fees (313) (23)
Net decrease (increase) in accrued interest payable & other liabilities 1,318) (540)
---------------- --------------
Net cash (used) provided by operating activities (235) 933
INVESTING ACTIVITIES:
Investment security purchases (243) (21)
Proceeds from maturities of investment securities 13,030 15,219
Proceeds from sales of AFS investment securities - 15,615
Net increase in time deposits in other financial institutions (1,250) (401)
Proceeds from sales of commercial and real estate loans 304 814
Net increase in loans (13,044) (4,208)
Purchases of premises and equipment (281) (637)
Net increase in real estate held for sale - (478)
Proceeds from sales of real estate held for sale 250 -
---------------- --------------
Net cash (used) provided by investing activities (1,234) 25,903
FINANCING ACTIVITIES:
Net (decrease) increase in demand, NOW and deposits (3,188) 11,161
Net increase in certificates of deposit 1,706 5,664
Net decrease in other borrowings (6,712) (620)
Exercise of stock options - 50
---------------- --------------
Net cash (used) provided by financing activities (8,194) 16,255
Net (decrease) increase in cash and cash equivalents (9,663) 43,091
Cash and cash equivalents at beginning of period 44,896 23,435
---------------- --------------
Cash and cash equivalents at end of period $ 35,233 $ 66,526
---------------- --------------
---------------- --------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Investment securities net unrealized (losses) gains; net of tax $ (159) $ 15
Interest paid 3,195 3,281
Transfer of securities from available for sale to held to maturity 4,327 -
Loans transferred to other real estate owned - 478
</TABLE>
See accompanying notes
6
<PAGE>
Capital Corp of the West
Notes to Consolidated Financial Statements
March 31, 1999 and December 31, 1998
(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 1998, 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 March 31, 1999 there were 4,607,102 common shares outstanding,
held of record by approximately 2,200 shareholders. There were no preferred
shares outstanding at March 31, 1999. 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.
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 one branch centrally located and
the other 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 which in the opinion of Management are necessary for a
fair presentation of the Company's financial position at March 31, 1999 and
December 31, 1998 and the results of operations for the three month period
ended March 31, 1999 and 1998, and the statements of cash flows for the three
months ended March 31, 1999 and 1998 have been included. The interim results
for the three months ended March 31, 1999 and 1998 are not necessarily
indicative of results for the full year. These financial statements should be
read in conjunction with the financial statements and the notes included in
the Company's Annual Report for the year ended December 31, 1998.
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 the weighted average number of shares
of common stock outstanding during each three-month period after giving
retroactive effect for the 5% stock dividend declared for shareholders of
record May 7, 1998, payable September 1, 1998. Basic earnings per share (EPS)
is computed by dividing net income available to shareholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income available to
shareholders by the weighted average number of 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.
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 March 31, 1999 and 1998:
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
-------------------------------
(In thousands, except per share data) 1999 1998
-------------- ------------
<S> <C> <C>
Basic EPS computation:
Net income $ 1,151 $ 837
------------ ------------
------------ ------------
Average common shares
outstanding 4,607 4,599
------------ ------------
------------ ------------
Basic EPS $ 0.25 $ .18
------------ ------------
------------ ------------
Diluted EPS Computations:
Net income $ 1,151 $ 837
------------ ------------
------------ ------------
Average common shares
Outstanding 4,607 4,599
Stock options 135 145
------------ ------------
4,742 4,744
------------ ------------
------------ ------------
Diluted EPS $ 0.24 $ 0.18
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
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 MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
OVERVIEW. For the three months ended March 31, 1999 the Company reported
record net income of $1,151,000. This compares to $837,000 for the same period
in 1998 and represents an increase of $314,000 or 38%. Basic and fully diluted
earnings per share were $.25 and $.24 for the three months ending March 31,
1999. This compares to basic and fully diluted earnings per share of $.18 for
the three months ending March 31, 1998 and represents an increase of $0.07 and
$0.06 per share, respectively. The annualized return on average assets was .94%
and .78% for the first three months of 1999 and 1998. The Company's annualized
return on average equity was 10.56% and 8.01% for the three months ended
March 31, 1999 and 1998.
NET INTEREST INCOME. The Company's primary source of income is net
interest income and is determined by the difference between interest income and
fees derived from earning assets and interest paid on interest bearing
liabilities. Net interest income for the three months ended March 31, 1999
totaled $5,737,000 and represented an increase of $948,000 or 20% when compared
to the $4,789,000 achieved during the three months ended March 31, 1998.
Total interest and fees on earning assets were $8,943,000 for the three
months ended March 31, 1999, an increase of $851,000 or 11% from the $8,092,000
for the same period in 1998. 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 months ended
March 31, 1999 was primarily the result of an increase in the volume of
interest-earning assets. Average interest-earning assets for the three months
ended March 31, 1999 were $434,811,000 compared with $375,683,000 for the three
months ended March 31, 1998, an increase of $59,128,000 or 16%.
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 $3,206,000 for
the three months ended March 31, 1999, compared with $3,303,000 for the three
months ended March 31, 1998, a decrease of $97,000 or 3%. This decrease was
primarily the result of a decrease in the rates of interest-bearing liabilities.
Average interest-bearing liabilities were $373,814,000 for the three months
ended March 31, 1999 compared with $326,930,000 for the same three months in
1998, an increase of $46,884,000 or 14%. Average interest rates paid on
interest-bearing liabilities were 3.43% for the three months ending March 31,
1999 compared with 4.10% for the same three months of 1998, a decrease in
interest rates paid of 0.67% or 16%.
10
<PAGE>
The increase in interest-earning assets and interest-bearing liabilities is
primarily the result of increased market penetration within our target markets.
The Company has not opened any new branch locations since the purchase of three
branches of Bank of America in December 1997.
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets, was 5.28% for the three months ended March 31,
1999 compared with 5.17% for the same period in 1998. Net interest margin
provides a measurement of the Company's ability to employ funds profitably
during the period being measured. The Company's increase 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 63% for
the three months ended March 31, 1999 compared to 58% for the three months ended
March 31, 1998.
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>
Three months ended Three months ended
March 31, 1999 March 31, 1998
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 12,917 $ 158 4.89% $ 20,041 $ 273 5.52%
Time deposits at other financial institutions 706 10 5.40% 820 12 5.93
Taxable investment securities: 115,332 1,717 5.95% 128,008 1,999 6.33
Nontaxable investment securities (1) 30,147 346 4.59 9,215 121 5.33
Loans, gross: (2) 275,709 6,712 9.74 217,599 5,687 10.60
--------- -------- ------ -------- -------- -------
Total interest-earning assets: 434,811 8,943 8.23% 375,683 8,092 8.74
Allowance for loan losses (4,852) (4,073)
Cash and due from banks 20,789 20,606
Premises and equipment, net 13,212 13,153
Interest receivable and other assets 26,395 22,094
--------- --------
Total assets $ 490,355 $427,463
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Negotiable order of withdrawal $ 66,033 $ 110 0.67 $ 53,560 $ 118 0.89
Savings deposits 172,237 1,358 3.15 148,507 1,434 3.92
Time deposits 127,679 1,601 5.02 102,965 1,415 5.57
Other borrowings 7,865 137 6.97 21,898 336 6.22
--------- -------- ------ -------- -------- -------
Total interest-bearing liabilities 373,814 3,206 3.43 326,930 3,303 4.10
Noninterest-bearing deposits 69,818 56,419
Accrued interest, taxes and other liabilities 3,107 2,342
--------- --------
Total liabilities 446,739 385,691
Total shareholders' equity 43,616 41,772
--------- --------
Total liabilities and shareholders' equity $ 490,355 $427,463
--------- --------
--------- --------
Net interest income and margin (3) $ 5,737 5.28% $ 4,789 5.17%
-------- ------ -------- -------
-------- ------ -------- -------
</TABLE>
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
(2) Amounts of interest earned includes loan fees of $193,000 and $343,000 for
March 31, 1999 and 1998 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>
March 31, 1999 compared to March 31, 1998
Volume Rate Total
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold $ (85) $ (37) $ (122)
Time deposits at other financial institutions (1) (2) (3)
Taxable investment securities (176) (98) (274)
Tax-exempt investment securities 242 (17) 225
Loans 1,504 (479) 1,025
------- -------- -------
Total 1,484 (633) 851
------- -------- -------
------- -------- -------
Increase (decrease) interest expense:
Interest bearing demand 25 (33) (8)
Savings deposits 221 (297) (76)
Time deposits 334 (148) 186
Other borrowings (236) 37 (199)
------- -------- -------
Total 344 (441) 97
------- -------- -------
------- -------- -------
Increase in net interest income $ 1,140 $ (192) $ 948
------- -------- -------
------- -------- -------
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three
months ended March 31, 1999 was $507,000 compared with $252,000 for the three
months ended March 31, 1998, an increase of $195,000 or 77%. See "Allowance for
Loan Losses" contained herein. As of March 31, 1999 the allowance for loan
losses was $5,383,000 or 1.91% of total loans. At March 31, 1999, nonperforming
assets totaled $2,456,000 or .45% of total assets, nonperforming loans totaled
$2,209,000 or .78% of total loans and the allowance for loan losses totaled 244%
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 $321,000 or 30% to
$1,379,000 for the three months ended March 31, 1999 compared with $1,058,000
in the same period in 1998. Service charges on deposit accounts increased by
$85,000 or 13% to $733,000 for the three months ended March 31, 1999 compared
with $648,000 for the same period in 1998. Income from the sale of real
estate held for sale or development increased by $228,000 over 1998 levels,
and other income increased by $8,000 or 2% for the three month period ended
March 31, 1999 when compared to the same period in 1998. The increase in
income from the sale of real estate during the first quarter of 1999 resulted
from the sale of a property that was previously written off.
NONINTEREST EXPENSE. Noninterest expenses increased by $473,000 or 11% to
$4,796,000 for the three months ended March 31, 1999 compared with $4,323,000
for the same period in 1998. The primary components of noninterest expenses
were salaries and employee benefits, furniture and equipment expenses, occupancy
expenses, professional fees, and other operating expenses.
For the three months ended March 31, 1999, salaries and related benefits
increased by $251,000 or 13% to $2,214,000 from the $1,963,000 recorded for the
same period in 1998. Equipment expenses decreased by $11,000 or 2% to $491,000
during the three months ended March 31, 1999 from the $502,000 experienced
during the same period in 1998. When comparing the results of the three months
13
<PAGE>
ending March 31, 1999 to three months ending March 31, 1998, premises and
occupancy expenses increased $5,000 or 2%, professional fees increased by
$177,000 or 115%, marketing expenses increased by $64,000 or 63%, goodwill and
intangible amortization expense did not change from 1998 levels, supplies
expense decreased by $11,000 or 7%, and other expenses increased by $99,000 or
12%. The salary expense increases were primarily the result of increased
staffing levels and normal salary progression. Increased professional fees were
the result of increased use of consultants to identify and develop profitability
enhancement strategies, and increased marketing expenditures designed to provide
greater market penetration within our existing markets. Expenses for branch
purchases incurred in 1998 were the result of trailing expenses related to the
acquisition of three branches purchased from Bank of America in December, 1997.
PROVISION FOR INCOME TAXES. The Company recorded an increase of $227,000
or 52% in the income tax provision to $662,000 for the three months ended March
31, 1999 compared to the $435,000 recorded for the same period in 1998. During
the first quarter of 1999, the Company experienced an effective tax rate of 37%
compared to 34% recorded for the same period in 1998. The increase in income
taxes during the first quarter of 1999 is primarily related to a reduction in
the overall size of the California Enterprise Zone tax credit that was recorded.
This credit is the result of certifying eligible employees that work within the
Merced-Atwater Enterprise Zone and may fluctuate over time. Overall income tax
expense was reduced in both 1999 and 1998 by utilizing 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 $5,736,000 as of March 31, 1999 and $4,300,000 as of March 31,
1998, resulting in tax credits of $80,000 and 79,000 respectively.
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 March
31, 1999, 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 MARCH 31, 1999
---------------------------------------------------------------------------------------
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 $ 1,850 $ - $ - $ - $ - $ 1,850
Federal funds sold 11,400 - - - - 11,400
Investment securities 8,941 18,812 34,584 76,380 3,507 142,224
Loans 135,148 39,075 73,041 34,508 - 281,822
--------- --------- --------- --------- ------------ ----------
Total earning assets 157,339 57,937 107,625 110,888 $ 3,507 437,296
Noninterest-earning assets and
allowances for loan losses - - - - 56,239 56,239
--------- --------- --------- --------- ------------ ----------
Total assets $ 157,339 $ 57,937 $ 107,625 $ 110,888 $ 59,746 $ 493,535
LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits $ - $ - $ - $ - $ 68,972 $ 68,972
Savings, money market and NOW
deposits 245,437 - - - - 245,437
Time deposits 38,562 75,014 14,743 - - 128,319
Other interest-bearing liabilities 400 103 - 3,251 - 3,754
Other liabilities and shareholders'
equity - - - - 46,255 47,053
--------- --------- --------- --------- ------------ ----------
Total liabilities and shareholders'
equity 284,399 75,117 14,743 3,251 116,025 $ 493,535
Incremental gap (127,060) (17,180) 92,882 107,736 (56,279)
Cumulative gap $(127,060) $(144,240) $ (51,358) $ 56,279 $ -
Cumulative gap as a % of earning
assets (29.06)% (32.98)% (11.74)% 12.87%
</TABLE>
The Company was liability-sensitive with a negative cumulative one-year gap of
$144,240,000 or (32.98)% of interest-earning assets at March 31, 1999. 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 March 31, 1999 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 $585,000 or 2% of net interest income. No assurance
can be given that the actual net interest income would not decrease by more than
$585,000 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 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 March 31, 1999 were $493,535,000, a decrease of $6,324,000
or 1% compared with total assets of $499,859,000 at December 31, 1998. Net
loans were $276,439,000 at March 31, 1999, an increase of $12,281,000 or 5%
compared with net loans of $264,158,000 on December 31, 1998. Deposits were
$442,728,000 at March 31, 1999, a decrease of $1,482,000 or less than 1%
compared with deposits of $444,210,000 at December 31, 1998. The reduction in
total assets of the Company from December 31, 1998 to March 31, 1999 was
primarily the result of a reduction in leverage that was maintained in the
Company's investment portfolio. During the first quarter of 1999, maturities
that occurred within the investment portfolio were used, in part, to repay short
term borrowings that were secured by a portion of the Company's investment
portfolio
Total shareholders' equity was $43,796,000 at March 31, 1999, an increase
of $992,000 or 2% from $42,804,000 at December 31, 1998. The growth in
shareholders' equity from December 31, 1998 to March 31, 1999 was primarily
achieved 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 March 31, 1999 and
December 31, 1998.
<TABLE>
<CAPTION> MARCH 31 DECEMBER 31
----------------------------------
1999 1998
<S> <C> <C>
(In thousands)
Available for sale securities:
-----------------------------------
U.S. Treasury and U.S. Government
agencies $ 12,058 $ 12,711
State and political subdivisions 25,481 30,192
Mortgage-backed securities 50,797 56,048
Collateralized mortgage obligations 24,509 29,264
Corporate debt securities 9,937 9,878
Other securities 3,507 3,264
------------- ------------
Carrying amount and fair value $ 126,289 $ 141,357
------------- ------------
------------- ------------
</TABLE>
16
<PAGE>
The following table sets forth the carrying amount (amortized cost)
and fair value of held to maturity securities at March 31, 1999 and
December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
---------- ------------
<S> <C> <C>
(Dollars in thousands) 1999 1998
Held To Maturity Securities:
- -----------------------------
U.S. Treasury and U.S. Government
agency $ 1,019 $ 2,024
State and political subdivisions 4,400 -
Mortgage-backed securities 10,516 11,486
---------- -----------
Carrying amount (amortized cost) $ 15,935 $ 13,510
---------- -----------
---------- -----------
Fair value $ 16,140 $ 13,584
---------- -----------
---------- -----------
</TABLE>
The following table sets forth the maturities of the Company's investment
securities at March 31, 1999 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 MARCH 31, 1999
-----------------------------------------------------------------------------------------
WITHIN ONE YEAR ONE TO 5 YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Available for Sale Securities:
Treasury and U.S. Government agency $ 501 6.02% $ 6,049 5.76% $ - -% $ 5,508 6.45% $ 12,058
State and political 253 4.99 532 7.80 1,662 4.08 23,034 4.49 25,481
Mortgage-backed securities 18 7.67 1,483 5.59 572 6.89 48,724 5.90 50,797
Collateralized mortgage obligations - - - - 714 4.60 23,795 6.05 24,509
Corporate debt securities - - 4,258 6.07 - - 5,679 6.28 9,937
-----------------------------------------------------------------------------------------
Carrying amount and fair value 772 5.72 12,322 5.70 2,948 4.75 106,740 5.68 122,782
-----------------------------------------------------------------------------------------
Held to maturity securities:
Treasury and U.S. Government agency - - - - 1,019 5.79 - - 1,019
State and political 4,400 5.14 4,400
Mortgage-backed securities - - - - - - 10,516 6.58 10,516
-----------------------------------------------------------------------------------------
Carrying amount (amortized cost) - - - - 1,019 5.79 14,916 6.16 15,935
-----------------------------------------------------------------------------------------
Total securities $ 772 5.72% $12,322 5.70% $3,967 5.02% $ 121,656 5.74% $138,717
-------- ---- ------- ---- ------ ---- --------- ----- --------
-------- ---- ------- ---- ------ ---- --------- ----- --------
</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.
17
<PAGE>
LOAN PORTFOLIO. The following table shows the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
-------------------------------- ----------------------------------
(Dollars in thousands) 1999 1998
---- ----
Percent Percent
Loan Categories: Dollar Amount of loans Dollar Amount of loans
---------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Commercial $ 43,221 15% $ 37,609 14%
Agricultural 46,733 16 49,636 18
Real estate construction 16,098 6 13,840 5
Real estate mortgage 98,095 35 96,957 36
Consumer 77,675 28 70,891 27
---------------- ------ -------------- --------
Total 281,822 100% 268,933 100%
---------------- ------ -------------- --------
------ --------
Less allowance for loan losses (5,383) (4,775)
---------------- --------------
Net loans $ 276,439 $ 264,158
---------------- --------------
---------------- --------------
</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 March 31, 1999:
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-------------------------------------------------------------------------
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 $ 51,255 $ 18,795 $ 4,037 $ 74,087
Loans with fixed interest rates 7,635 7,210 1,022 15,867
------------------ ---------------- --------------- --------------
Subtotal 58,890 26,005 5,059 89,954
Real estate construction
Loans with floating interest rates 9,485 1,929 853 12,267
Loans with fixed interest rates 2,652 1,053 126 3,831
------------------ ---------------- --------------- --------------
Subtotal 12,137 2,982 979 16,098
Real estate mortgage
Loans with floating interest rates 9,055 50,737 24,085 83,877
Loans with fixed interest rates 71 14,147 - 14,218
------------------ ---------------- --------------- --------------
Subtotal 9,126 64,884 24,085 98,095
Consumer 37,834 38,476 1,365 77,675
------------------ ---------------- --------------- --------------
Total $ 117,987 $ 132,347 $ 31,488 $ 281,822
------------------ ---------------- --------------- --------------
------------------ ---------------- --------------- --------------
</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, 1998:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------------------------------------
AFTER 1 BUT
WITHIN 1 YEAR WITHIN 5 YEARS AFTER 5 YEARS TOTAL
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural:
Loans with floating interest rates $ 49,843 $ 18,195 $ 3,818 $ 71,856
Loans with fixed interest rates 7,405 6,993 991 15,389
----------------- -------------- ------------- --------------
Subtotal 57,248 25,188 4,809 87,245
Real estate-construction:
Loans with floating interest rates 5,974 1,454 1,963 9,391
Loans with fixed interest rates 2,590 1,618 241 4,449
----------------- -------------- ------------- --------------
Subtotal 8,564 3,072 2,204 13,840
Real estate-mortgage:
Loans with floating interest rates 9,006 50,770 24,041 83,817
Loans with fixed interest rates 51 13,089 - 13,140
----------------- -------------- ------------- --------------
Subtotal 9,057 63,859 24,041 96,957
Consumer 40,570 29,054 1,267 70,891
----------------- -------------- ------------- --------------
Total $ 115,439 $ 121,173 $ 32,321 $ 268,933
----------------- -------------- ------------- --------------
----------------- -------------- ------------- --------------
</TABLE>
OFF-BALANCE SHEET COMMITMENTS. The following table shows the distribution
of the Company's undisbursed loan commitments at the dates indicated.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -------------
1999 1998
----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Letters of credit $ 2,554 $ 2,694
Commitments to extend credit 81,935 76,984
----------- ---------
Total $ 84,489 $ 79,678
----------- ---------
----------- ---------
</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 MARCH 31, AT DECEMBER 31,
----------- ----------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash surrender value of life insurance $5,151 $4,104
----- -----
----- -----
</TABLE>
19
<PAGE>
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
March 31, 1999 and December 31, for the years indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 1,967 $ 1,032
Accruing loans past due 90 days or more 242 413
-------------- --------------
Total nonperforming loans 2,209 1,445
Other real estate owned 60 60
Repossessed automobiles 187 132
-------------- --------------
Total nonperforming assets $ 2,456 $ 1,637
-------------- --------------
-------------- --------------
Nonperforming assets:
To total loans .78% .61%
To total assets .45% .33%
</TABLE>
Interest income on loans on nonaccrual status during the three months ended
March 31, 1999, and the nine months ended March 31, 1998, that would have been
recognized if the loans had been current in accordance with their original terms
was approximately $235,000 and $142,000, respectively.
At March 31, 1999, nonperforming assets represented .45% of total assets,
an increase of .12% of total assets compared to the .33% at December 31, 1998.
Nonperforming loans represented .78% of total loans at March 31, 1999, an
increase of .17% of total loans compared to the .61% at December 31, 1998.
Nonperforming loans that were secured by first deeds of trust on real property
were $863,000 at March 31, 1999 and $623,000 at December 31, 1998. 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
March 31, 1999 compared with their levels as of December 31, 1998, was due
primarily to an increase in delinquent agricultural loans coupled with an
increase in repossessed automobiles.
20
<PAGE>
At March 31, 1999, 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 1999. No assurance can be given
that the Company will sell such property during 1999 or at any time or the
amount for which such property might be sold. During the first quarter of 1999,
one foreclosure property that had previously been written-off was sold for
$250,000 resulting in a gain on sale equal to the net sales proceeds.
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
March 31, 1999. This investment was completely written off in 1995, although
County Bank still retains title to this property. During the first three months
of 1999, no lots were sold.
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
March 31, 1999 and December 31, 1998, 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 March 31, 1999 were 2,209,000 (all of
which were also nonaccrual loans), on account of which the Company had made
provisions to the allowance for loan losses of $553,000.
Except for loans that are disclosed above, there were no assets as of
March 31, 1999, 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.
21
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the loan loss experience of the Company for
the three months ended March 31, 1999 and 1998, and for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
------------------------------ -----------
1999 1998 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 4,775 $ 3,833 $ 2,792
--------- --------- ----------
Provision for loan losses 507 252 3,903
Charge-offs:
Commercial and agricultural 123 121 2,539
Real estate construction - - 4
Consumer 297 223 983
--------- --------- ----------
Total charge-offs 420 344 3,526
--------- --------- ----------
Recoveries
Commercial and agricultural 430 20 135
Real estate-mortgage - - 100
Consumer 91 37 330
--------- --------- ----------
Total recoveries 521 57 565
Net (recoveries) charge-offs (101) 287 2,961
--------- --------- ----------
Balance at end of period $ 5,383 $ 3,799 $ 4,775
--------- --------- ----------
--------- --------- ----------
Loans outstanding at period-end $ 260,114 $ 221,108 $ 268,933
--------- --------- ----------
--------- --------- ----------
Average loans outstanding $ 275,709 $ 217,599 $ 242,989
--------- --------- ----------
--------- --------- ----------
Net (recoveries) charge-offs to average loans (0.04%) .13% 1.22%
Allowance for loan losses
To total loans 1.91% 1.72% 1.78%
To nonperforming assets 219.22% 297.02% 301.07%
</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 of 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 three
months of 1999 of $507,000 compared with $252,000 in the same period of 1998.
The increase in loan loss provisions in 1998 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.
22
<PAGE>
The Company's charge-offs, net of recoveries, were $(101,000) for the three
months ended March 31, 1999 compared with $287,000 for the same three months in
1998. The decrease in net charge-offs for the first quarter of 1999 was
primarily due to a single recovery in excess of $400,000 on a loan that was
written-off in the fourth quarter of 1998.
As of March 31, 1999, the allowance for loan losses was $5,383,000 or 1.91%
of total loans outstanding, compared with $4,775,000 or 1.78% of total loans
outstanding as of December 31, 1998 and $3,799,000 or 1.72% of total loans
outstanding as of March 31, 1998. During the first quarter of 1999, the
allowance for loan loss increased $608,000 or 13% compared to December 31, 1998
levels.
From 1992 to 1996, loan losses were relatively low and stable. In 1998,
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 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 1.8% 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 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 not 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 at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
AMOUNT AMOUNT
TO TOTAL TO TOTAL
LOAN LOSS LOAN LOSS
AMOUNT ALLOWANCE AMOUNT ALLOWANCE
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 2,736 51% $ 2,618 55%
Real estate- construction 402 7 376 8
Real estate- mortgage 1,600 30 1,260 26
Consumer 645 12 521 11
--------- --- --------- ---
Total $ 5,383 100% $ 4,775 100%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
23
<PAGE>
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 these 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 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 $163,372,000 and
$186,853,000 on March 31, 1999 and December 31, 1998, respectively, and
constituted 33%, and 37%, 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 $48,838,000 at March 31,
1999 compared with $46,023,000 at December 31, 1998.
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
$503,000 was outstanding as of March 31, 1999 and $7,203,000 was outstanding
as of December 31, 1998. Funds used to reduce outstanding short term
borrowings during the first quarter of 1999 were obtained from maturities and
curtailments that occurred within the investment portfolio. 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
24
<PAGE>
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 $992,000 or 2% from December 31, 1998 to March 31, 1999.
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 adverse effect on the Company's financial statements. Management
believes, as of March 31, 1999, that the Company, the Bank and the Thrift met
all capital requirements to which they are subject. The Company's leverage
capital ratio at March 31, 1999 was 8.15% as compared with 8.58% as of
December 31, 1998. The Company's total risk based capital ratio at March 31,
1999 was 12.37% as compared to 12.78% as of December 31,1998.
The Company's and Bank's actual capital amounts and ratios met all
regulatory requirements as of March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Dollars in thousands Actual Adequacy Purposes Action Provisions:
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999
Total capital (to risk weighted assets) $ 42,756 11.93% $ 28,682 8.0% $ 35,853 10.0%
Tier 1 capital (to risk weighted assets) 38,263 10.67 14,341 4.0 21,512 6.0
Leverage ratio* 38,263 7.89 19,388 4.0 24,235 5.0
The Bank:
---------------------------------------------------------------------------------------------------------------------------------
As of March 31, 1999
Total capital (to risk weighted assets) $ 34,956 11.34% $ 24,661 8.0% $ 30,826 10.0%
Tier 1 capital (to risk weighted assets) 31,088 10.08 12,330 4.0 18,496 6.0
Leverage ratio* 31,088 7.13 17,447 4.0 21,809 5.0
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The leverage ratio consists of Tier 1 capital divided by quarterly
average assets. The minimum leverage ratio is 3 percent for banking
organizations that do not anticipate significant growth and that have
well-diversified risk, excellent asset quality and in general, are
considered top-rated banks.
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.
On May 23, 1999 the Company's board of directors authorized
management to repurchase up to 200,000 shares or $2,300,000 of the Company's
common stock. The Company intends to repurchase shares from time to time in
open market transactions. Management's authorization to repurchase Company
common stock will continue until withdrawn by the Board of Directors.
DEPOSITS. Deposits are the Company's primary source of funds. At
March 31, 1999, the Company had a deposit mix of 41% in savings deposits, 29%
in time deposits, 16% 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.
25
<PAGE>
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 March 31, 1999, the Company had no
brokered deposits.
Maturities of time certificates of deposits of $100,000 or more outstanding
at March 31, 1999 and December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------ --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less $ 14,851 $ 17,136
Over three to six months 11,624 10,028
Over six to twelve months 8,355 8,205
Over twelve months 7,983 7,233
---------------- -----------------
Total $ 42,813 $ 42,602
---------------- -----------------
---------------- -----------------
</TABLE>
BORROWED FUNDS
At March 31 1999 and December 31, 1998, the Company's borrowed funds consisted
of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
--------- -----------
(Dollars in thousands) 1999 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities sold under agreements to repurchase; dated
March 25, 1999; fixed rate of 5.69%; payable on
April 25, 1999 $ 400 $ 2,100
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
FHLB loan, dated July 15, 1994; fixed rate of 7.58%
payable on July 15, 1999 103 103
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 3,251 3,263
---------- -----------
Total $ 3,754 $ 10,466
---------- -----------
---------- -----------
</TABLE>
The decrease in the borrowings was primarily due to amortized principal
payments and maturities on available lines of credit with the Federal Home
Loan Bank.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
Three months Three months
ended ended Year ended
March 31 March 31 December 31
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Annualized return on average assets .94% .78% .60%
Annualized return on average equity 10.56% 8.12% 6.48%
Average equity to average assets 8.89% 9.77% 9.26%
</TABLE>
26
<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 March 31, 1999, 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 three months of 1999,
no lots were sold. 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 its systems to make them
27
<PAGE>
they be Year 2000 compliant. The Bank's core banking system, Jack Henry
Associates Inc. Silverlake, issued a new software release in August 1999 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, including its
non-information technology 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 mission critical systems, and the need to establish firm test dates for the
most important "mission critical" systems. The Company is in the process of
insuring these additional concerns are addressed within the Y2K plan. The
Company's 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
community 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 rating each
inventoried system's importance to the day-to-day operation of the Company.
The most important systems were rated as "mission critical." The renovation
phase is also 100% 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 also 100% complete.
This is by far the costliest and most time consuming part of the project.
Each mission critical system was tested for Y2K compliance. This included the
Company's core application software and its data communications systems.
Additionally, the Company tested many of its other systems which had been
deemed non-mission critical. Implementation is the last phase and involves
putting the new Y2K compliant software into production. This phase is 80%
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 and the Y2K costs are not expected
to have any effect on the Company's continuing status as a technological leader
among community financial organizations. During the first three months of 1999,
the Company has incurred approximately $10,000 in Y2K 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 organization's 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
28
<PAGE>
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.
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 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
29
<PAGE>
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 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.
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.
On May 12, 1999, the DFI contacted the Company with notification that
the Memorandum of Understanding was being removed. The FDIC and the DFI
agreed that the Bank was in compliance with the terms and conditions of the
Memorandum of Understanding and that management had made the changes
necessary to allow its removal.
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 March 31, 1999, 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."
30
<PAGE>
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 AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
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.
Exhibits Description of Exhibits
-------- -----------------------
3.1 Articles of Incorporation, incorporated by reference *
from (filed as Exhibit 3.1 of the Company's March 31,
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 March *
31, 1996 Form 10Q filed with the SEC on or about
November 14, 1996.)
10 Employment agreement between Thomas T. Hawker and *
Capital Corp. (filed as Exhibit 10 of the Company's
1996 Form 10K filed with the SEC on or about March 31,
1997)
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
31
<PAGE>
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).
10.5 Purchase Agreement for three branches from Bank of *
America is incorporated herein by reference from Note
1 of the Company's Consolidated Financial Statements
b) REPORTS ON FORM 8-K
None
* DENOTES DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE.
32
<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/ R. Dale McKinney
-----------------------------
R. Dale McKinney
Chief Financial Officer
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 23,833
<INT-BEARING-DEPOSITS> 1,850
<FED-FUNDS-SOLD> 11,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,289
<INVESTMENTS-CARRYING> 15,935
<INVESTMENTS-MARKET> 16,140
<LOANS> 281,822
<ALLOWANCE> 5,383
<TOTAL-ASSETS> 493,535
<DEPOSITS> 442,728
<SHORT-TERM> 503
<LIABILITIES-OTHER> 3,257
<LONG-TERM> 3,251
0
0
<COMMON> 37,142
<OTHER-SE> 6,654
<TOTAL-LIABILITIES-AND-EQUITY> 493,535
<INTEREST-LOAN> 6,712
<INTEREST-INVEST> 2,063
<INTEREST-OTHER> 168
<INTEREST-TOTAL> 8,943
<INTEREST-DEPOSIT> 3,069
<INTEREST-EXPENSE> 3,206
<INTEREST-INCOME-NET> 5,737
<LOAN-LOSSES> 507
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,796
<INCOME-PRETAX> 1,813
<INCOME-PRE-EXTRAORDINARY> 1,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,151
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 8.23
<LOANS-NON> 1,967
<LOANS-PAST> 242
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,775
<CHARGE-OFFS> 420
<RECOVERIES> 521
<ALLOWANCE-CLOSE> 5,383
<ALLOWANCE-DOMESTIC> 5,383
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
