<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/ X / Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Quarterly Period Ended June 30, 2000
-------------
or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ________ to _______
Commission File Number: 0-27384
---------------------
CAPITAL CORP OF THE WEST
(Exact name of registrant as specified in its charter)
California 77-0405791
--------------------------------- ------------------------
(State or other jurisdiction of IRS Employer ID Number
incorporation or organization)
550 West Main, Merced, CA 95340
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (209) 725-2200
---------------------
Former name, former address and former fiscal year, if changed since last
report: Not Applicable
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock, no par value,
as of June 30, 2000 was 4,525,982. No shares of preferred stock, no par value,
were outstanding at June 30, 2000.
1
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CAPITAL CORP OF THE WEST
Table of Contents
PART I. -- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated 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 31
PART II. -- OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of matters to a vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 34
</TABLE>
2
<PAGE>
Capital Corp of the West
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
06/30/00 12/31/99
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits in other banks $ 29,148 $ 41,582
Federal funds sold 16,880 8,640
Time deposits at other financial institutions 350 850
Investment securities available for sale, at fair value 145,646 117,814
Investment securities held to maturity at cost, fair value of
$31,144,000, and $28,675,000 at June 30, 2000 and
December 31, 1999 31,875 29,554
Loans, net of allowance for loan losses of $6,925,000, and
$6,542,000 at June 30, 2000 and December 31, 1999 361,576 324,726
Interest receivable 4,671 3,436
Premises and equipment, net 12,916 13,163
Intangible assets 4,673 5,069
Other assets 19,812 18,716
-------- --------
Total assets $627,547 $563,550
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 87,487 $ 87,564
Negotiable orders of withdrawal 73,190 72,788
Savings 187,431 164,158
Time, under $100,000 113,234 101,395
Time, $100,000 and over 86,636 68,996
-------- --------
Total deposits 547,978 494,901
Short term borrowings 24,100 17,600
Long term borrowings 3,182 3,214
Accrued interest, taxes and other liabilities 5,411 4,158
-------- --------
Total liabilities 580,671 519,873
Preferred stock, no par value; 10,000,000 shares authorized;
None outstanding
Common stock, no par value; 20,000,000 shares authorized; 4,525,982 and
4,496,201 issued & outstanding at June 30, 2000, and
December 31, 1999 35,742 35,593
Retained earnings 14,057 10,743
Accumulated other comprehensive loss, net (2,923) (2,659)
-------- --------
Total shareholders' equity 46,876 43,677
-------- --------
Total liabilities and shareholders' equity $ 627,547 $ 563,550
========= =========
</TABLE>
See accompanying notes
3
<PAGE>
Capital Corp of the West
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 9,242 $ 7,305 $ 17,721 $ 14,017
Interest on deposits with other financial institutions 6 29 18 39
Interest on investments held to maturity:
Taxable 506 183 997 367
Non-taxable 56 56 112 78
Interest on investments available for sale:
Taxable 2,041 1,431 3,877 2,964
Non-taxable 286 289 571 613
Interest on federal funds sold 224 145 298 303
-------- -------- -------- --------
Total interest income 12,361 9,438 23,594 18,381
Interest expense:
Interest on negotiable orders of withdrawal 124 112 245 222
Interest on savings deposits 1,773 1,426 3,287 2,784
Interest on time deposits, under $100,000 1,472 1,077 2,795 2,141
Interest on time, $100,000 and over 1,236 560 2,226 1,097
Interest on other borrowings 436 93 792 230
-------- -------- -------- --------
Total interest expense 5,041 3,268 9,345 6,474
Net interest income 7,320 6,170 14,249 11,907
Provision for loan losses 768 593 1,531 1,100
-------- -------- -------- --------
Net interest income after provision for loan losses 6,552 5,577 12,718 10,807
Other income:
Service charges on deposit accounts 871 804 1,684 1,537
Income from real estate held for sale 381 - 381 250
Other 392 420 726 816
-------- -------- -------- --------
Total other income 1,644 1,224 2,791 2,603
Other Expenses:
Salaries and related benefits 2,715 2,404 5,221 4,618
Premises and occupancy 422 393 828 723
Equipment 654 517 1,244 1,008
Professional fees 334 362 495 693
Marketing 236 186 464 352
Goodwill and intangible amortization 198 198 396 396
Supplies 186 153 314 293
Other 910 934 1,836 1,860
-------- -------- -------- --------
Total other expenses 5,655 5,147 10,798 9,943
Income before income taxes 2,541 1,654 4,711 3,467
Provision for income taxes 741 449 1,397 1,111
-------- -------- -------- --------
Net income $ 1,800 $ 1,205 $ 3,314 $ 2,356
-----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Unrealized loss on securities arising during the period, net (187 (1,365) (264) (1,524)
Less: reclassification adjustment for losses included in net income, net - 21 - 21
-------- -------- -------- --------
Comprehensive income (loss), net $ 1,613 $ (139) $ 3,050 $ 853
======== ======== ======== ========
Basic earnings per share $ 0.40 $ 0.26 $ 0.73 $ 0.51
Diluted earnings per share $ 0.39 $ 0.25 $ 0.71 $ 0.50
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes
</TABLE>
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 loss, net Total
------------ ----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 4,496,201 $ 35,593 $ 10,743 $ (2,659) $ 43,677
Exercise of stock options 29,781 149 - - 149
Net change in fair market value
of investment securities, net of
tax effect of $(182) - - - (264) (264)
Net income - - 3,314 - 3,314
------------ ----------- ----------- ----------------- -------------
Balance, June 30, 2000 4,525,982 $ 35,742 $ 14,057 $ ( 2,923) $ 46,876
============ =========== =========== ================= =============
</TABLE>
See accompanying notes
5
<PAGE>
Capital Corp of the West
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
6 months ended 6 months ended
06/30/00 06/30/99
------------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,314 $ 2,356
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,531 1,100
Depreciation, amortization and accretion, net 1,164 1,546
Gain on sale of real estate held for sale 381 250
Gain on sale of premises and equipment - 10
Net increase in interest receivable & other assets (2,556) (3,862)
Net decrease (increase) in deferred loan fees 125 (556)
Net increase in accrued interest payable & other liabilities 1,305 2,360
-------- --------
Net cash provided by operating activities 5,264 3,204
INVESTING ACTIVITIES:
Investment security purchases (39,047) (16,459)
Proceeds from maturities of investment securities 6,663 22,046
Proceeds from sales of AFS investment securities 1,725 6,779
Net decrease (increase) in time deposits in other financial 500 (1,250)
institutions
Proceeds from sales of commercial and real estate loans 1,315 602
Net increase in loans (39,903) (38,171)
Purchases of premises and equipment (734) (542)
Proceeds from sales of real estate held for sale 381 250
-------- --------
Net cash used by investing activities (69,100) (26,745)
FINANCING ACTIVITIES:
Net increase in demand, NOW and savings deposits 23,545 2,254
Net increase in certificates of deposit 29,480 10,985
Net increase (decrease) in other borrowings 6,468 (4,523)
Purchase of treasury stock - (146)
Exercise of stock options 149 29
-------- --------
Net cash provided by financing activities 59,642 8,599
Net decrease in cash and cash equivalents (4,194) (14,942)
Cash and cash equivalents at beginning of period 50,222 44,896
-------- --------
Cash and cash equivalents at end of period $ 46,028 $ 29,954
======== ========
CASH PAID DURING THE QUARTER:
Interest paid $ 9,554 $ 6,469
Income tax payments 1,770 1,506
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Investment securities net unrealized losses; net of tax (264) (1,503)
Transfer of securities from available for sale to held to maturity - 4,327
Loans transferred to other real estate owned 143 -
</TABLE>
See accompanying notes
6
<PAGE>
Capital Corp of the West
Notes to Consolidated Financial Statements
June 30, 2000 and December 31, 1999
(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"). 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 June
30, 2000 there were 4,525,982 common shares outstanding, held of record by
approximately 2,500 shareholders. There were no preferred shares outstanding at
June 30, 2000. 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, and Capital West Group, unless context otherwise
requires.
GENERAL - BANK
The Bank was organized and commenced operations, in 1977, as County
Bank of Merced, a California state banking corporation. 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 are 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.
INDUSTRY AND MARKET AREA
The Bank engages in general commercial banking business primarily in
Fresno, Madera, Mariposa, Merced, Tulare, Toulumne and Stanislaus counties. The
Bank has sixteen branch offices: two in Merced with one branch centrally located
in Merced and the other in downtown Merced within the Bank's administrative
office building, two in Modesto, two in Turlock and single offices in Atwater,
Dos Palos, Fresno, Hilmar, Los Banos, Livingston, Madera, Mariposa, Sonora and
Visalia.
OTHER FINANCIAL NOTES
All adjustments which in the opinion of Management are necessary for a
fair presentation of the Company's financial position at June 30, 2000 and
December 31, 1999 and the results of operations for the three and six month
periods ended June 30, 2000 and 1999, and the statements of cash flows for the
six months ended June 30, 2000 and 1999 have been included. The interim results
for the three and six months ended June 30, 2000 and 1999 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, 1999.
7
<PAGE>
The accompanying unaudited financial statements have been prepared on a
basis consistent with the generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
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 common 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 six month periods ending June 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------ ------------------
(In thousands, except per share data) 2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS computation:
Net income $1,800 $1,205 $3,314 $2,356
====== ====== ====== ======
Average common shares outstanding 4,526 4,598 4,517 4,602
====== ====== ====== ======
Basic EPS $ 0.40 $ 0.26 $ 0.73 $ 0.51
====== ====== ====== ======
Diluted EPS Computations:
Net income $1,800 $1,205 $3,314 $2,356
====== ====== ====== ======
Average common shares outstanding 4,526 4,598 4,517 4,602
Stock options 123 135 123 135
------ ------ ------ ------
4,649 4,733 4,640 4,737
====== ====== ====== ======
Diluted EPS $ 0.39 $ 0.25 $ 0.71 $ 0.50
====== ====== ====== ======
</TABLE>
8
<PAGE>
In June 1998, the Financial Accounting Standards Board ("FASB") 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 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. Certain sections of SFAS No. 133 were amended in June 2000,
when the FASB issued Statement No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" (SFAS No. 138). SFAS No. 133, as amended by SFAS No. 138, also nullifies or
modifies the consensuses reached in a number of issues addressed by the Emerging
Issues Task Force. SFAS No. 133, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138 are effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Initial application of
these statement should be as of the beginning of an entity's fiscal quarter; on
that date, hedging relationships must be designated anew and documented pursuant
to the provisions of these statements. Neither SFAS No. 133 nor SFAS No. 138
should be applied retroactively to financial statements of prior periods. The
Company has a program in place to evaluate its financial instruments and
purchase contracts. Management believes the effects of adopting SFAS No. 133 and
SFAS No. 138 will not have a significant impact on its results of operations or
financial position.
On March 31, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB Opinion No. 25" (FIN No.
44). This interpretation provides guidance for issues that have arisen in
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after July 1, 2000, except for the provisions related to
repricing and the definition of an employee which apply to awards issued after
December 31, 1998. The provisions related to modifications to fixed stock option
awards are effective for awards modified after January 12, 2000. Management
believes the effects of adopting FIN No. 44 will not have a significant impact
on its results of operations or financial position.
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 are
subject to risks and uncertainties and include information about possible or
assumed future results of operations. Many possible events or factors could
affect the future financial results and performance of the company. This could
cause results or performance to differ materially form those expressed in our
forward-looking statements. Words such as "experts", "anticipates", "believes",
"estimates", variations of such words and other similar expressions are intended
to identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in, or implied by, such
forward-looking statements.
Readers of the Company's Form 10-Q should not rely solely on forward
looking statements and should consider all uncertainties and risks discussed
throughout this report, as well as those discussed in the Company's 1999 annual
Report on Form 10-K filed March 17, 2000. These statements are representative
only on the date hereof, and the Company undertakes no obligation to update any
forward-looking statements made. Some possible events or factors that could
occur that may cause differences from expected results include the following:
the company's loan growth is dependent on economic conditions, as well as
various discretionary factors, such as decisions to sell, or purchase certain
loans or loan portfolios; participations of loans and the management of
borrower, industry, product and geographic concentrations and the mix of the
loan portfolio. The rate of charge-offs and provision expense can be affected by
local, regional and international economic and market conditions, concentrations
of borrowers, industries, products and geographical conditions, the mix of the
loan portfolio and management's judgements regarding the collectibility of
loans. Liquidity requirements may change as a result of fluctuations in assets
and liabilities and off-balance sheet exposures, which will impact the capital
and debt financing needs of the company and the mix of funding sources.
Decisions to purchase, hold, or sell securities are also dependent of liquidity
requirements and market volatility, as well as on the off-balance sheet
positions. Factors that may impact interest rate risk include local, regional
and international economic conditions, levels, mix, maturities, yields or rates
of assets and liabilities and the wholesale and retail funding sources of the
Company. Factors that may cause actual noninterest expense to differ from
estimates include the ability of third parties with whom the Company has
business relationships to fully accommodate uncertainties related to the
Company's efforts to prepare its technology systems for the Year 2000, as well
as uncertainties relating to the ability of third parties with whom the Company
has business relationships to address the Year 2000 issue in an adequate manner.
The Company is also exposed to the potential of losses arising from
adverse changes in market rate and prices which can adversely impact the value
of financial products, including securities, loans, and deposits. In addition,
the banking industry in general is subject to various monetary and fiscal
policies and regulations, which include those determined by the Federal Reserve
Board, the Federal Deposit Insurance Corporation and state regulators, whose
policies and regulations could affect the Company's results.
10
<PAGE>
Other factors that may cause actual results to differ from the
forward-looking statements include the following: competition with other local
and regional banks, savings and loan associations, credit unions and other
non-bank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, mutual funds and insurance companies, as well
as other entities which offer financial services; interest rate, market and
monetary fluctuations: inflation; market volatility; general economic
conditions; introduction and acceptance of new banking-related products,
services and enhancement; fee pricing strategies, mergers and acquisitions and
their integration into the Company and management's ability to manage these and
other risks.
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
OVERVIEW. For the three and six months ended June 30, 2000 the Company
reported record net income of $1,800,000 and $3,314,000. This compares to
$1,205,000 and $2,356,000 for the same period in 1999 and represents an increase
of $595,000 and $958,000. Basic and diluted earnings per share were $.40 and
$.39 for the three months ending June 30, 2000. This compares to basic and
diluted earnings per share of $.26 and $.25 for the three months ending June 30,
1999 and represents an increase of $0.14 per basic and diluted share. The
annualized return on average assets was 1.18% and .97% for the three months
ended June 30, 2000 and 1999, respectively. The Company's annualized return on
average equity was 15.73% and 10.96% for the three months ended June 30, 2000
and 1999, respectively.
The following tables provides a summary of the major categories of
income and expense for the second quarter of 2000 compared with the second
quarter of 1999 and for the first six months of 2000 compared with the first six
months of 1999:
<TABLE>
<CAPTION>
Three Months
Ended June 30, Percentage Change
2000 1999 Increase
(in thousands, except earnings per share)
<S> <C> <C> <C>
Interest income $ 12,361 $ 9,438 31.0 %
Interest expense 5,041 3,268 54.3
Net interest income 7,320 6,170 18.6
Provisions for loan losses 768 593 29.5
Net interest income after provision
for loan losses 6,552 5,577 17.5
Other income 1,644 1,224 34.3
Other expenses 5,655 5,147 9.9
Net income before income taxes 2,541 1,654 53.6
Income taxes 741 449 65.0
Net income 1,800 1,205 49.4
Diluted earnings per common share 0.39 0.25 56.0
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30, Percentage Change
2000 1999 Increase
(in thousands, except earnings per share)
<S> <C> <C> <C>
Interest income $ 23,594 $ 18,381 28.4 %
Interest expense 9,345 6,474 44.3
Net interest income 14,249 11,907 19.7
Provisions for loan losses 1,531 1,100 39.2
Net interest income after provision
for loan losses 12,718 10,807 17.7
Other income 2,791 2,603 7.2
Other expenses 10,798 9,943 8.6
Net income before income taxes 4,711 3,467 35.9
Income taxes 1,397 1,111 25.7
Net income 3,314 2,356 40.7
Diluted earnings per common share 0.71 0.50 42.0
</TABLE>
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 and six months ended June 30,
2000 totaled $7,320,000 and $14,249,000 and represented an increase of
$1,150,000 and $2,342,000 or 18.6% and 19.7% when compared to the $6,170,000 and
$11,907,000 achieved during the three and six months ended June 30, 1999.
Total interest and fees on earning assets were $12,361,000 and
$23,594,000 for the three and six months ended June 30, 2000, an increase of
$2,923,000 and $5,213,000 or 31.0% and 28.4% from the $9,438,000 and $18,381,000
for the same period in 1999. The level of interest income is affected by changes
in volume of and rates earned on interest-earning assets. Interest-earning
assets consist primarily of loans, investment securities and federal funds sold.
The increase in interest income for the three and six months ended June 30, 2000
was primarily the result of an increase in the volume of interest-earning
assets. Average interest-earning assets for the three and six months ended June
30, 2000 were $544,401,000 and $525,122,000 compared with $445,466,000 and
$441,526,000 for the three and six months ended June 30, 1999, an increase of
$98,935,000 and $83,596,000 or 22.2% and 18.9%.
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 $5,041,000 and
$9,345,000 for the three and six months ended June 30, 2000, compared with
$3,268,000 and $6,474,000 for the three and six months ended June 30, 1999, an
increase of $1,773,000 and $2,871,000 or 54.3% and 4.3%. This increase was
primarily the result of an increase in the rates and volumes of interest-bearing
liabilities. Average interest-bearing liabilities were $469,183,000 and
$452,757,000 for the three and six months ended June 30, 2000 compared with
$381,300,000 and $377,193,000 for the same three and six months in 1999, an
increase of $87,883,000 and $75,564,000 or 23.0 and 20.0%. Average interest
rates paid on interest-bearing liabilities were 4.30% and 4.13% for the three
and six months ending June 30, 2000 compared with 3.43% for the same three and
months of 1999, an increase of 87 and 70 basis points or 25.4 and 20.4%.
The increase in interest-earning assets and interest-bearing
liabilities is primarily the result of increased market penetration within our
target markets. Internal growth has been achieved primarily through expanding
loan and deposit balances.
12
<PAGE>
The Company's net interest margin, the ratio of net interest income to
average interest-earning assets, was 5.38% and 5.43% for the three and six
months ended June 30, 2000 compared with 5.54% and 5.39% for the same periods in
1999, a decrease of 16 basis points for the three months ending June 30, 2000
compared to the same three months ending June 30, 1999 and an increase of 4
basis points for the six months ending June 30, 2000 compared to the same six
months ending June 30, 1999. Net interest margin provides a measurement of the
Company's ability to employ funds profitably during the period being measured.
The Company's decrease in net interest margin for the three months ending June
30, 2000 was primarily attributable to the increase in market rates experienced
during the three months ending June 30, 2000. Loans as a percentage of average
interest-earning assets were 65% for the three months ended June 30, 2000
compared to 66% for the three months ended June 30, 1999.
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 three month 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
June 30, 2000 June 30, 1999
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 13,821 $ 224 6.48 % $ 12,217 $ 145 4.75 %
Time deposits at other financial
institutions 483 6 4.97 2,168 29 5.35
Taxable investment securities 143,981 2,547 7.08 106,006 1,614 6.09
Nontaxable investment securities (1) 29,709 342 4.60 30,078 345 4.59
Loans, gross: (2) 356,407 9,242 10.37 294,997 7,305 9.91
-------- ------ ---- --------- ------ ----
Total interest-earning assets: 544,401 12,361 9.08 445,466 9,438 8.47
Allowance for loan losses (6,801) (5,693)
Cash and due from banks 22,976 20,109
Premises and equipment, net 13,083 13,171
Interest receivable and other assets 28,273 24,712
--------- ---------
Total assets $ 601,932 $ 497,765
========= =========
Liabilities And Shareholders' Equity
Negotiable order of withdrawal $ 73,917 $ 124 0.67 % $ 66,993 $ 112 0.67 %
Savings deposits 177,380 1,773 4.00 176,763 1,426 3.23
Time deposits 191,402 2,708 5.66 132,761 1,637 4.93
Other borrowings 26,484 436 6.59 4,783 93 7.78
-------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 469,183 5,041 4.30 381,300 3,268 3.43
Noninterest-bearing deposits 82,517 69,301
Accrued interest, taxes and other
liabilities 4,457 3,194
--------- ---------
Total liabilities 556,157 453,795
Total shareholders' equity 45,775 43,970
--------- ---------
Total liabilities and shareholders' equity $ 601,932 $ 497,765
========= =========
Net interest income and margin (3) $ 7,320 5.38 % $ 6,170 5.54 %
======= ==== ======= ====
</TABLE>
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
(2) Amounts of interest earned includes loan fees of $190,000 and $92,000
for June 30, 2000 and 1999 respectively.
(3) Net interest margin is computed by dividing net interest income by
total average interest-earning assets.
13
<PAGE>
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 six month periods indicated. Nonaccruing loans
are included in the calculation of the average balances of loans, but the
nonaccrued interest on such loans is excluded.
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
Average Average
Balance Interest Yield/rate Balance Interest Yield/rate
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $ 9,544 $ 298 6.24 % $ 12,876 $ 303 4.71 %
Time deposits at other financial
institutions 702 18 5.13 1,441 39 5.41
Taxable investment securities 139,115 4,874 7.01 112,370 3,331 5.93
Nontaxable investment securities (1) 29,758 683 4.59 30,112 691 4.59
Loans, gross: (2) 346,003 17,721 10.24 284,727 14,017 9.85
-------- ------ ---- --------- ------- ----
Total interest-earning assets: 525,122 23,594 8.99 441,526 18,381 8.33
Allowance for loan losses (6,762) (5,628)
Cash and due from banks 22,827 20,422
Premises and equipment, net 13,126 13,191
Interest receivable and other assets 27,575 23,849
-------- --------
Total assets $581,888 $493,360
======== ========
Liabilities And Shareholders' Equity
Negotiable order of withdrawal $ 72,884 $ 245 0.67 % $ 66,515 $ 222 0.67 %
Savings deposits 174,187 3,287 3.77 174,120 2,784 3.20
Time deposits 181,603 5,021 5.53 130,234 3,238 4.97
Other borrowings 24,083 792 6.58 6,324 230 7.27
------- ------ ---- --------- ------- ----
Total interest-bearing liabilities 452,757 9,345 4.13 377,193 6,474 3.43
Noninterest-bearing deposits 79,711 69,558
Accrued interest, taxes and other
liabilities 4,484 3,648
-------- --------
Total liabilities 536,952 450,399
Total shareholders' equity 44,936 42,961
-------- --------
Total liabilities and shareholders' equity $581,888 $493,360
======== ========
Net interest income and margin (3) $14,249 5.43 % $ 11,907 5.39 %
======= ==== ======== ====
</TABLE>
(1) Interest on nontaxable securities is not computed on a tax-equivalent
basis.
(2) Amounts of interest earned includes loan fees of $326,000 and $285,000
for June 30, 2000 and 1999 respectively.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
14
<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.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 2000 compared to June 30, 1999
Volume Rate Total
------ ---- -----
(Dollar in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Federal funds sold $ 5 $ 74 $ 79
Time deposits at other financial (21) (2) (23)
institutions
Taxable investment securities 332 601 933
Tax-exempt investment securities (6) 3 (3)
Loans 1,579 358 1,937
------ ------ -------
Total 1,889 1,034 2,923
====== ====== =======
Increase (decrease) interest expense:
Interest bearing demand 12 - 12
Savings deposits 5 342 347
Time deposits 803 268 1,071
Other borrowings 359 (16) 343
------ ------ -------
Total 1,179 594 1,773
====== ====== =======
Increase in net interest income $ 710 $ 440 $ 1,150
====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 compared to June 30, 1999
Volume Rate Total
------ ---- -----
(Dollar in thousands)
<S> <C> <C> <C>
(Decrease) increase in interest income:
Federal funds sold $ (90) $ 85 $ (5)
------- ------ -------
Time deposits at other financial (19) (2) (21)
institutions
Taxable investment securities 875 668 1,543
Tax-exempt investment securities (8) - (8)
Loans 3,119 585 3,704
------- ------ -------
Total 3,877 1,336 5,213
======= ====== =======
Increase (decrease) interest expense:
Interest bearing demand 22 1 23
Savings deposits 1 502 503
Time deposits 1,389 394 1,783
Other borrowings 586 (24) 562
------- ------ -------
Total 1,998 873 2,871
======= ====== =======
Increase in net interest income $ 1,879 $ 463 $ 2,342
======= ====== =======
</TABLE>
15
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three
and six months ended June 30, 2000 was $768,000 and $1,531,000 which compares
with $593,000 and $1,100,000 for the three and six months ended June 30, 1999.
See "Allowance for Loan Losses" contained herein. As of June 30, 2000 the
allowance for loan losses was $6,925,000 or 1.88% of total loans. At June 30,
2000, nonperforming assets totaled $1,852,000 or .30% of total assets,
nonperforming loans totaled $1,605,000 or .44% of total loans and the allowance
for loan losses totaled 432% of nonperforming loans. At December 31, 1999,
nonperforming assets totaled $2,237,000 or .40% of total loans, nonperforming
loans totaled $1,990,000 or .60% of total loans and the allowance for loan
losses totaled 328.74% 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.
OTHER INCOME. Total other income for the three and six months ended
June 30, 2000 was $1,644,000 and $2,791,000 which compares with $1,224,000 and
$2,603,000 for the same periods in 1999. Service charges on deposit accounts
increased by $67,000 or 8.3% to $871,000 for the three months ended June 30,
2000 compared with $804,000 for the same period in 1999. Income from the sale of
real estate held for sale or development increased by $381,000 over 1999 levels,
as there were no real estate sales during the second quarter of 1999. Other
income, which includes commissions earned on the retail sale of securities and
annuities, decreased by $28,000 or 7% for the three month period ended June 30,
2000 to $392,000 which compares to the $420,000 recorded in the same period in
1999. The $381,000 gain on sale of real estate recorded during the second
quarter of 2000 resulted from the sale of the last remaining land parcel held by
MAID, the real estate subsidiary of County Bank. The book value of this property
had been previously written off.
OTHER EXPENSE. Noninterest expenses for the three and six months ended
June 30, 2000 were $5,655,000 and $10,798,000 which compares with $5,147,000 and
$9,943,000 for the three and six months ended June 30, 1999. The primary
components of noninterest expenses were salaries and related benefits, equipment
expenses, premises and occupancy expenses, professional fees, marketing
expenses, goodwill and intangible amortization expense, supplies expense, and
other operating expenses.
For the three and six months ended June 30, 2000, salaries and related
benefits increased by $311,000 and $603,000 over the same period in 1999 to
$2,715,000 and $5,221,000. Equipment expenses increased by $137,000 and $236,000
or 26% and 23% during the three and six months ended June 30, 2000 to $654,000
and $1,244,000 from the $517,000 and $1,008,000 experienced during the three and
six months ending June 30, 1999. When comparing the results of the three and six
months ending June 30, 2000 to three and six months ending June 30, 1999,
premises and occupancy expenses increased $29,000 and $105,000 or 7% and 15%,
professional fees decreased by $28,000 and $198,000 or 8% and 29%, marketing
expenses increased by $50,000 and $112,000 or 27% and 32%, supplies expense
increased by $33,000 and $21,000 or 22% and 7%, and other expenses decreased by
$24,000 and $24,000 or 3% and 1%. The salary expense increases were primarily
the result of increased staffing levels and normal salary progression. Increased
equipment expenses were primarily the result of increased spending on technology
and processing equipment. Increased spending on premises and occupancy is
primarily related to increased spending on branch office maintenance and repair.
Decreased professional fees were primarily the result of decreased use of
outside consulting firms. Increased marketing expenses were primarily the result
of increased media spending on network and cable television advertising.
Increased supplies expense was primarily the result of increased use of supplies
in supporting increased loan and deposit volumes.
PROVISION FOR INCOME TAXES. The Company recorded an increase of
$292,000 and $286,000 in the income tax provision to $741,000 and $1,397,000 for
the three and six months ended June 30, 2000 compared to the $449,000 and
$1,111,000 recorded for the same periods in 1999. For the three and six months
ended June 30, 2000, the Company experienced an effective tax rate of 29% and
30% compared
16
<PAGE>
to 27% and 32% recorded for the same periods in 1999. The increase in income
taxes during the three and six months ending June 30, 2000 as compared to the
same period in 1999 is primarily related to an overall increase in pretax
earnings. The increase in effective tax rates during the three months ending
June 30, 2000 as compared to the same period in 1999 is primarily related to an
increased level of taxable income, primarily net interest income, without a
corresponding increase in nontaxable income and tax credits. The primary source
of nontaxable income during the three and six months ending June 30, 2000 and
1999 was interest generated from investments in bank qualified municipal
securities. The primary source of tax credits during these same periods was tax
credits derived from investments in housing tax credit limited partnerships.
These partnership investments allow the Company to utilize federal and state
housing credits obtained from investments in low-income affordable housing
projects. The Company had investments in these partnerships of $5,800,000 as of
June 30, 2000 and 1999 which generated estimated tax credits of $105,000 and
$245,000 for the three and six months ended June 30, 2000 compared with $95,000
and $225,000 for the same periods in 1999.
INTEREST RATE RISK MANAGEMENT
Managing 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, 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 considered to be asset-sensitive. If repricing liabilities
exceed repricing assets in a time period the Company would be considered 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.
17
<PAGE>
The following tables set forth the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of June
30, 2000, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms.
<TABLE>
<CAPTION>
At June 30, 2000
---------------------------------------------------------------------------------
After 3 After 1
But Year But
Within Within Within After Noninterest-
3 Months 12 Months 5 Years 5 Years Bearing Total
-------- --------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Time deposits at other banks $ 350 $ - $ - $ - $ - $ 350
Federal funds sold 16,880 - - - - 16,880
Investment securities 5,589 7,590 69,182 92,849 2,311 177,521
Loans 168,993 50,256 102,464 46,788 - 368,501
--------- -------- --------- --------- -------- --------
Total earning assets 191,812 57,846 171,646 139,637 2,311 563,252
Noninterest-earning assets and
allowances for loan losses - - - 64,295 64,295
--------- -------- --------- --------- -------- --------
Total assets $ 191,812 $ 57,846 $ 171,646 $ 139,637 $ 66,606 $627,547
LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits $ - $ - $ - $ - $ 87,487 $ 87,487
Savings, money market and NOW deposits 260,621 - - - - 260,621
Time deposits 53,290 114,564 32,016 - - 199,870
Other interest-bearing liabilities 9,500 14,600 - 3,182 - 27,282
Other liabilities and shareholders'
equity - - - 52,287 52,287
--------- -------- --------- --------- -------- --------
Total liabilities and shareholders'
equity 323,411 129,164 32,016 3,182 139,774 627,547
Incremental gap (131,599) (71,318) 139,630 136,455 73,168 -
Cumulative gap (131,599) (202,917) (63,287) 73,168 - -
Cumulative gap as a % of earning
assets (23.36)% (202,917)% (63,287)% (73,168)% - -
</TABLE>
The Company was liability-sensitive with a negative cumulative one-year gap
of $202,917,000 or (36.03)% of interest-earning assets at June 30, 2000. 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
18
<PAGE>
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 liability 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.
In order to manage interest rate sensitivity, the Company utilizes a
detailed model to expected change in net interest income. The model's estimate
of interest rate sensitivity takes into account the differing time intervals and
differing rate change increments of each type of interest-sensitive asset and
liability. It then measures the projected impact of changes in market interest
rates on the Company's net interest income. Based upon the June 30, 2000 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
approximately $763,000 or 3% of annualized net interest income. No assurance can
be given that the actual net interest income would not decrease by more than
$763,000 or 3% 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%.
FINANCIAL CONDITION
Total assets at June 30, 2000 were $627,547,000, an increase of
$63,997,000 or 11% compared with total assets of $563,550,000 at December 31,
1999. Net loans were $361,576,000 at June 30, 2000, an increase of $36,850,000
or 11% compared with net loans of $324,726,000 at December 31, 1999. Deposits
were $547,978,000 at June 30, 2000, an increase of $53,077,000 or 11% compared
with deposits of $494,901,000 at December 31, 1999. Brokered deposits totaled
$8,366,000 and $12,000,000 as of June 30, 2000 and December 31, 1999. The
increase in total assets of the Company from December 31, 1999 to June 30, 2000
was primarily the result of increased deposit gathering efforts in gathering
retail deposits and the introduction of a brokered certificate of deposit
program. During the second quarter of 2000, maturities that occurred within the
investment portfolio and new deposit monies received were primarily used to fund
loan growth. All short term borrowings were secured by a portion of the
Company's investment portfolio
Total shareholders' equity was $46,876,000 at June 30, 2000, an
increase of $3,199,000 or 7% from $43,677,000 at December 31, 1999. The growth
in shareholders' equity between June 30, 2000 and December 31, 1999 was
primarily achieved through the retention of accumulated earnings.
19
<PAGE>
INVESTMENT PORTFOLIO. The following table sets forth the carrying amount (fair
value) of available for sale investment securities as of June 30, 2000 and
December 31, 1999.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------------
<S> <C> <C>
(In thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury and U.S. government agencies $ 31,518 $ 16,756
State and political subdivisions 23,649 23,371
Mortgage-backed securities 48,014 43,723
Collateralized mortgage obligations 30,540 20,341
Corporate debt securities 9,614 9,660
Other securities 2,311 3,963
--------- ---------
Carrying amount and fair value $ 145,646 $ 117,814
========= =========
</TABLE>
The following table sets forth the carrying amount (amortized cost) and
fair value of held to maturity securities at June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2000 1999
-------------------------------
<S> <C> <C>
HELD TO MATURITY SECURITIES:
U.S. Treasury and U.S. government agency $ - $ 1,004
State and political subdivisions 4,382 4,389
Mortgage-backed securities 23,050 24,161
Collateralized mortgage obligations 4,443 -
--------- ---------
Carrying amount (amortized cost) $ 31,875 $ 29,554
========= =========
Fair value $ 31,144 $ 28,675
========= =========
</TABLE>
20
<PAGE>
The following table sets forth the maturities of the Company's
investment securities at June 30, 2000 and the weighted average yields of such
securities based on cost and 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 prepay obligations with or without prepayment
penalties. Yields on municipal securities have not been calculated on a
tax-equivalent basis.
<TABLE>
<CAPTION>
At June 30, 2000
-------------------------------------------------------------------------------------------
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>
(In thousands)
Available for Sale Securities:
Treasury and U.S. Government agency $ - -% $ 29,978 6.59% $ - -% $ 1,540 7.02% $ 31,518
State and political 504 7.65 - - 5,130 4.37 18,015 4.44 23,649
Mortgage-backed securities - 978 6.54 609 7.53 46,427 6.72 48,014
Collateralized mortgage obligations 32 5.13 9,840 7.15 7,693 6.72 12,975 7.34 30,540
Corporate debt securities 980 6.09 3,123 6.38 - - 5,511 7.72 9,614
Equity Securities - - - - - - 2,311 - 2,311
-------------------------------------------------------------------------------------------
Carrying amount and fair value 1,516 6.59 43,919 6.70 13,432 5.86 86,779 6.23 145,646
-------------------------------------------------------------------------------------------
Held to maturity securities:
State and political 4,382 5.14 4,382
Mortgage-backed securities - - - - - - 23,050 7.25 23,050
-------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations - - 4,443 7.91 - - - - 4,443
-------------------------------------------------------------------------------------------
Carrying amount (amortized cost) - - 4,443 7.91 - - 27,432 6.91 31,875
-------------------------------------------------------------------------------------------
Total securities $ 1,516 6.59% $ 48,362 6.81% $13,432 5.86% $114,211 6.39% $177,521
======== ==== ======== ==== ======= ==== ======== ==== ========
</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.
LOAN PORTFOLIO. The following table shows the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
(In thousands) 2000 1999
------------------------------------------------------------------
Percent Percent
Loan Categories: Dollar Amount of Loans Dollar Amount of Loans
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Commercial $ 71,902 16 % $ 53,932 16 %
Agricultural 77,958 18 58,247 17
Real estate construction 10,412 5 11,926 4
Real estate mortgage 119,315 34 120,978 37
Consumer 88,914 27 86,185 26
---------- --- --------- ---
Total 368,501 100 % 331,268 100 %
---------- === --------- ===
Less allowance for loan losses (6,925) (6,542)
---------- ---------
Net loans $ 361,576 $ 324,726
========== =========
</TABLE>
21
<PAGE>
The following table shows the maturity distribution of the portfolio of
commercial, agricultural, real estate construction, real estate mortgage, and
consumer loans at June 30, 2000:
<TABLE>
<CAPTION>
At June 30, 2000
------------------------------------------------------------------
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 $ 49,806 $ 19,439 $ 34,492 $ 103,737
Loans with fixed interest rates 7,070 16,057 22,996 46,123
---------- --------- ---------- ----------
Subtotal 56,876 35,496 57,488 149,860
Real estate construction
Loans with floating interest rates 3,688 340 5,032 9,060
Loans with fixed interest rates 675 - 677 1,352
---------- --------- ---------- ----------
Subtotal 4,363 340 5,709 10,412
Real estate mortgage
Loans with floating interest rates 4,734 21,971 52,454 79,159
Loans with fixed interest rates 7,098 2,308 30,750 40,156
---------- --------- ---------- ----------
Subtotal 11,832 24,279 83,204 119,315
Consumer Installment
Loans with floating interest rates 391 72,365 2,304 75,060
Loans with fixed interest rates 4,107 1,032 8,715 13,854
---------- --------- ---------- ----------
Subtotal 4,498 73,397 11,019 88,914
---------- --------- ---------- ----------
Total $ 77,569 $ 133,512 $ 157,420 $ 368,501
========== ========= ========== ==========
</TABLE>
OFF-BALANCE SHEET COMMITMENTS. The following table shows the
distribution of the Company's undisbursed loan commitments at the dates
indicated.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Letters of credit $ 1,227 $ 2,674
Commitments to extend credit 118,652 101,847
--------- ---------
Total $ 119,879 $ 104,521
========= =========
</TABLE>
OTHER INTEREST-EARNING ASSETS. The following table relates to other
interest-earning assets not disclosed previously for the dates indicated. This
item consists of a salary continuation plan for the Company's executive
management and deferred retirement benefits for participating board members. The
plan is informally linked with universal life insurance policies for the salary
continuation plan. Income from these policies is reflected in noninterest
income.
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Cash surrender value of life insurance $5,944 $5,792
====== ======
</TABLE>
22
<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 still accruing 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 table below.
The following table summarizes nonperforming assets of the Company at
June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 1,578 $ 1,984
Accruing loans past due 90 days or more 27 6
------- -------
Total nonperforming loans 1,605 1,990
Other real estate owned 247 247
------- -------
Total nonperforming assets $ 1,852 $ 2,237
======= =======
Nonperforming assets:
To total loans .50% .60%
To total assets .30% .40%
</TABLE>
The amount of gross interest income that would have been recorded in
the periods then ended if the loans had been current in accordance with the
original terms and had been outstanding throughout the period, or since
origination, if held for part of the period, was $65,000 for the six month
period ending June 30, 2000 and $143,000 for the twelve month period ending
December 31, 1999. The amount of interest income on these loans that was
included in net income was $14,000 for the six months ending June 30, 2000 and
$126,000 for the twelve months ending December 31, 2000.
At June 30, 2000, nonperforming assets represented .30% of total
assets, a decrease of .10% of total assets compared to the .40% at December 31,
1999. Nonperforming loans represented .50% of total loans at June 30, 2000, an
decrease of .10% of total loans compared to the .60% at December 31, 1999.
23
<PAGE>
Nonperforming loans that were secured by first deeds of trust on real property
were $0 at June 30, 2000 and $623,000 at December 31, 1999. 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 decrease in nonperforming loans and nonperforming assets as of June
30, 2000 compared with their levels as of December 31, 1999, was due primarily
to a decrease in non performing agricultural and commercial loans.
As of June 30, 2000, the Company had $247,000 in two property acquired
through foreclosure. The properties are 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. No assurance can be given that the Company will sell such property
during 2000 or at any time or the amount for which such property might be sold.
In addition to property acquired through foreclosure, the Company had
an investment in one land parcel through its real estate subsidiary MAID, which
was sold during the second quarter of 2000 for $381,000. The property had been
written down to a basis of $0 in 1995.
Management defines impaired loans, regardless of past due status on
loans, as those on which principal and interest are not expected to be collected
under the original contractual loan repayment terms. An impaired loan is charged
off at the time management believes the collection process has been exhausted.
At June 30, 2000 and December 31, 1999, impaired loans were measured based on
the present value of future cash flows discounted at the loan's effective rate,
the loan's observable market price or the fair value of collateral if the loan
is collateral-dependent. Impaired loans at June 30, 2000 were $1,605,000, on
account of which the Company had made provisions to the allowance for loan
losses of $386,000.
Except for loans that are disclosed above, there were no assets as of
June 30, 2000, where known information about possible credit problems of the
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.
24
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the loan loss experience of the Company
for the six months ended June 30, 2000 and 1999, and the year ended December 31,
1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999 1999
---- ---- ----
In thousands
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of period $ 6,542 $ 4,775 $ 4,775
-------- --------- --------
Provision for loan losses 1,531 1,100 2,659
Charge-offs:
Commercial and agricultural 416 173 531
Real estate construction - - -
Consumer 935 531 1,323
-------- --------- --------
Total charge-offs 1,351 704 1,854
-------- --------- --------
Recoveries
Commercial and agricultural 41 548 715
Real estate-mortgage - - -
Consumer 162 170 247
-------- --------- --------
Total recoveries 203 718 962
Net (recoveries) charge-offs 1,148 (14) 892
-------- --------- --------
Balance at end of period $ 6,925 $ 5,889 $ 6,542
======== ========= ========
Loans outstanding at period-end $ 368,501 $ 306,794 $ 331,268
========= ========= =========
Average loans outstanding $ 346,003 $ 284,727 $ 303,463
========= ========= =========
Net charge-offs to average loans .33 % .00 % 0.29 %
Allowance for loan losses
To total loans 1.88 % 1.92 % 1.97 %
To nonperforming assets 373.88 % 191.51 % 292.45 %
</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 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
25
<PAGE>
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 for the three and six months
ended June 30, 2000 of $768,000 and $1,531,000 compared with $593,000 and
$1,100,000 for the same periods during 1999. The increase in loan loss
provisions in 2000 compared to 1999 is primarily due to loan portfolio and a
moderate increase in the level of charge-offs.
The Company's charge-offs, net of recoveries, were $1,148,000 for the
six months ended June 30, 2000 compared with a net recovery of $14,000 for the
same six months in 1999. The increase in net charge-offs during the first six
months of 2000 was primarily due to growth within the loan portfolio.
As of June 30, 2000, the allowance for loan losses was $6,925,000 or
1.88% of total loans outstanding, compared with $6,542,000 or 1.97% of total
loans outstanding as of December 31, 1999. During the second quarter of 2000,
the allowance for loan loss increased $133,000 or 2% compared to December 31,
1999 levels.
The Company uses a method developed by management 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.
26
<PAGE>
The following table summarizes a breakdown of the allowance for loan
losses by loan category and the allocation in each category as a percentage of
total loan allowance at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- --------------------
Amount Amount
To Total To total
Loans in Loans in
Amount Category Amount Category
------ -------- ------ --------
(In thousands)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 3,542 34 % $ 3,365 33 %
Real estate- construction 363 5 358 4
Real estate- mortgage 1,916 34 1,815 37
Installment 1,104 27 1,004 26
-------- -------- -------- --------
Total $ 6,925 100 % $ 6,542 100 %
======== ======== ======== ========
</TABLE>
The allocation of the allowance to loan categories is an estimate by
management of the relative risk characteristics of loans in those categories. No
assurance can be given that losses in one or more loan categories will not
exceed the portion of the allowance allocated to that category or even exceed
the entire allowance.
EXTERNAL FACTORS AFFECTING ASSET QUALITY. As a result of the Company's
loan portfolio mix, the future quality of its assets could be affected by
adverse economic trends in its region or in the agricultural community. These
trends are beyond the control of the Company.
California is an earthquake-prone region. Accordingly, a major
earthquake could result in material loss to the Company. At times the Company's
service area has experienced other natural disasters such as floods and
droughts. The Company's properties and substantially all of the real and
personal property securing loans in the Company's portfolio are located in
California. The Company faces the risk that many of its borrowers face uninsured
property damage, interruption of their businesses or loss of their jobs from
earthquakes, floods or droughts. As a result these borrowers may be unable to
repay their loans in accordance with their terms and the collateral for such
loans may decline significantly in value. The Company's service area is a
largely agricultural region and therefore is highly dependent on a reliable
supply of water for irrigation purposes. The area obtains nearly all of its
water from the run-off of melting snow in the mountains of the Sierra Nevada to
the east. Although such sources have usually been available in the past, water
supply can be adversely affected by light snowfall over one or more winters or
by any diversion of water from its present natural courses. Any such event could
impair the ability of many of the Company's borrowers to meet their obligations
to the Company.
California is a region that also experiences flooding. The Company is
not aware of any material adverse effects to the collateral position of the
Company as a result of flooding, but no assurance can be given that future
flooding will not have an adverse impact on the Company and its borrowers and
depositors.
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. The 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
27
<PAGE>
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 Holding Company's primary source of liquidity is from
dividends received from the Bank. Dividends from the Bank are subject to certain
regulatory limitations.
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 $192,024,000 and
$168,886,000 on June 30, 2000 and December 31, 1999, respectively, and
constituted 31%, and 30%, 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 $137,424,000 at June 30,
2000 compared with $105,008,000 at December 31, 1999.
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 $82,645,000 of which $24,100,000 was
outstanding as of June 30, 2000 and $12,600,000 was outstanding as of December
31, 1999. Funds used to reduce outstanding short term borrowings during the
second quarter of 1999 were obtained from maturities and curtailments that
occurred within the investment portfolio and deposit gathering efforts.
Management believes that the Company maintains adequate amounts of liquid assets
to meet its liquidity needs. The Company's liquidity might be insufficient if
deposit withdrawals were to exceed anticipated levels. Deposit withdrawals can
increase if a company experiences financial difficulties or receives adverse
publicity for other reasons, or if its pricing, products or services are not
competitive with those offered by other institutions.
CAPITAL RESOURCES.Capital serves as a source of funds and helps protect
depositors against potential losses. The primary source of capital for the
company has been internaly generated capital through retained earnings. The
Company's shareholder equity increased by $3,199,000 or 6% from December 31,
2000 to June 30, 2000.
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 June
30, 2000, that the Company and the Bank met all capital requirements to which
they are subject. The Company's leverage capital ratio at June 30, 2000 was
7.56% as compared with 7.50% as of December 31, 1999. The Company's total risk
based capital ratio at June 30, 2000 was 10.97% as compared to 11.24% as of
December 31, 1999.
28
<PAGE>
The Company's and Bank's actual capital amounts and ratios met all
regulatory requirements as of June 30, 2000 and were summarized as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective
In thousands Actual Adequacy Purposes Action Provisions:
---------------------------------------------------------------------------------------------------------------------------
Consolidated Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Total capital (to risk weighted assets) $ 50,946 10.97 % $ 37,162 8.0 % $ 46,453 10.0 %
Tier 1 capital (to risk weighted assets) 45,126 9.71 18,581 4.0 27,872 6.0
Leverage ratio* 45,126 7.56 23,890 4.0 29,863 5.0
The Bank:
---------------------------------------------------------------------------------------------------------------------------
As of June 30, 2000
Total capital (to risk weighted assets) $ 48,261 10.50 % $ 36,762 8.0 % $ 45,953 10.0 %
Tier 1 capital (to risk weighted assets) 42,502 9.25 18,381 4.0 27,572 6.0
Leverage ratio* 42,502 7.18 23,670 4.0 29,587 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.
DEPOSITS. Deposits are the Company's primary source of funds. At June
30, 2000, the Company had a deposit mix of 34% in savings deposits, 37% in time
deposits, 13% in interest-bearing checking accounts and 16% in
noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance
the Company's net interest income by lowering its costs of funds.
The Company obtains deposits primarily from the communities it serves.
No material portion of its deposits has been obtained from or is dependent on
any one person or industry. The Company's business is not seasonal in nature.
The Company accepts deposits in excess of $100,000 from customers. These
deposits are priced to remain competitive. At June 30, 2000, the Company had
brokered deposits of $8,366,000.
Maturities of time certificates of deposits of $100,000 or more
outstanding at June 30, 2000 and December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands)
<S> <C> <C>
Three months or less $32,909 $ 21,157
Over three to six months 25,661 20,655
Over six to twelve months 16,885 16,901
Over twelve months 11,181 10,283
------- --------
Total $86,636 $ 68,996
======= ========
</TABLE>
29
<PAGE>
BORROWED FUNDS
At June 30 2000 and 1999, the Company's borrowed funds consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
(In Thousands)
Treasury tax loan, dated June 30, 2000; variable rate
of 6.25% rate reprices monthly based on changes in the
federal funds rate; payable July 1, 2000 $ 9,500 $ 5,000
FHLB loan, dated February 11, 2000; variable rate of 6.55%;
rate reprices monthly based on the 1 month
LIBOR; payable on February 19, 2001 3,000 2,600
FHLB loan, dated February 16, 2000; variabe rate of
6.55%; rate reprices monthly based on the 1 month 3,000 -
LIBOR; payable on February 16, 2001
FHLB loan, dated March 20, 2000; variable rate of 6.54%;
rate reprices monthly based on the 1 month LIBOR;
payable on March 20, 2001 2,600 -
FHLB loan, dated February 11, 2000; fixed rate of 6.55%
payable on February 11, 2005 2,000 -
FHLB loan, dated February 16, 2000; fixed rate of 6.66;
payable on February 16, 2005 2,000 5,000
FHLB loan, dated March 20, 2000; fixed rate of 6.55%
payable on March 21, 2005 2,000 5,000
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 3,182 3,214
-------- --------
Total $ 27,282 $ 20,814
======== ========
</TABLE>
The increase in other borrowings during the second quarter of 2000 was
primarily due to the implementation of a leveraged investment strategy that used
additional FHLB borrowings to fund purchases of investment securities within the
Bank's investment portfolio.
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.
30
<PAGE>
REAL ESTATE DEVELOPMENT ACTIVITIES
California law allows state-chartered banks to engage in real estate
development activities. The Bank established MAID in 1987 pursuant to this
authorization. After changes in federal law effectively required that these
activities be divested as prudently as possible but in any event before 1997,
MAID reduced its activities and embarked on a plan to liquidate its real estate
holdings. In 1995, the uncertainty about the effect of the investment in MAID on
the results of future operations caused management to write off its remaining
investment of $2,881,000 in real property development.
The last remaining parcel of land held by MAID was sold on May 3, 2000
for net proceeds less accrued expenses of $381,000 which was recorded as gain on
sale of real estate during the second quarter of 2000. There are no plans to
invest in new real estate investment properties as of June 30, 2000.
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 June 30, 2000, 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk Management."
31
<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.
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.
(a.) Annual Meeting was held April 11, 2000. The number of shares
represented in person or by proxy and constituting a quorum was
3,840,523 which equals 83%.
(b.) Election of directors VOTES FOR
---------
Lloyd H. Ahlem 3,622,215
Dorothy L. Bizzini 3,620,492
Jerry E. Callister 3,633,709
ITEM 5. OTHER INFORMATION.
In the opinion of management, there is no additional information relating to
these periods being reported which warrants inclusion in the report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
EXHIBITS DESCRIPTION OF EXHIBITS
-------- -----------------------
<S> <C> <C>
3.1 Articles of Incorporation, incorporated by reference from (filed as Exhibit *
3.1 of the Company's June 30, 1996 Form 10Q filed with the SEC on or about
November 14, 1996).
3.2 Bylaws (filed as Exhibit 3.2 of the Company's June 30, 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 June
30, 1997)
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C>
10.1 Administration Construction Agreement (filed as Exhibit 10.4 of the Company's *
1995 Form 10K filed with the SEC on or about June 30, 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 June 30, 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 June 30, 1996).
10.4 Employee Stock Ownership Plan (filed as Exhibit 10.8 of the Company's 1995 *
Form 10K filed with the SEC on or about June 30, 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
10.6 Change-in-Control Agreement between R. Dale McKinney and Capital Corp of the *
West (filed as Exhibit 10.6 of the Company's 1999 Form 10K with the SEC on or
about March 17, 2000).
10.7 Deferred Compensation Agreement between members of the board of directors and *
Capital Corp of the West (filed as Exhibit 10.7 of the Company's 1999 Form 10K
with the SEC on or about March 17, 2000).
10.8 Executive Salary Continuation Agreement between certain members of executive *
management and Capital Corp of the West (filed as Exhibit 10.8 of the
Company's 1999 Form 10K with the SEC on or about March 17, 2000).
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the second quarter of
2000; however, on July 14, 2000, the Company filed a report on 8-K, dated July
10, 2000 in conjunction with the Company's 1992 Stock Option Plan, 401(k) Profit
Sharing Plan, and Employee Stock ownership Plan whereby the Company is
authorized to purchase its common stock through open-market transactions.
* DENOTES DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE.
33
<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
34
