<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended SEPTEMBER 30, 1995
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 0-9584
CALIFORNIA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2147553
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 PARK PLACE, STE 140, SAN RAMON, CALIFORNIA 94583
(Address of principal executive offices) (Zip Code)
(510) 743-4200
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 26, 1995
Common Stock, $2.50 par value 10,042,552
This report contains a total of 29 pages.
<PAGE>
CALIFORNIA BANCSHARES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income. . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows. . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Highlights. . . . . . . . . . . . . . . . . . . . 9
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Results of Operations
Net Interest Income. . . . . . . . . . . . . . . . . . . . 10
Allowance and Provision for Loan Losses. . . . . . . . . . 15
Noninterest Income . . . . . . . . . . . . . . . . . . . . 16
Noninterest Expense. . . . . . . . . . . . . . . . . . . . 16
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 17
Financial Condition
Securities . . . . . . . . . . . . . . . . . . . . . . . . 18
Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . 19
Nonaccrual Loans, Restructured Loans
and Foreclosed Assets . . . . . . . . . . . . . . . . . . 20
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 21
Asset/Liability Management
Interest Rate Risk . . . . . . . . . . . . . . . . . . . . 22
Liquidity. . . . . . . . . . . . . . . . . . . . . . . . . 24
Capital. . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(2)
<PAGE>
ITEM 1. Financial Statements
California Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
(In thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $69,229 $66,587
Federal funds sold 87,055 14,800
---------- ----------
Total cash and cash equivalents 156,284 81,387
Securities:
Available for sale 42,829 51,426
Held to maturity (approximate market values
of $253,900-1995 and $233,479-1994) 255,624 245,984
---------- ----------
Total securities 298,453 297,410
Loans 1,028,143 913,476
Less: Allowance for loan losses (15,156) (12,822)
---------- ----------
Net loans 1,012,987 900,654
Premises and equipment, net 20,566 17,329
Interest receivable and other assets 36,508 32,709
---------- ----------
TOTAL ASSETS $1,524,798 $1,329,489
---------- ----------
---------- ----------
LIABILITIES
Deposits:
Non interest-bearing demand $269,083 $228,211
Savings and interest-bearing demand 561,757 519,431
Time certificates, $100,000 or more 126,821 86,338
Other time 429,960 345,737
---------- ----------
Total deposits 1,387,621 1,179,717
Borrowed funds --- 29,747
Interest payable and other liabilities 9,799 7,782
---------- ----------
Total liabilities 1,397,420 1,217,246
---------- ----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred stock, no par value
Shares authorized: 2,000,000
Shares issued: none --- ---
Common stock, $2.50 par value
Shares authorized: 16,000,000
Shares issued and outstanding: 1995 - 10,033,887
1994 - 9,353,000 25,085 23,383
Capital surplus 38,294 35,707
Unrealized gain (loss) on securities available for
sale, net 100 (421)
Retained earnings 63,899 53,574
---------- ----------
Total shareholders' equity 127,378 112,243
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,524,798 $1,329,489
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
(3)
<PAGE>
California Bancshares, Inc. and Subsidiaries
Consolidated Statement of Income (Unaudited)
For the Three and Nine Month Periods Ended September 30, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $24,771 $15,016 $69,123 $42,329
Securities:
Taxable 3,624 3,643 10,835 10,337
Exempt from Federal income taxes 584 684 1,824 2,098
Other interest income 1,347 431 2,816 1,302
------- ------- ------- -------
Total interest income 30,326 19,774 84,598 56,066
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits:
Savings and interest-bearing demand 3,322 2,474 9,602 7,355
Time certificates, $100,000 or more 1,550 656 3,457 1,658
Other time 6,652 2,057 17,593 5,892
------- ------- ------- -------
Total interest on deposits 11,524 5,187 30,652 14,905
Interest on borrowed funds --- 34 729 89
------- ------- ------- -------
Total interest expense 11,524 5,221 31,381 14,994
------- ------- ------- -------
Net interest income 18,802 14,553 53,217 41,072
Provision for loan losses 445 425 1,045 1,480
------- ------- ------- -------
Net interest income after provision
for loan losses 18,357 14,128 52,172 39,592
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 1,496 1,166 4,156 3,281
Loss on sale of securities available
for sale --- (7) --- (18)
Other operating income 1,115 565 2,715 2,175
------- ------- ------- -------
Total noninterest income 2,611 1,724 6,871 5,438
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 7,357 5,820 20,566 16,841
Occupancy expense 1,203 847 3,407 2,515
Equipment expense 932 944 2,829 2,485
Other operating expense 3,528 3,292 11,106 10,252
------- ------- ------- -------
Total noninterest expense 13,020 10,903 37,908 32,093
------- ------- ------- -------
Income before provision for income taxes 7,948 4,949 21,135 12,937
Provision for income taxes 3,206 1,852 8,183 4,644
------- ------- ------- -------
NET INCOME $4,742 $3,097 $12,952 $8,293
------- ------- ------- -------
------- ------- ------- -------
PER SHARE
Net Income $0.47 $0.33 $1.29 $0.89
------- ------- ------- -------
------- ------- ------- -------
Dividends declared $0.18 $0.14 $0.54 $0.41
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding 10,032 9,362 10,003 9,364
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements
(4)
<PAGE>
California Bancshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
For the Nine Month Period Ended September 30, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $12,952 $ 8,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,519 2,157
Provision for loan losses 1,045 1,480
Net loss on sales of securities --- 18
Net gain on sales of premises and equipment and
foreclosed assets (317) (36)
Gain on sale of loans (791) (688)
Provision for foreclosed assets 314 122
Net (additions) proceeds from sales of mortgages
held for sale (4,614) 2,399
Net change in interest receivable, other assets
interest payable and other liabilities 2,790 (4,025)
--------- ---------
Net cash provided by operations 13,898 9,720
--------- ---------
Cash flows from investing activities:
Securities:
Held to Maturity:
Proceeds from prepayments and maturities 41,144 51,860
Purchases (23,777) (64,136)
Available for Sale:
Sales 8,838 ---
Proceeds from prepayments and maturities 31,268 19,500
Purchases (4,134) (24,102)
Loans made to customers less principal payments
collected (5,255) (39,048)
Proceeds from sale of loans held for investment 5,855 2,520
Net cash provided by acquisitions 3,651 ---
Net change in interest-bearing time deposits --- 300
Capital expenditures (2,652) (1,741)
Proceeds from sales of premises and equipment 8 7
Proceeds from sales of foreclosed assets 2,388 1,383
--------- ---------
Net cash provided by (used in) investing
activities 57,334 (53,457)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 37,784 31,425
Net decrease in borrowed funds (29,747) ---
Cash dividends paid (4,911) (3,358)
Proceeds from issuance of common stock for stock
options exercised and dividend reinvestment plan 1,302 1,741
Repurchase of common stock (763) (1,366)
--------- ---------
Net cash provided by financing activities 3,665 28,442
--------- ---------
Net change in cash and cash equivalents 74,897 (15,295)
Cash and cash equivalents at beginning of year 81,387 114,318
--------- ---------
Cash and cash equivalents at end of period $156,284 $99,023
--------- ---------
--------- ---------
Supplemental disclosure on non-cash investing
activities:
Loans transferred to foreclosed assets $2,173 $1,016
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for :
Interest $30,672 $15,044
--------- ---------
--------- ---------
Income taxes $6,868 $3,915
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
(5)
<PAGE>
California Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited consolidated financial statements of California Bancshares,
Inc. and Subsidiaries (the "Company") are prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented have been
included and are normal and recurring. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1994.
The unaudited financial statements of the Company include the accounts of
California Bancshares, Inc. and its banking subsidiaries, Alameda First
National Bank, The Bank of Milpitas, N.A., The Bank of San Ramon Valley,
Centennial Bank, Commercial Bank of Fremont, Community First National Bank,
Concord Commercial Bank, Lamorinda National Bank, Modesto Banking Company
and Westside Bank (collectively, the Banks), and non-bank subsidiaries, CBI
Mortgage, Island Bancorp. Leasing, Inc. and LNB Corp.
The revenues, expenses, assets and liabilities of the subsidiaries are
included in the respective line items in the unaudited consolidated
financial statements, after elimination of all material intercompany
accounts and transactions. The results of operations and cash flows are not
necessarily indicative of those expected for the full fiscal year. Certain
amounts for prior periods have been reclassified to conform with the 1995
presentation.
2. ACQUISITIONS:
On June 30, 1995, the Company acquired all of the outstanding shares of
First Community Bankshares, Inc., the holding company for Centennial Bank.
Centennial Bank, located in Castro Valley, California, had assets of $118
million at June 30, 1995. This acquisition was accounted for as a purchase
and accordingly, the results of operations, which are not material to the
consolidated financial statements, are included in the Company's
consolidated financial statements from the acquisition date. The total cost
of the acquisition was $16.25 million in cash. The excess of the purchase
price over fair value of net assets acquired was $5.1 million.
On January 31, 1995, the Company completed the acquisition of Bank of
Livermore (Livermore), which was subsequently merged with another of the
Company's subsidiaries. Livermore had $71 million in total assets at
December 31, 1994. The Company issued 633,908 shares of common stock valued
at approximately $10.9 million at the time of the transaction. The
acquisition of Livermore was accounted for as a pooling-of-interests.
Livermore is not material to the financial condition or operating results of
the Company, and therefore, prior period balances were not restated.
However, 1995 amounts were adjusted to reflect the transaction as if it had
occurred January 1, 1995.
(6)
<PAGE>
3. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114 AND 118:
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS No. 118 (collectively referred to as SFAS No.
114), on a prospective basis. These Statements address the accounting
treatment of certain impaired loans and amend SFAS No. 5 and 15. However,
these statements do not address the overall adequacy of the allowance for
loan losses and do not apply to large groups of smaller-balance homogeneous
loans unless they have been involved in a restructuring.
A loan is considered impaired, within the scope of SFAS No. 114, when, based
on current information and events, it is probable that the Company will be
unable to collect principal or interest due according to the contractual
terms of the loan. For a loan that has been restructured the contractual
terms of the loan refer to the contractual terms of the original loan
agreement.
The Company measures the impairment of a loan when and while a loan is on
nonaccrual or the loan has been restructured. The amount of impairment is
calculated by the Company using discounted cash flows, except when the
source of repayment for the loan is through the liquidation of the
underlying collateral. For these loans, the net realizable value of the
collateral (current fair value less estimated costs to sell) is used in
place of discounted cash flows. If the measurement of the impaired loan is
less than the recorded investment in the loan, the Company recognizes such
impairment by creating or adjusting the existing allowance for loan losses.
If full collection is uncertain, cash receipts are applied first to
principal, then to recovery of amounts previously charged off, then to
interest income.
The following table presents the recorded investment in impaired loans and
the related SFAS No. 114 allowance for loan losses at September 30, 1995:
<TABLE>
<CAPTION>
Related
Recorded SFAS No. 114
investment in allowance for
(In thousands) impaired loans loan losses
-------------- -------------
<S> <C> <C>
Impaired loans with a required allowance $2,577 $678
Impaired loans not requiring an allowance 8,258 ---
------- ----
Total $10,835 $678
------- ----
------- ----
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES:
In the normal course of business there are outstanding various commitments
to extend credit, letters of credit and contingent liabilities that are not
reflected in the financial statements. While no related losses are
anticipated, such instruments do involve elements of credit and interest
rate risk in excess of amounts recorded in the balance sheet. Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Standby and commercial
letters of credit are written conditional commitments issued by the Banks to
guarantee
(7)
<PAGE>
the performance of a customer to a third party. Letters of credit have
fixed expiration dates and require payment of a fee. When making
commitments or issuing letters of credit, the Banks evaluate each customer's
creditworthiness on a case-by-case basis. The same credit policies are used
in making commitments and conditional obligations as are used for on-balance
sheet instruments. The Banks control the credit risk of these transactions
through credit approval, limits and monitoring procedures. The amount of
collateral obtained, if deemed necessary, is based on management's credit
evaluation of the customer. Exposure to credit loss, in the event of
nonperformance by the other party to the financial instrument, for
commitments to extend credit and letters of credit is represented by the
contractual notional amount of those instruments.
Amounts of these financial instruments at September 30, 1995 and December
31, 1994 are summarized below:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
---------- ----------
<S> <C> <C>
Commitments to extend credit $243,579 $195,217
Standby letters of credit 8,160 5,837
</TABLE>
The Company and its subsidiaries, in the ordinary course of business, are
defendants in various legal proceedings. Management believes the aggregate
contingent liability, if any, will not materially affect the Company's
financial position.
The California franchise tax returns for the Company for the years 1977
through 1979, 1983 and 1984 have been examined by the California Franchise
Tax Board. These examinations have resulted in the assessment of additional
taxes, principally relating to the tax treatment of direct financing leases.
Management does not believe that the resolution of the issue will have a
material adverse effect on the Company's financial position.
5. ACCOUNTING CHANGE:
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". This Statement establishes an
alternative method for accounting for stock based-compensation plans and
encourages employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion (APB No. 25), "Accounting for Stock
Issued to Employees". SFAS No. 123 establishes a fair value based
accounting method for stock-based compensation arrangements. Companies may
continue to apply the accounting provisions of APB No. 25 in determining net
income; however, they must apply the disclosure requirements of SFAS No.
123.
The recognition provisions may be adopted immediately and apply to all
awards granted after the beginning of the fiscal year in which the
recognition provisions are first applied. The disclosure requirements of
this Statement are effective January 1, 1996; earlier application of the
disclosure requirements is encouraged.
(8)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
(Dollar amounts in thousands except per share data) 1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FOR THE PERIOD
Net interest income on a taxable- equivalent basis $19,104 $14,906 $54,159 $42,154
Less: Taxable-equivalent adjustments (302) (353) (942) (1,082)
Provision for loan losses (445) (425) (1,045) (1,480)
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses 18,357 14,128 52,172 39,592
Noninterest income 2,611 1,724 6,871 5,438
Noninterest expense (13,020) (10,903) (37,908) (32,093)
Provision for income taxes (3,206) (1,852) (8,183) (4,644)
---------- ---------- ---------- ----------
Net income $4,742 $3,097 $12,952 $8,293
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share $0.47 $0.33 $1.29 $0.89
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FINANCIAL RATIOS
Return on average assets(1) 1.23% 1.14% 1.20% 1.04%
Return on average equity(1) 14.93 11.14 14.15 10.20
Average shareholders' equity to average assets 8.24 10.26 8.49 10.24
Total risk-based capital ratio(2) 13.13 16.60 13.13 16.60
Net interest margin (TE)(1) 5.34 5.95 5.41 5.75
<CAPTION>
September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C> <C> <C>
AT PERIOD END
Loans $1,028,143 $641,989
Allowance for loan losses 15,156 10,038
Assets 1,524,798 1,081,548
Shareholders' equity 127,378 110,833
Deposits 1,387,621 965,158
STOCK DATA
Book value per common share $12.69 $11.82
Common stock price range:
High 23 1/2 19 1/4 23 1/2 19 1/4
Low 19 3/4 17 16 1/2 14 1/2
Closing common stock price 21 1/4 18 1/2 21 1/4 18 1/2
Average common shares outstanding (000's) 10,032 9,362 10,003 9,364
Number of common shares outstanding at period
end (000)'s 10,034 9,376 10,034 9,376
Dividend payout ratio 38.3% 42.4% 41.9% 46.1%
</TABLE>
- -------------------------
(1)Annualized
(2)Tier 1 and Tier 2 capital.
(9)
<PAGE>
OVERVIEW
Net income for the third quarter of 1995 was $4.7 million ($0.47 per
share), a 53.1% increase from the $3.1 million ($0.33 per share) reported
for the same period in 1994. For the nine months ended September 30, 1995
and 1994 net income was $13.0 million ($1.29 per share) and $8.3 million
($0.89 per share), respectively.
The return on average assets for the three and nine months ended September
30, 1995 was 1.23% and 1.20%, respectively, up from 1.14% and 1.04% for the
like periods in 1994. Return on average shareholders' equity for the three
and nine months ended September 30, 1995 was 14.93% and 14.15%,
respectively, compared to 11.14% and 10.20% for the comparable periods in
1994.
On June 30, 1995, the Company acquired all of the outstanding shares of
First Community Bankshares, Inc., the holding company for Centennial Bank.
This acquisition was accounted for as a purchase and accordingly, the
results of operations are included in the Company's consolidated
financial statements from the acquisition date. On January 31, 1995, the
Company acquired Bank of Livermore, in a transaction accounted for as a
pooling-of-interests. Bank of Livermore is not material to the
consolidated financial condition or operating results of the Company, and
therefore, prior period balances have not been restated. However, 1995
amounts were adjusted to reflect the transaction as if it occurred
January 1, 1995. Bank of Livermore was subsequently merged with another
of the Company's bank subsidiaries. On December 2, 1994, the Company
acquired Old Stone Bank of California, F.S.B. (Old Stone), which was merged
into an existing subsidiary. This transaction was accounted for using
the purchase method. Subsequent to the acquisition, the results of
operations of Old Stone were combined with the Company's. When
appropriate, this analysis discusses the impact of these transactions so
meaningful comparisons can be made.
The following discusses significant areas , including the above mentioned
acquisitions, that have affected the Company's results of operations for the
three and nine months ended September 30, 1995 as compared to the same
periods in 1994 and financial condition at September 30, 1995 as compared
to December 31, 1994.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income on a taxable-equivalent basis was $19.1 million and
$54.2 million for the three and nine month periods of 1995, respectively,
compared with $14.9 million and $42.2 million for the like periods in 1994.
The increase in net interest income between these periods is primarily
attributable to increases in loan volume. Average loans outstanding for the
third quarter of 1995 increased by $398.0 million (63.1%) compared to 1994
and $359.7 million (58.6%) for the first nine months of 1995 compared to
1994. This increase was principally related to the Company's
acquisitions. Rising interest rates also helped increase the yields on
the Company's earning assets but were offset by increases on deposit
rates. In addition, the Company's interest-bearing liabilities volume
also increased substantially in 1995 compared to 1994 which was also
acquisition related.
(10)
<PAGE>
The net interest margin on a taxable-equivalent basis decreased to
5.34% for the third quarter of 1995 and 5.41% for the nine months ended
September 30, 1995 compared with 5.95% and 5.75% for the same periods in
1994. While the average yield on the Company's earning assets have
improved by 54 basis points and 74 basis points, respectively, these
increases have not kept pace with the rates paid on interest-bearing
liabilities, which increased 128 basis points in the third quarter of
1995 compared to 1994 and 120 basis points for the first nine months of
1995 compared to 1994. The decrease in the Company's net interest margin
between the periods presented was principally related to the acquisition
of Old Stone Bank. This savings and loan association historically operated
with a lower net interest margin than the Company's other community banks.
The following tables present the Company's consolidated average balance
sheets including average yields and rates on a taxable-equivalent basis for
the three and nine month periods ended September 30, 1995 and 1994 (Table A)
and the approximate effect on net interest income of volume and rate changes
from these periods (Table B). The change in interest due to both rate and
volume has been allocated to change due to rate and change due to volume in
proportion to the relationship of absolute dollar amounts of change in each.
(11)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------
1995 1994
-------------------------- --------------------------
TABLE A Average Yields Average Yields
(Dollars in thousands) Balance Interest & Rates Balance Interest & Rates
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold $94,715 $1,347 5.56% $38,022 $431 4.53%
Securities:
Taxable 251,857 3,624 5.71 274,163 3,643 5.27
Non-taxable (TE)(1) 43,368 886 8.17 50,955 1,037 8.14
---------- ------- ---- ---------- ------- ----
Total securities(1) 295,225 4,510 6.06 325,118 4,680 5.71
Loans(2) 1,028,694 24,771 9.55 630,681 15,016 9.45
---------- ------- ---- ---------- ------- ----
Total earning assets 1,418,634 30,628 8.57 993,821 20,127 8.03
Nonearning assets, net of
allowance for loan losses 110,153 80,864
---------- ----------
Total Assets $1,528,787 $1,074,685
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
Savings and interest-bearing
demand accounts $577,861 $3,322 2.28 $481,255 $2,474 2.04
Time 554,478 8,202 5.87 267,726 2,713 4.02
---------- ------- ---- ---------- ------- ----
Total interest-bearing deposits 1,132,339 11,524 4.04 748,981 5,187 2.75
Other borrowings --- --- --- 1,467 34 9.20
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 1,132,339 11,524 4.04 750,448 5,221 2.76
Demand deposits 260,406 209,065
Other liabilities 10,024 4,905
---------- ----------
Total liabilities 1,402,769 964,418
Shareholders' equity 126,018 110,267
---------- ----------
Total Liabilities and
Shareholders' Equity $1,528,787 $1,074,685
---------- ------- ----- ---------- ------- -----
---------- ----------
Net Interest Income and Margin(3) $19,104 5.34% $14,906 5.95%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
- -------------------------
(1)Interest income is presented on a taxable-equivalent basis.
The taxable-equivalent adjustments were based on a marginal tax rate of
35%.
(2)Nonaccrual loans are included in total loans, but are not
material to this presentation.
(3)Net interest margin is calculated as annualized net interest
income on a taxable-equivalent basis divided by average earning assets.
(12)
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------
1995 1994
-------------------------- --------------------------
TABLE A Average Yields Average Yields
(Dollars in thousands) Balance Interest & Rates Balance Interest & Rates
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing time deposits $ --- $ --- --- $180 $5 3.71%
Federal funds sold 64,234 2,816 5.78% 46,697 1,297 3.70
Securities:
Taxable 257,415 10,835 5.63 265,940 10,337 5.20
Non-taxable (TE)(1) 43,332 2,766 8.51 52,892 3,180 8.02
---------- ------- ---- ---------- ------- ----
Total securities(1) 300,747 13,601 6.05 318,832 13,517 5.67
Loans(2) 973,996 69,123 9.49 614,304 42,329 9.21
---------- ------- ---- ---------- ------- ----
Total earning assets 1,338,977 85,540 8.54 980,013 57,148 7.80
Nonearning assets, net of
allowance for loan losses 102,354 81,602
---------- ----------
Total Assets $1,441,331 $1,061,615
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing deposits:
Savings and interest-bearing
demand accounts $547,843 $9,602 2.34 $478,551 $7,355 2.05
Time 514,632 21,050 5.47 262,125 7,550 3.85
---------- ------- ---- ---------- ------- ----
Total interest-bearing deposits 1,062,475 30,652 3.86 740,676 14,905 2.69
Other borrowings 12,114 729 8.05 1,489 89 7.99
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 1,074,589 31,381 3.90 742,165 14,994 2.70
Demand deposits 235,797 206,228
Other liabilities 8,591 4,548
---------- ----------
Total liabilities 1,318,977 952,941
Shareholders' equity 122,354 108,674
---------- ----------
Total Liabilities and
Shareholders' Equity $1,441,331 $1,061,615
---------- ------- ----- ---------- ------- -----
---------- ----------
Net Interest Income and Margin(3) $54,159 5.41% $42,154 5.75%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
- -------------------------
(1)Interest income is presented on a taxable-equivalent basis.
The taxable-equivalent adjustments were based on a marginal tax rate of
35%.
(2)Nonaccrual loans are included in total loans, but are not
material to this presentation.
(3)Net interest margin is calculated as annualized net interest
income on a taxable-equivalent basis divided by average earning assets.
(13)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1995 compared to 1994 1995 compared to 1994
---------------------------- ----------------------------
TABLE B Volume Rate Total Volume Rate Total
(In thousands) ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Interest-bearing time deposits $ --- $ --- $ --- $(2) $(3) $(5)
Federal funds sold 782 134 916 598 921 1,519
Securities:
Taxable (309) 290 (19) (339) 837 498
Non-taxable (TE) (155) 4 (151) (601) 187 (414)
Loans 9,582 173 9,755 25,491 1,303 26,794
------- ------- ------- ------- ------- -------
Total average earning assets 9,900 601 10,501 25,147 3,245 28,392
------- ------- ------- ------- ------- -------
Increase (decrease) in interest expense:
Savings and interest-bearing
demand deposits 534 314 848 1,141 1,106 2,247
Time certificates 3,840 1,649 5,489 9,400 4,100 13,500
Other borrowings (17) (17) (34) 639 1 640
------- ------- ------- ------- ------- -------
Total average interest-bearing
liabilities 4,357 1,946 6,303 11,180 5,207 16,387
------- ------- ------- ------- ------- -------
Net increase in net interest income $5,543 $(1,345) $4,198 $13,967 $(1,962) $12,005
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
(14)
<PAGE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The following table details the changes in the Company's allowance for loan
losses for the first nine months of 1995 and 1994. The allowance for loan
losses should not be interpreted as an indication that charge-offs in the future
will occur in these amounts or proportions.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(Dollars in thousands) 1995 1994
------- -------
<S> <C> <C>
Balance at beginning of year $12,822 $11,547
------- -------
Deduct loans charged-off:
Real estate (500) (410)
Commercial and industrial (722) (1,674)
Consumer (616) (864)
------- -------
Total charge-offs (1,838) (2,948)
------- -------
Add recoveries of loans charged-off:
Real estate 135 ---
Commercial and industrial 560 210
Consumer 94 211
------- -------
Total recoveries 789 421
------- -------
Net charge-offs (1,049) (2,527)
------- -------
Provision for loan losses 1,045 1,480
Allowance related to acquisitions 2,338 (462)
------- -------
Balance at end of period $15,156 $10,038
------- -------
------- -------
Net charge-offs to average loans outstanding
(annualized) 0.14% 0.55%
Average loans outstanding $973,996 $614,304
Allowance at end of period to loans outstanding 1.47% 1.56%
Period end loans $1,028,143 $641,989
</TABLE>
At September 30, 1995, the allowance for loan losses was $15.2 million or
1.47% of total loans compared with $12.8 million or 1.40% at December 31, 1994
and $10.0 million or 1.56% at September 30, 1994. The provision for loan losses
increased to $445,000 for the third quarter of 1995 from $425,000 for the like
period in 1994. For the first nine months of 1995 the provision was $1.0
million compared to $1.5 million in 1994. Net charge-offs for the third quarter
and first nine months of 1995 were $393,000, (0.15% of average total loans on
an annualized basis) and $1.1 million (0.14%), compared with $441,000 million
(0.28%) and $2.5 million (0.55%) for the comparable periods in 1994. At
September 30, 1995, December 31, 1994 and September 30, 1994, the Company's
ratio of the allowance for loan losses to total nonperforming loans was 113%,
98% and 94%, respectively.
The Company's determination of the allowance for loan losses and the
corresponding provision for loan losses is based on various judgments and
assumptions including, but not limited to, general economic conditions, the
composition of the loan portfolio, prior loss experience and estimates of
potential future losses. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks'
allowances for loan losses.
(15)
<PAGE>
The Company performs a quarterly assessment to determine the appropriate
level of the allowance for loans losses. This process uses a series of
allocation methods including specific credit allocations for individual loans
and historical loss experience for each loan category and degree of criticism
within each category. The total of these allocations is then supplemented by
the unallocated portion of the allowance for loan losses. Based on management's
analysis of the Company's overall allowance for loan losses, management believes
that the provision for loan losses for 1995 is appropriate. It is management's
opinion that the allowance for loan losses at September 30, 1995 is adequate to
provide for potential losses in the current loan portfolio. No assurances can
be given that adverse economic conditions or other factors will not result in
increased losses in the Company's loan portfolio.
NONINTEREST INCOME
Noninterest income for the third quarter and first nine months of 1995 was
$2.6 million and $6.9 million, respectively, an increase of $887,000 and $1.4
million over the like periods in 1994. The components of noninterest income were
as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
(In thousands) 1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $1,496 $1,166 $4,156 $3,281
Other fee income 427 253 1,125 809
Loss on sale of securities --- (7) --- (18)
Gains on sales of loans 479 129 962 744
Other income 209 183 628 622
------ ------ ------ ------
Total noninterest income $2,611 $1,724 $6,871 $5,438
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The increase in service charge income and other fee income between the
periods presented was primarily acquisition related. Sales of loans generated
by the company's mortgage banking subsidiary have increased substantially in the
third quarter of 1995 compared to 1994 principally because of the favorable
interest rate environment.
NONINTEREST EXPENSE
Total noninterest expense was $13.0 million for the third quarter of 1995
compared with $10.9 million for 1994. For the first nine months of 1995 total
noninterest expense was $37.9 million, a $5.8 million or 18.1% increase over the
same period in 1994. The ratio of noninterest expense to operating revenue, on
a taxable-equivalent basis, excluding securities transactions, was 60.0% for the
third quarter and 62.1% for the first nine months of 1995 compared with 65.5%
and 67.4% for the like periods in 1994.
(16)
<PAGE>
The following table presents the major components of noninterest expense
for the third quarter and first nine months of 1995 and 1994.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 30, Change 95/94 September 30, Change 95/94
----------------- ----------------- ----------------- -----------------
1995 1994 $ % 1995 1994 $ %
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $7,357 $5,820 $1,537 26.4% $20,566 $16,841 $3,725 22.1%
Occupancy 1,203 847 356 42.0 3,407 2,515 892 35.5
Equipment 932 944 (12) (1.3) 2,829 2,485 344 13.8
Regulatory expenses 240 624 (384) (61.5) 1,710 1,832 (122) (6.7)
Banking forms and stationery 347 296 51 17.2 1,147 828 319 38.5
Communications expense 444 424 20 4.7 1,313 983 330 33.6
Outside data processing expense 208 116 92 79.3 548 499 49 9.8
Legal expense 118 186 (68) (36.6) 421 470 (49) (10.4)
Foreclosed assets expense, net 177 98 79 80.6 251 180 71 39.4
Consultant fees 174 6 168 n/m 574 442 132 29.9
Promotional expense 250 204 46 22.5 782 744 38 5.1
Courier service 260 207 53 25.6 731 588 143 24.3
Other 1,310 1,131 179 15.8 3,629 3,686 (57) (1.5)
------- ------- ------- ------- ------- -------
Total $13,020 $10,903 $2,117 19.4% $37,908 $32,093 $5,815 18.1%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The increase in salaries and benefits for the periods presented in 1995
compared to 1994 is directly related to the Company's expansion, primarily
acquisition related. The Company's full time equivalent staff numbered 647 at
September 30, 1995, this compares with 546 at September 30, 1994.
The Company benefited from the reduction in premiums paid to the FDIC for
deposit insurance during the third quarter of 1995. Because the premiums are
prepaid to the FDIC on a quarterly basis the Company received a refund of
$641,000 covering overassessments from the first and second quarters of 1995.
Increases in a variety of categories in 1995 compared to 1994 is primarily
expansion related. The Company had 37 banking locations at September 30, 1995
compared to 26 locations at September 30, 1994.
At the beginning of 1995, the Company announced plans to re-focus on cost
reduction and revenue enhancement with a target efficiency ratio of 62.0%.
Adjusting for the lower FDIC insurance premiums, which was not anticipated when
the Company set its goal, the Company has now targeted a 60.0% efficiency ratio
to be achieved by the first quarter of 1996. The goal will be achieved through
on-going efforts to enhance revenue growth while achieving operations
efficiencies through acquisition consolidation, re-engineering of work flows and
normal employee attrition.
INCOME TAXES
The provision for income taxes was $3.2 million for the third quarter of
1995 and $8.2 million for the first nine months of 1995. This compares with
$1.9 million and $4.6 million, respectively, for the comparable periods in 1994.
The effective tax rates for the periods in 1995 were 40.3% and 38.7%,
respectively. The effective tax rates in 1994 were 37.4% and 35.9%. The
increase in the Company's effective tax rate between these two periods is
primarily attributable to the decrease in nontaxable income in 1995 relative to
the Company's earnings.
(17)
<PAGE>
FINANCIAL CONDITION
SECURITIES
The Company's securities portfolio increased by $1.0 million between
December 31, 1994 and September 30, 1995. Increases in the securities portfolio
related to acquisitions were $54.0 million. Excluding these transactions, the
Company had year to date maturities and repayments totaling $72.4 million, $27.9
million in purchases and $8.8 million in sales.
At September 30, 1995 and December 31, 1994, the held to maturity
securities had an estimated unrealized pretax loss of $1.7 million and $12.5
million, respectively.
At September 30, 1995, the available for sale securities portfolio had an
unrealized pretax gain of $168,000 or a net of tax gain of $100,000. This net
gain has been reported as a separate component of shareholders' equity. At
December 31, 1994 the Company had a pretax loss in this segment of the portfolio
of $721,000, with a net of tax loss of $421,000.
The amortized cost and estimated market value of securities, at September
30, 1995 by contractual maturity are shown in the following table. Actual
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties. For asset/liability purposes, the Company monitors these securities
with consideration of prepayment assumptions. Yields have been calculated by
dividing the taxable-equivalent interest income, including discount or premium
by the book value. Yields on nontaxable securities of states and political
subdivisions were presented on a taxable-equivalent basis using a marginal tax
rate of 35%.
<TABLE>
<CAPTION>
Securities Available for Sale
---------------------------------------------------------------
Within 1 1 to 5 5 to 10 After 10
(Dollars in thousands) Year Years Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury
securities $23,676 $ 8,007 $ --- $ --- $31,683
Securities of U.S.
Government agencies and
corporations 2,714 4,259 --- 1,728 8,701
Obligations of states
and political sub-
divisions 100 225 724 --- 1,049
Corporate and Federal
Reserve Bank Stock --- --- --- 1,228 1,228
------- ------- ------- ------- -------
Total $26,490 $12,491 $ 724 $ 2,956 $42,661
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average yield 5.35% 6.18% 9.81% 6.06% 5.72%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Market value $26,460 $12,592 $ 757 $ 3,020 $42,829
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(18)
<PAGE>
<TABLE>
<CAPTION>
Securities Held to Maturity
-----------------------------------------------------------------
Within 1 1 to 5 5 to 10 After 10
(Dollars in thousands) Year Years Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities $14,192 $ 51,298 $ --- $ --- $ 65,490
Securities of U.S.
Government agencies
and corporations 13,492 50,709 45,558 27,669 137,428
Obligations of states
and political sub-
divisions 10,223 27,940 12,965 1,428 52,556
Other securities --- 150 --- --- 150
------- -------- ------- ------- --------
Total $37,907 $130,097 $58,523 $29,097 $255,624
------- -------- ------- ------- --------
------- -------- ------- ------- --------
Weighted average yield 6.02% 6.14% 6.71% 6.90% 6.34%
------- -------- ------- ------- --------
------- -------- ------- ------- --------
Market value $37,914 $129,549 $57,927 $28,510 $253,900
------- -------- ------- ------- --------
------- -------- ------- ------- --------
</TABLE>
LOAN PORTFOLIO
The Company's loan portfolio consists primarily of commercial and
industrial loans, real estate 1-4 family residential properties, other
commercial real estate mortgages, construction and land development loans,
consumer installment loans and individual lines of credit. The following table
presents the loan mix at September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
$ %
-------------------- ------------------
(In thousands) 09/30/95 12/31/94 09/30/95 12/31/94
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Real estate -
Construction and land development $122,205 $99,975 11.9% 11.0%
Secured by 1-4 family residential
properties 347,340 347,093 33.8 38.0
Other real estate mortgages 236,826 186,638 23.0 20.4
Loans held for sale 5,882 1,268 0.6 0.1
Commercial and industrial 181,715 159,266 17.7 17.4
Consumer 134,175 119,236 13.0 13.1
---------- -------- ------- -------
Total loans $1,028,143 $913,476 100.0 100.0
---------- -------- ------- -------
---------- -------- ------- -------
</TABLE>
The Company's loan portfolio increased by $114.7 million or 12.6% at
September 30, 1995 compared to December 31, 1994. This increase was primarily
attributable to 1995 acquisitions. Included in commercial and industrial loan
totals were agricultural loans of $18.6 million and $18.8 million at September
30, 1995 and December 31, 1994, respectively. Agricultural loans consist of
loans to finance agricultural production and other loans to farmers.
Agricultural loans that are primarily secured by real estate (farmland) are
included in other real estate mortgages.
The Company has historically been active in financing the construction and
development of residential properties. The underwriting standards and
administrative guidelines regarding these credits are specific and stringent.
Although a significant percentage of the Company's nonperforming loans come from
this portion of the portfolio the Company has not historically suffered any
material losses in this area.
(19)
<PAGE>
Other real estate mortgages, the majority of which are commercial
properties, are another active market for the Company. These credits are
also governed by stringent loan policies. These credits are primarily owner
occupied business properties that are limited to specific types of properties.
Inherent in any loan portfolio are risks associated with certain types of
loans. The Company's objective is to limit these risks through strict loan
policies and review procedures. Included in these policies are specific loan-
to-value (LTV) limitations as to various categories of real estate related
loans. The Company has also established policies to limit the degree of
portfolio concentration in any product type or to any individual borrower.
NONACCRUAL LOANS, RESTRUCTURED LOANS AND FORECLOSED ASSETS
The following table presents the Company's nonaccrual and restructured loans
and foreclosed assets at September 30, 1995 and December 31, 1994.
Classification of a loan as nonaccrual or restructured does not necessarily
indicate the loan is not performing with respect to collection of principal and
interest nor does it mean that the principal of the loan is uncollectible in
whole or in part.
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1995 1994
------------- ------------
<S> <C> <C>
Nonaccrual loans $10,835 $8,751
Restructured loans 2,555 4,285
-------- -------
Total nonperforming loans 13,390 13,036
Foreclosed assets 3,098 2,415
-------- -------
Total nonperforming assets $16,488 $15,451
-------- -------
-------- -------
Nonperforming loans as a percentage of
total loans 1.3% 1.4%
Nonperforming assets as a percentage of
total loans and foreclosed assets 1.6% 1.7%
Loans past due 90 days and still accruing
interest $2,052 $659
Foregone interest $1,095 $665
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118 (collectively referred to as
SFAS No. 114). The adoption of SFAS No. 114 has not affected the Company's
policy for placing loans on nonaccrual status. The Company generally identifies
loans to be evaluated for impairment when such loans are on nonaccrual or have
been restructured. Loans are placed on nonaccrual status when full
collectibility of principal or interest is uncertain or when principal or
interest is past due for 90 days (unless the loan is well secured and in the
process of collection). From the time a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed and charged against
interest income. Any interest or principal payments received on a nonaccrual
loan are normally applied as a principal reduction. A nonaccrual loan may be
restored to accrual status when none of its principal and interest is past due
and unpaid or when it otherwise becomes well secured and in the
(20)
<PAGE>
process of collection. In a case where a borrower experiences financial
difficulties and the Company makes certain concessionary modifications to
contractual terms (i.e., the reduction of either interest or principal or other
such modifications that the Company would not otherwise consider), the loan is
classified as a restructured loan. If the borrower is not able to meet the
revised payment schedule and the loan becomes delinquent, the loan is placed on
nonaccrual status.
The increase in nonaccrual loans between the two periods is primarily
acquisition related. Restructured loans are principally three credits, a
residential lot development loan (of which $1.6 million was reduced from the
December 31, 1994 balance) and two commercial real estate properties. All loans
in this category are currently performing according to their respective revised
terms and are yielding a market rate.
Foreclosed assets include property acquired through foreclosure. These
properties are carried at the lower of (i) fair value less estimated costs to
sell or (ii) the recorded cost of the asset. Upon foreclosure, any necessary
write-downs are charged to the allowance for loan losses. The difference
between cost and fair value less estimated cost to sell, if lower, is recorded
as a valuation allowance. Subsequent declines in the fair value of the property
are recorded as an addition to the valuation allowance. The increase of
$683,000 in foreclosed assets between December 31, 1994 and September 30, 1995
was entirely from residential properties, both single family homes and
residential lot developments.
Loans 90 days or more past due and still accruing at September 30, 1995 were
$2.1 million, up $1.4 million from the December 31, 1994 total of $659,000. All
loans in this category are well secured and in the process of collection.
Management is not aware of any significant potential problem loans which
have not otherwise been disclosed as a nonaccrual or restructured loan at
September 30, 1995, in which there is known information about possible credit
problems of a borrower that has caused management to have serious doubts as
to the ability of such borrowers to comply with the present loan repayment
terms.
DEPOSITS
Total deposits increased to $1.39 billion at September 30, 1995 from $1.18
billion at December 31, 1994. Average daily deposits, along with the average
rates paid thereon, for the three and nine months ended September 30, 1995 and
1994 on an annualized basis are summarized on the following table:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1994 1995 1994
------------------ ------------------ ------------------ ------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate
--------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $260,406 ---% $209,065 ---% $235,797 ---% $206,228 ---%
Savings and interest-bearing demand 577,861 2.28 481,255 2.04 547,843 2.34 478,551 2.05
Time certificates, $100,000 or more 110,887 5.55 67,277 3.87 92,273 5.01 64,748 3.42
Other time 443,591 5.95 200,449 4.07 422,359 5.57 197,377 3.99
---------- ----- -------- ----- ---------- ----- -------- -----
Total $1,392,745 3.28% $958,046 2.15% $1,298,272 3.16% $946,904 2.10%
---------- ----- -------- ----- ---------- ----- -------- -----
---------- ----- -------- ----- ---------- ----- -------- -----
</TABLE>
The total amount held in the accounts of any single depositor is not
material in relationship to total deposits.
(21)
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Company has separate policies and guidelines for managing the Company's
balance sheet and off-balance sheet activities which are incorporated and
considered integral parts of the asset/liability management process. Certain
policies may be governed and implemented by committees or persons other than the
Asset/Liability Committee (ALCO) as directed by the Board of Directors. Overall
asset/liability management encompasses the management and monitoring of asset
quality, liquidity and capital needs and interest rate risk.
INTEREST RATE RISK
One of the principal objectives of asset/liability management is to manage
the risks associated with changing interest rates and their impact on earnings.
The ALCO regularly evaluates and sets predetermined limits on the sensitivity of
each Bank's net interest income to changes in interest rates.
Interest rate risk can be viewed from a variety of perspectives, including
the sensitivity of earnings to rate movements and the sensitivity of the market
value of the Company's equity to changes in interest rates. One way to measure
how a change in interest rates will impact net interest income in specific time
frames is through a cumulative gap analysis. Traditional gap analysis
represents interest rate risk in terms of the mismatch between the stated
repricing of the Company's earning assets and interest-bearing liabilities
within defined time periods. As shown in the following table, at September 30,
1995, the cumulative one-year contractual gap for the Company was a negative
$75.5 million, or (5.3%) of earning assets. In other words, 5.3% of the
Company's interest-bearing liabilities has the potential to reprice or mature
more quickly than its earning assets in one year.
(22)
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity
-----------------------------------------------------------------------
0-3 >3-12 >1-5 >5 Non-
(Dollars in thousands) months months years years market Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $87,055 $ ---- $ ---- $ ---- $ ---- $87,055
Securities1 20,631 43,736 142,689 90,169 1,228 298,453
Loans2 483,384 298,765 156,560 78,599 10,835 1,028,143
-----------------------------------------------------------------------
Total earning assets 591,070 342,501 299,249 168,768 12,063 1,413,651
Noninterest-earning assets ---- ---- ---- ---- 111,147 111,147
-----------------------------------------------------------------------
Total assets 591,070 342,501 299,249 168,768 123,210 1,524,798
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Savings and interest-bearing
demand deposits $561,757 $ ---- $ ---- $ ---- $ ---- $561,757
Time certificates, $100,000
or more 44,176 58,794 23,651 200 ---- 126,821
Other time 114,674 229,679 85,244 363 ---- 429,960
-----------------------------------------------------------------------
Total interest-bearing
deposits 720,607 288,473 108,895 563 ---- 1,118,538
Borrowed funds --- ---- ---- ---- ---- ----
-----------------------------------------------------------------------
Total interest-bearing
liabilities 720,607 288,473 108,895 563 ---- 1,118,538
-----------------------------------------------------------------------
Noninterest-bearing liabilities ---- ---- ---- ---- 278,882 278,882
Shareholders' equity ---- ---- ---- ---- 127,378 127,378
-----------------------------------------------------------------------
Total liabilities and
shareholders' equity 720,607 288,473 108,895 563 406,260 1,524,798
-----------------------------------------------------------------------
Incremental gap (129,537) 54,028 190,354 168,205 (283,050) ----
-----------------------------------------------------------------------
Cumulative gap ($129,537) ($75,509) $114,845 $283,050 $ ----
----------------------------------------------------------
----------------------------------------------------------
% to earning assets (9.2%) (5.3%) 8.1% 20.0%
---------------------------------------------
---------------------------------------------
</TABLE>
1The nonmarket column consists of Federal Reserve Bank stock
2The nonmarket column consists of nonaccrual loans of $10,835
Over the short period (one year or less) changes in interest rates affect
net interest income to the extent that there is a timing difference between the
repricing of assets and liabilities. For instance, if more liabilities than
assets reprice during a time period, such as the Company's gap analysis
indicates, given a rising rate environment, net interest income will have a
tendency to decrease if the assets and liabilities reprice in rate by
approximately the same amount. Conversely, if an institution is considered to
be asset sensitive, or as having a positive gap, when the amount of its
liabilities maturing or repricing is less than
(23)
<PAGE>
the amount of its assets also maturing or repricing during the same period, net
interest income would benefit from a rising rate environment. Generally, in a
falling interest rate environment, a negative gap should result in an increase
in net interest income, and in a rising interest rate environment
this negative gap should adversely affect net interest income. The converse
would be true for a positive gap.
However, shortcomings are inherent in a simplified gap analysis that may
result in an institution with a nominally negative gap having interest rate
behavior associated with an asset sensitive balance sheet. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Furthermore, repricing characteristics of certain assets and liabilities
vary substantially within a given time period. In the event of a change in
interest rates, prepayment and early withdrawal levels could also deviate
significantly from those assumed in calculating gap. The Company attempts to
quantify these characteristics by taking into account the expected repricing or
maturities of earning assets and funding sources, as opposed to their
contractual maturities.
Because net interest income is not necessarily a conclusive indication of
an institution's ongoing net worth, a second measure of interest rate risk - the
market value of portfolio equity (MVPE) is important. This measure attempts to
quantify the ongoing worth of the institution by considering all cash flows,
regardless of their timing, and discounting these back to the present. The
difference between the discounted assets less the discounted liabilities is the
present value of equity or the economic measure of the institution's net worth.
These two approaches to interest rate risk measurement are complimentary
and are used in tandem by the individual Banks to provide a more complete
picture of the interest rate risk associated with their balance sheets.
Included in the Company's Asset/Liability Management Policy are limitations on
the maximum volatility each Bank may undertake associated with possible interest
rate movement.
LIQUIDITY
Liquidity is defined as the Company's ability to provide funds to meet
customers' loan and deposit needs and to fund operations in the most timely and
cost effective basis. The Company's liquidity is measured and managed on a
individual bank basis. The holding company (parent) is funded primarily by
dividends and management fee income from its subsidiaries.
Core deposits have historically provided the Company with funding sources.
The Company also utilizes repurchase agreements. In addition, the Banks have
informal federal funds borrowing arrangements with correspondents banks to meet
unforeseen deposit outflows. At September 30, 1995 and December 31, 1994, the
Company's loan to deposit ratio was 74.1% and 77.4%, respectively.
(24)
<PAGE>
CAPITAL
The Company reviews various capital adequacy ratios on a quarterly basis to
ensure that each banking subsidiary and the consolidated Company are within
established internal and external guidelines. The Company and its banking
subsidiaries are subject to risk-based capital regulations.
These guidelines are used to evaluate capital adequacy and are based on an
institution's balance sheet risk and off-balance sheet risk. Current
regulations define capital adequacy into five categories; well capitalized,
adequately capitalized, undercapitalized, significantly under capitalized and
critically undercapitalized. Each of these capital categories have predefined
risk-based capital ratio minimums. At September 30, 1995 and December 31, 1994,
the capital ratios of the Company exceeded the "well capitalized" threshold as
prescribed by banking regulators. An institution's deposit insurance premiums
are determined through a matrix based on the institution's capital category and
supervisory subgroup. Any reduction in an institution's capital category can
significantly increase premiums.
The following table presents the Company's capital positions at September
30, 1995 and December 31, 1994, including the risk-based capital ratio and
leverage ratio.
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
Tier 1: 1995 1994
------------- ------------
<S> <C> <C>
Shareholders'equity $127,378 $112,243
Less: Intangibles (7,128) (906)
Adjust: Unrealized (gains) losses
on securities available for sale (100) 421
---------- ---------
Total Tier 1 capital 120,150 111,758
Tier 2 capital 12,642 11,042
---------- ---------
Total risk-based capital $132,792 $122,800
---------- ---------
---------- ---------
Risk-adjusted assets $1,011,332 $883,325
---------- ---------
---------- ---------
Tier 1 capital/risk-adjusted assets
Capital ratio 11.88% 12.65%
Minimum ratio 4.00% 4.00%
Total risk-based capital/risk-
adjusted assets
Capital ratio 13.13% 13.90%
Minimum 8.00% 8.00%
Leverage ratio 7.86% 10.27%
</TABLE>
The Company regularly evaluates opportunities for expansion through
merger and acquisition. Such transactions, if any, in the future could
involve capital commitments giving rise to a need for additional capital.
(25)
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings Per Share
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 14, 1995, concerning
the acquisition of First Community Bankshares, Inc., the holding company for
Centennial Bank.
(26)
<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.
CALIFORNIA BANCSHARES, INC.
---------------------------------------
(Registrant)
Date: November 9, 1995 /S/ JOSEPH P. COLMERY
---------------------------------------
Joseph P. Colmery
President/Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 1995 /S/ VINCENT M. LEVERONI
--------------------------------------
Vincent M. Leveroni
Exec. Vice President and
Chief Financial Officer
(Principal Financial Officer)
(27)
<PAGE>
CALIFORNIA BANCSHARES, INC.
EXHIBIT INDEX
Exhibit Page
Number Description Number
------- ----------- ------
11 Computation of Earnings Per Share 29
(28)
<PAGE>
EXHIBIT 11
CALIFORNIA BANCSHARES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $4,742 $3,097 $12,952 $8,293
------ ------ ------ ------
------ ------ ------ ------
Weighted average number
of common shares
outstanding 10,032 9,362 10,003 9,364
------ ------ ------ ------
------ ------ ------ ------
Earnings per common share $ 0.47 $ 0.33 $1.29 $0.89
------ ------ ------ ------
------ ------ ------ ------
Fully diluted earnings per
common share(1):
Weighted average number of
common shares outstanding 10,032 9,362 10,003 9,364
Assuming exercise of stock
options reduced by the
number of shares which
could have been purchased
with the proceeds from
exercise of such options 220 184 227 188
------ ------ ------ ------
10,252 9,546 10,230 9,552
------ ------ ------ ------
------ ------ ------ ------
Earnings per common and
common equivalent share $ 0.46 $ 0.32 $ 1.27 $ 0.87
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
- --------------
(1) This presentation is submitted in accordance with Item 601(b)(11) of
Regulation S-K. This presentation is not required by APB Opinion
No. 15, because it results in dilution of less than 3%.
(29)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 69,229
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 87,055
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,829
<INVESTMENTS-CARRYING> 255,624
<INVESTMENTS-MARKET> 253,900
<LOANS> 1,028,143
<ALLOWANCE> 15,156
<TOTAL-ASSETS> 1,524,798
<DEPOSITS> 1,387,621
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,799
<LONG-TERM> 0
<COMMON> 25,085
0
0
<OTHER-SE> 102,293
<TOTAL-LIABILITIES-AND-EQUITY> 1,524,798
<INTEREST-LOAN> 69,123
<INTEREST-INVEST> 12,659
<INTEREST-OTHER> 2,816
<INTEREST-TOTAL> 84,598
<INTEREST-DEPOSIT> 30,652
<INTEREST-EXPENSE> 31,381
<INTEREST-INCOME-NET> 53,217
<LOAN-LOSSES> 1,045
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 37,908
<INCOME-PRETAX> 21,135
<INCOME-PRE-EXTRAORDINARY> 21,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,952
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 5.41
<LOANS-NON> 10,835
<LOANS-PAST> 2,052
<LOANS-TROUBLED> 2,555
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,822
<CHARGE-OFFS> 1,838
<RECOVERIES> 789
<ALLOWANCE-CLOSE> 15,156
<ALLOWANCE-DOMESTIC> 7,869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,287
</TABLE>
