<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 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: 000-22797
TEHAMA BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 91-1775524
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
239 SOUTH MAIN STREET, RED BLUFF, CALIFORNIA 96080
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (530) 528-3000
--------------------------------------
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.
Common Stock, No Par Value: 1,896,140 shares outstanding (September 30, 2000)
<PAGE>
INDEX
TEHAMA BANCORP
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: September 30, 2000 and
December 31, 1999
Condensed Consolidated Statements of Income: Three months ended
September 30, 2000 and 1999; and nine months ended
September 30, 2000 and 1999
Condensed Consolidated Statement of Changes in Shareholder Equity:
December 31, 1998 through September 30, 2000
Condensed Consolidated Statement of Cash Flows: Nine months ended
September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements:
September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule Worksheet
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEHAMA BANCORP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 21,174,869 $ 17,157,451
Investment securities (market value of $38,026,000 at
September 30, 2000 and $38,400,500 at December 31, 1999) 38,010,254 38,513,743
Loans, less allowance for loan losses of $2,382,671 at
September 30, 2000 ($2,148,074 at December 31, 1999) 166,933,158 143,025,745
Bank premises and equipment, net 2,574,783 2,716,042
Other real estate 167,693 35,986
Investment in leasing company 4,136,402 2,793,416
Investment in Class C Lease-Backed Notes 2,042,693 -
Accrued interest receivable and other assets 8,030,334 7,551,742
------------------ -----------------
TOTAL ASSETS $ 243,070,186 $ 211,794,125
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 51,321,987 50,686,125
Interest bearing 158,469,115 137,781,272
------------------ -----------------
Total deposits 209,791,102 188,467,397
Short-term borrowings 7,000,000 2,100,000
Long-term borrowings 2,539,904 -
Accrued interest payable and other liabilities 2,404,160 2,588,756
------------------ -----------------
Total liabilities 221,735,166 193,156,153
------------------ -----------------
Commitments
Shareholders' equity
Preferred stock - no par value; 2,000,000 shares
authorized; none issued - -
Common stock - no par value; 4,000,000 shares
authorized; 1,896,140 shares issued and outstanding
at September 30, 2000 (1,884,750 at December 31, 1999) 15,543,434 15,413,603
Retained earnings 6,366,737 4,077,990
Accumulated other comprehensive loss (575,151) (853,621)
------------------ -----------------
Total shareholders' equity 21,335,020 18,637,972
------------------ -----------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 243,070,186 $ 211,794,125
================== =================
</TABLE>
See accompanying notes.
<PAGE>
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended,
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $3,729,935 $2,840,121 $10,435,003 $8,079,580
Interest on Federal funds sold 343 50,975 14,892 332,618
Interest on investment securities:
Taxable 416,838 438,560 1,267,784 1,411,750
Exempt from Federal income taxes 141,484 148,485 430,281 464,903
Other Interest income 57,915 - 83,156 -
---------- ---------- ----------- ----------
Total interest income 4,346,515 3,478,141 12,231,116 10,288,851
---------- ---------- ----------- ----------
Interest expense on deposits 1,782,500 1,208,068 4,598,864 3,794,720
Interest on short-term and long-term
borrowings 152,724 1,256 381,506 5,312
---------- ---------- ----------- ----------
Total interest expense 1,935,224 1,209,324 4,980,370 3,800,032
---------- ---------- ----------- ----------
Net interest income 2,411,291 2,268,817 7,250,746 6,488,819
Provision for loan losses 100,000 300,000 700,000 1,025,000
---------- ---------- ----------- ----------
Net interest income after
provision for loan losses 2,311,291 1,968,817 6,550,746 5,463,819
---------- ---------- ----------- ----------
Non-interest income:
Service charges 236,195 202,778 694,718 573,405
Merchant processing fees 200,000 250,000 640,000 832,419
Gain on sale of loans 124,509 115,000 155,757 168,261
Automatic teller machine servicing fees 349,992 167,260 747,084 250,419
Loan packaging fees 9,559 63,775 79,646 216,816
Undistributed income from investment 49,580 90,824 323,020 287,799
Other income 152,422 141,464 380,943 380,651
---------- ---------- ----------- ----------
Total non-interest income 1,122,257 1,031,101 3,021,168 2,709,770
---------- ---------- ----------- ----------
Non-interest expense:
Salaries and employee benefits 1,031,554 1,054,139 3,098,300 3,143,336
Occupancy 316,372 273,169 897,540 760,258
Other 712,691 844,069 2,256,853 2,219,504
---------- ---------- ----------- ----------
Total non-interest expense 2,060,617 2,171,377 6,252,693 6,123,098
---------- ---------- ----------- ----------
Income before income taxes 1,372,931 828,541 3,319,221 2,050,491
Income taxes 468,400 233,400 1,026,400 566,900
---------- ---------- ----------- ----------
Net income $ 904,531 $ 595,141 2,292,821 1,483,591
========== ========== =========== ==========
Basic earnings per share $ 0.48 $ 0.32 $ 1.21 $ 0.79
========== ========== =========== ==========
Diluted earnings per share $ 0.46 $ 0.32 $ 1.18 $ 0.79
========== ========== =========== ==========
Weighted average number of
shares outstanding 1,891,420 1,883,544 1,887,465 1,867,549
========== ========== =========== ==========
Weighted average number of shares
outstanding including common
stock equivalents 1,978,683 1,883,544 1,944,553 1,867,549
========== ========== =========== ==========
</TABLE>
See accompanying notes.
<PAGE>
TEHAMA BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
------------------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
---------- ----------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,672,129 $12,824,202 $4,908,485 $ (21,430) $ 17,711,257
Stock options exercised and related
tax benefit 60,249 602,320 602,320
Retirement of common stock (18,684) (236,647) (236,647)
Comprehensive income:
Net Income 2,247,213 2,247,213 $ 2,247,213
Unrealized loss on available-for-sale
investment securities (832,191) (832,191) (832,191)
-------------
Total comprehensive income $ 1,415,022
=============
Cash dividend - $.50 per share (853,980) (853,980)
10% stock dividend 171,056 2,223,728 (2,223,728) -
---------- ----------- ---------- ------------- -------------
Balance at December 31, 1999 1,884,750 15,413,603 4,077,990 (853,621) 18,637,972
Stock options exercised and related
tax benefit 11,390 129,831 129,831
Comprehensive income:
Net Income 2,292,821 2,292,821 2,292,821
Unrealized gain on
available-for-sale
investment securities 278,470 278,470 278,470
-------------
Total comprehensive income $ 2,571,291
============
Cash issued for fractional shares
related to stock dividend (4,074) (4,074)
---------- ----------- ---------- ------------- -------------
Balance at September 30, 2000 1,896,140 $15,543,434 $6,366,737 $ (575,151) $ 21,335,020
========== =========== ========== ============= =============
</TABLE>
See accompanying notes.
<PAGE>
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,292,821 $ 1,483,591
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 700,000 1,025,000
Depreciation and amortization 378,219 305,303
Deferred loan origination (costs) fees, net (274,291) 309,744
Increase in interest receivable and other assets (969,528) (1,275,920)
(Decrease) increase in interest payable and other liabilities (184,596) 752,302
Undistributed earnings of investment in leasing company (323,020) (287,799)
------------- -------------
Net cash provided by operating activities 1,619,605 2,312,221
------------- -------------
Cash flows from investing activities:
Net increase in maturities, purchases and sales of
investment securities 956,681 5,533,613
Net increase in loans (24,198,118) (17,940,224)
Purchases of other real estate (16,609) -
Purchases of premises and equipment (191,064) (490,690)
Investment in Class C Lease-Backed Notes (2,375,655) -
Proceeds from investment in Class C Lease-Backed Notes 332,962 -
Investment in leasing company (999,750) -
------------- -------------
Net cash used in investing activities (26,491,553) (12,897,301)
------------- -------------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
and savings accounts 15,442,466 12,512,159
Net increase (decrease) in time deposits 5,881,239 (10,077,339)
Net increase in short-term borrowings 4,900,000 -
Borrowings under long-term debt agreement 2,907,655 -
Payments on long-term borrowings (367,751) -
Payments of cash dividends - (853,979)
Payments for fractional shares (4,074) -
Retirement of common stock - (236,647)
Proceeds from exercise of stock options 129,831 492,445
------------- -------------
Net cash provided by financing activities 28,889,366 1,836,639
------------- -------------
Increase (decrease) in cash and cash equivalents 4,017,418 (8,748,441)
Cash and cash equivalents at beginning of period 17,157,451 22,762,664
------------- -------------
Cash and cash equivalents at end of period $ 21,174,869 $ 14,014,223
============= =============
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A Basis of Presentation
The financial information included herein is unaudited (although the
12/31/99 data is derived from audited financial statements), but has been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary
to a fair presentation of the financial position, results of operations, changes
in shareholder equity, and cash flows for the interim periods presented.
Certain information and footnotes required by generally accepted
accounting principles for annual financial statements are not included in these
interim financial statements. Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K. Operating results for the three months and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000.
Tehama Bancorp was incorporated on January 15, 1997 and consumated a
merger with Tehama Bank on June 30, 1997. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary Tehama Bank,
and a 50% interest in Bancorp Financial Services, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
Note B Agreement and Plan of Reorganization and Merger
On September 20, 2000, Tehama Bancorp and Humboldt Bancorp announced
the signing of a definitive Agreement and Plan of Reorganization and Merger (the
"Agreement") under which Humboldt Bancorp will acquire all of the outstanding
shares of common stock of Tehama Bancorp pursuant to a tax-free exchange of
shares. The Agreement, which has been approved unanimously by the Boards of
Directors of both companies, is subject to conditions customary to transactions
of this type, including approval by the shareholders of both Humboldt Bancorp
and Tehama Bancorp, approval by bank regulatory authorities, and satisfaction of
certain other terms and conditions. The merger will be accounted for under the
pooling-of-interests method of accounting.
Under the terms of the Agreement, Tehama shareholders will receive
1.775 shares of Humboldt common stock for each Tehama Bancorp share. The
value to Tehama shareholders will vary if the price of Humboldt Bancorp
shares goes down within an established range before closing; however, in no
event will Tehama shareholders receive less than $17.47 per share. There will
be no change to the exchange formula if the price of Humboldt Bancorp shares
goes up; shareholders of both companies will share in any appreciation of the
price of Humboldt Bancorp stock at closing. Shareholders of Tehama are
expected to acquire approximately 37% of the shares of the combined
companies, and the board of directors following the merger will consist of
seven members from the current Humboldt Bancorp board and four members from
the current Tehama Bancorp board.
At December 31, 1999, and June 30, 2000, Humboldt reported total
assets of approximately $423.6 and $575.3 million, shareholders' equity of
approximately $34.1 and $44.3 million and net income of approximately $4.6
and $2.8 million, respectively. At December 31, 1999, and June 30, 2000,
Tehama had approximately $211.8 and $233.4 million in assets, shareholders'
equity of approximately $18.6 and $20.1 million and net income of
approximately $2.2 and $1.4 million, respectively.
Note C Earnings per Share
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
Diluted earnings per share is computed by dividing net income by the weighted
average of common shares outstanding including common stock equivalents of
options.
Note D New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which was subsequently amended in June 1999 by FASB Statement
No. 137 and in June 2000 by FASB Statement No. 138. FASB Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. FASB Statement No. 137 deferred the required
adoption date to fiscal quarters of all fiscal years beginning after June 15,
2000. FASB Statement No. 138 addresses certain issues causing difficulties in
implementing FASB Statement No. 133. The implementation of these
pronouncements is not expected to have a material effect on the Company's
financial statements.
In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. This statement replaces
FASB Statement No. 125 and revises certain of the standards for accounting
for securitizations and other transfers of financial assets and collateral
and their related disclosures. However, most of the provisions of FASB
Statement No. 125 were carried over without reconsideration. The statement
will be applied prospectively and is effective for transfers occurring after
March 31, 2001 and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. In
management's opinion, adoption of this statement will not be material to the
Company's financial position or results of operations.
Note E Dividends
On March 16, 2000, the Board of Directors declared a 10% stock
dividend payable May 15, 2000 to shareholders of record on April 10, 2000.
The dividend resulted in a charge to retained earnings in the amount of
$2,223,728, which was based on the estimated fair value of the Company's
common stock. In connection with the 10% stock dividend, the Company
increased the number of stock options under its stock option plans by 10% and
reduced the exercise prices accordingly. All references to weighted average
shares outstanding, per share amounts, option shares, and exercise prices
included in the accompanying consolidated financial statements and notes
reflect the 10% stock dividend and its retroactive effect.
Note F Segment Information
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management. Generally, financial information is reported on the basis that it is
used internally for evaluating segment performance and in deciding how to
allocate resources to segments.
The Company has four reportable segments: Retail and Commercial
Banking, Merchant Card Processing, ATM Cash Services, and Bancorp. The Retail
and Commercial Banking segment offers a diverse range of traditional loan and
deposit products and services to individuals and businesses. The Merchant Card
Processing segment is responsible for the processing of third-party credit card
transactions. The ATM Cash Services segment is responsible for servicing third
party ATM machines. The Bancorp segment represents the activity at the Bank's
holding company, which primarily consists of the Company's share of net income
from its joint venture in a leasing company Bancorp Financial Services, Inc.
The accounting policies of the segments are the same as those described Note A.
<PAGE>
The following table includes selected financial information for the three months
ended September 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
----------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Three Months Ended September 30, 2000
Interest income $ 4,289 $ - $ - $ 58 $ 4,347
Interest expense 1,886 - - 49 1,935
Provision for loan and lease losses 100 - - - 100
Non-interest income 498 224 350 50 1,122
Depreciation expense 110 1 4 - 115
Other non-interest expense 1,484 151 285 26 1,946
Income before income taxes 1,207 72 61 33 1,373
Segment assets $ 223,605 $ 6 $ 12,970 $ 6,489 $ 243,070
Three Months Ended September 30, 1999
Interest income $ 3,478 $ - $ - $ - $ 3,478
Interest expense 1,209 - - - 1,209
Provision for loan and lease losses 300 - - - 300
Non-interest income 519 253 168 91 1,031
Depreciation expense 89 1 3 - 93
Other non-interest expense 1,875 79 63 61 2,078
Income before income taxes 524 173 102 30 829
Segment assets $ 202,035 $ 13 $ 6,768 $ 2,978 $ 211,794
</TABLE>
The following table includes selected financial information for the nine months
ended September 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
----------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
Interest income $ 12,148 $ - $ - $ 83 $ 12,231
Interest expense 4,913 - - 67 4,980
Provision for loan and lease losses 700 - - - 700
Non-interest income 1,256 689 747 329 3,021
Depreciation expense 331 2 11 - 344
Other non-interest expense 4,697 426 689 97 5,909
Income before income taxes 2,763 261 47 248 3,319
Segment assets $ 223,605 $ 6 $ 12,970 $ 6,489 $ 243,070
Nine Months Ended September 30, 1999
Interest income $ 10,289 $ - $ - $ - $ 10,289
Interest expense 3,800 - - - 3,800
Provision for loan and lease losses 1,025 - - - 1,025
Non-interest income 1,330 841 251 288 2,710
Depreciation expense 260 3 8 - 271
Other non-interest expense 5,331 175 203 144 5,853
Income before income taxes 1,203 663 40 144 2,050
Segment assets $ 202,035 $ 13 $ 6,768 $ 2,978 $ 211,794
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Tehama Bancorp (the "Company") is the bank holding company for Tehama
Bank (the "Bank"), a state chartered, Federal Reserve member-bank. The following
is management's discussion and analysis of the financial condition and results
of operations of the Company for the quarter and nine-month periods ending
September 30, 2000, with comparative data from the same periods ending September
30, 1999. Some discussion may naturally focus solely on the Bank as that entity
comprises the substantial majority of the consolidated company. The focus is on
information, which is not otherwise apparent from the financial statements in
this quarterly report. Reference should be made to those statements for a more
thorough understanding of the analysis presented.
The Bank's main office is located at 333 Main Street, Red Bluff, Tehama
County, CA 96080, with five other community branch offices located in: Los
Molinos (Tehama County), Chico (Butte County), Orland and Willows (Glenn County)
and Redding (Shasta County). The Bank's administrative offices are located at
239 South Main Street, Red Bluff, Tehama County, CA 96080. The Bank's principal
business consists of attracting deposits from the general public and using the
funds to originate commercial, real estate and installment loans to both
consumers and businesses. The Bank's primary source of revenue is interest
income from its loan and investment portfolios. In addition to the Bank, the
Company maintains a 50% ownership interest in Bancorp Financial Services, Inc.
("BFS"), a leasing company located in Sacramento, CA. BFS concentrates on small
ticket business equipment and automobile leases over a broader service area
encompassing numerous western states. On March 15, 2000, the Company invested an
additional $999,750 in BFS. After such investment, the Company still maintained
a 50% ownership in BFS.
On September 20, 2000, Tehama Bancorp and Humboldt Bancorp announced
the signing of a definitive Agreement and Plan of Reorganization and Merger (the
"Agreement") under which Humboldt Bancorp will acquire all of the outstanding
shares of common stock of Tehama Bancorp pursuant to a tax-free exchange of
shares. The Agreement, which has been approved unanimously by the Boards of
Directors of both companies, is subject to conditions customary to transactions
of this type, including approval by the shareholders of both Humboldt Bancorp
and Tehama Bancorp, approval by bank regulatory authorities, and satisfaction of
certain other terms and conditions. The merger will be accounted for under the
pooling-of-interests method of accounting.
In addition to the historical information contained herein, this Form
10-Q quarterly report may contain certain forward-looking statements, within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
as amended, and regulations issued thereunder. Readers of this quarterly report
should understand that these forward-looking statements involve certain risks
and uncertainties that could cause actual results to differ materially from
those suggested in the forward-looking statements. Forward-looking statements
use phrases such as "expected to" and "on target to." Risks and uncertainties in
forward-looking statements include, but are not limited to, the following
factors: competitive pressure in the banking industry, changes in the regulatory
environment, changes in the interest rate environment and/or volatility in
interest sensitive deposits, general economic conditions in the Bank's major
service areas, a deterioration in credit quality resulting in an increase to the
provision for loan losses, operational risks including data processing or other
technological system failures, asset / liability matching risks and liquidity
risks, and changes in the securities markets.
EARNINGS SUMMARY
The Company's net income in the third quarter of 2000 totaled $904,531,
which was a 52.0% increase over the third quarter of 1999. Basic earnings per
share for the third quarter of 2000 was $0.48 ($0.46 diluted) compared to $0.32
($0.32 diluted) for the third quarter of 1999. Growth in net income during the
third quarter is the continuation of several business strategies initiated in
1999. Increasing the resources and focus on business banking relationships
throughout the Bank's service area resulted in significant growth in commercial
and commercial real estate loan bookings. Average real estate loans increased
$16,518,246 from a quarterly average of $58,381,044 in the third quarter of 1999
to $74,899,290 in the third quarter of 2000. Additionally, the Bank's dealer
lending business continues to provide steady growth in the consumer loan
portfolio, which increased $18,658,928, from a quarterly average of $27,904,717
in the third quarter of 1999 to $46,563,645 in the third quarter of 2000. The
Bank's ATM Cash Servicing Department, established in December 1998, also
contributed significantly to the growth in other income.
In 1991, Tehama Bank contracted with Cardservice International, Inc.
(CSI) for the solicitation on behalf of the Bank of merchants who accept credit
cards as payment for goods and services. As a result, the Bank has obtained
electronic credit card draft processing relationships with approximately 27.000
merchants on a nationwide basis. The Bank also entered into an agreement with
First Data Resources, Inc. for the processing of merchant credit card
transactions. Because of increased competition for this business among community
banks, the Bank and CSI renegotiated their contract in March of 1999 for an
additional five years. Among other things, the contract provided for a declining
level of fee income over the life of the contract, a provision whereby the Bank
reimburses CSI for 50% of the earnings on all funds held by the Bank for CSI,
and the elimination of reimbursement by CSI of personnel costs incurred by the
Bank in providing merchant card services to CSI. Merchant card fee
<PAGE>
EARNINGS SUMMARY (CONTINUED)
income reflects a decrease of 11.5% in a comparison of third quarter 2000 to
third quarter 1999. Fee income to the Bank from CSI totaled $689,180 for the
nine months ended September 30, 2000, compared to $841,052 for the nine months
ended September 30, 1999. Fee income under the revised contract is expected to
decline to approximately $900,000 in 2000, $700,000 in 2001, and $600,000 in
2002 and 2003.
Net income for the nine months ended September 30, 2000 was
$2,292,821, an increase of $809,230 (54.6%) over the same period in 1999.
Basic earnings per share for the nine months ended September 30, 2000 was
$1.21 ($1.18 diluted), compared to $0.79 ($0.79 diluted) for the same period
in 1999.
BALANCE SHEET ANALYSIS
Total assets of $243,070,186 at September 30, 2000 represent an
increase of $31,276,061 or 14.8% from the 1999 year-end figure of $211,794,125.
During this same period net loans increased $23,907,413 or 16.7% while total
investments decreased by $503,489 or 1.3%. Total deposits of $209,791,102 at
September 30, 2000 represent an increase of $21,323,705 or 11.3% from the 1999
year-end figure of $188,467,397. Non-interest bearing deposits were 24.5% of
total deposits at September 30, 2000, compared with 26.9% at December 31, 1999.
Savings deposits of $39,719,030 at September 30, 2000 represents an increase of
$24,144,180 or 155.0% from the 1999 year end figure of $15,574,850. This
increase is due to the introduction of a promotional savings product, a high
yield account with a $20,000 minimum balance requirement.
The Company also invested in Class C Lease-Backed Notes issued by B
F S Funding Company, L.L.C., a wholly owned subsidiary of Bancorp Financial
Services, Inc. The initial investment of $2,375,654 was funded by long-term
borrowings with another bank, which matures in 2003. The balance of the
investment and borrowings at September 30, 2000, was $2,042,693 and
$2,007,904, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased $234,597 from December 31,
1999 to September 30, 2000. The provision for loan losses for the nine months
ended September 30, 2000 was $700,000 compared to $1,025,000 for the nine
months ended September 30, 1999. The decrease in the provision is due to the
improvement in the quality of the loan portfolio and reduction in loan
charge-offs. The allowance for loan losses reflects management's judgment as
to the level which is considered adequate to absorb potential losses inherent
in the loan portfolio. This allowance is increased by provisions charged to
expense and reduced by loan charge-offs, net of recoveries. Management
determines the provision charged to expense based on an on-going analysis of
the loan portfolio's product mix, delinquency ratios, losses incurred and
other factors. The following table presents information concerning the
allowance:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 DECEMBER 31, 1999
------------------ ------------------ -----------------
<S> <C> <C> <C>
Allowance at beginning of period $ 2,148,074 $ 2,080,831 $ 2,080,831
Provision for loan losses 700,000 1,325,000 1,025,000
Losses charged to the allowance (542,408) (1,438,474) (1,336,649)
Recoveries of amounts charged off 77,005 109,904 180,717
------------------ ------------------ -----------------
Allowance at end of period $ 2,382,671 $ 1,879,086 $ 2,148,074
================== ================== =================
Ending loan portfolio (Before allowance for loan losses) $ 169,315,829 $ 137,494,102 $ 145,173,819
================== ================== =================
Ending allowance as a percentage of ending loan portfolio 1.41% 1.37% 1.48%
================== ================== =================
</TABLE>
NET INTEREST INCOME
The primary source of income for the Company is net interest income,
the difference between interest earned on assets (loans and investments) and
interest paid on deposits and other borrowings taken by the Bank to fund these
assets. Changes in net interest income can be attributed to changes in the yield
on interest-earning assets and to changes in the rate paid on interest-bearing
<PAGE>
NET INTEREST INCOME (CONTINUED)
liabilities. It can also be attributed to changes in the volume of
interest-earning assets and interest-bearing liabilities. Net interest income
for the quarter ending September 30, 2000 totaled $2,411,291, an increase of
$142,474 (6.3%) increase over the $2,268,817 for the third quarter of 1999. Net
interest income for the nine months ended September 30, 2000 totaled $7,250,746,
an increase of $761,927 (11.7%) over the same period in 1999.
NON-INTEREST INCOME
Non-interest income consists primarily of service charges on deposit
accounts, other fees and charges collected by the Bank for both deposit accounts
and loans, fee income generated by the processing of merchant credit card
transactions, ATM cash servicing fees and earnings on life insurance policies.
Non-interest income for the quarter ending September 30, 2000 totaled
$1,122,257, an increase of 8.8% over the $1,031,101 for the third quarter of
1999. Non-interest income for the nine months ended September 30, 2000 totaled
$3,021,168, an increase of $311,398 (11.5%) over the $2,709,770 for the same
period in 1999.
Deposit account service charges for the quarter ended September 30,
2000 increased 16.5% (21.2% for the nine month period) from the same period in
1999. Processing fees on brokered loans declined $54,216 or 85.0% ($137,170 or
63.3% for the nine month period), due to a decrease in origination volume as a
result of increased loan rates. Merchant card processing revenue was down
$50,000 or 20.0% ($192,419 or 23.1% for the nine month period), in line with
contractual decreases in processing volume and fee income. Income from ATM cash
servicing was up $182,732 or 109.3% in the third quarter of 2000 ($496,665 or
198.3% for the nine month period), from $167,260 in the third quarter of 1999
($250,419 for the nine month period), reflecting the startup of that unit in
early 1999.
The Company's share of net income from its joint venture in a leasing
company, Bancorp Financial Services, decreased $41,244 or 45.4%, from the third
quarter of 1999, and increased $35,221 or 12.2% from the nine months ended
September 30, 1999.
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and related benefits,
occupancy and equipment expense and other expenses. Non-interest expense totaled
$2,060,617 for the three months ended September 30, 2000, a decrease of $110,760
(5.1%) over the same period in 1999 and was $6,252,693 for the nine months ended
September 30, 2000, an increase of $129,595 (2.1%) over the same period in 1999.
Personnel expense was down $22,585 or 2.1% for the third quarter of
2000 ($45,036 or 1.4% for the nine month period) compared with the third
quarter of 1999, due primarily to staff reductions through attrition.
Occupancy expense was up $43,203 or 15.8% in the third quarter of 2000
($137,282 or 18.1% for the nine month period), primarily attributable to
increases in depreciation expense on bank premises and equipment associated with
new branch and loan center facilities.
Other expenses were down $131,378 or 15.6% in the third quarter of 2000
compared with the third quarter of 1999, due primarily to reduction in legal and
professional fees specifically related to renegotiation of a credit
relationship. Other expenses were up $37,349 or 1.7% for the nine month period
over the same period in 1999, due to increases in public relations and
advertising expenses, increases in supplies, telephone and postage expenses,
increases in officers salary continuation expenses and increases in software
licensing fees, all associated with the expansion of Bank services and new
facilities. The renegotiated merchant card processing contract included a
provision whereby the Bank is obligated to reimburse the outside vendor for a
portion of the earnings on transaction float previously retained by the Bank,
which also contributed to the increase in other expenses.
NET INCOME BEFORE TAXES
Net income before taxes was $1,372,931 for the third quarter of
2000, an increase of $544,390 (65.7%) over the $828,541 for the third quarter
of 1999. For the nine months ended September 30, 2000, net income before
taxes was $3,319,221, an increase of $1,268,730 (61.9%) over the same period
in 1999.
INCOME TAXES
Income taxes accrued for the three months ended September 30, 2000
totaled $468,400 or 34.1% of net income before taxes, compared with $233,400 or
28.2% of net income before taxes for the same period in 1999. Income taxes
accrued for the nine months ended September 30, 2000 totaled $1,026,400 or 30.9%
of net income before taxes, compared with $566,900 or 27.6% of net income before
taxes for the same period in 1999. Variations in volumes of tax-exempt
securities, loans and leases, and their respective income, are primarily
responsible for the change in the tax rate.
<PAGE>
LIQUIDITY AND CAPITAL
The Bank manages its liquidity to ensure that sufficient funds are
available to support asset growth and satisfy cash flow requirements created by
fluctuations in deposits. Primary sources of liquidity include cash and amounts
due from correspondent banks, federal funds sold, and available-for-sale
investments. The Bank's primary liquidity ratio, the ratio of liquid assets to
total assets, was 16.4% at September 30, 2000 compared to 20.6% at December 31,
1999 and 21.2% at September 30, 1999. Another indication of a company's
liquidity is its ratio of net loans to total deposits. The lower the ratio the
more liquid the Company's current position. However, since loans are generally
the highest yielding earning asset, the Bank attempts to maximize earnings
through the generation of additional loans, while maintaining sufficient
liquidity to meet its obligations. The loan-to-deposit ratio as of September 30,
2000 was 80.7% compared to a ratio of 75.9% at December 31, 1999 and 75.1% ratio
at September 30, 1999.
Tehama Bancorp's sources of liquidity consist of overnight funds sold
to correspondent banks, unpledged marketable investments, a Federal funds line
of credit with a correspondent bank, a line of credit with the Federal Home Loan
Bank of San Francisco backed by a pledge of marketable investments, and loans
held for sale. Additional liquidity can be obtained through new borrowings from
the Federal Home Loan Bank of San Francisco secured by a pledge of eligible real
estate loans or sales of eligible real estate loans or the guaranteed portion of
government guaranteed loans in the secondary market, promotional activities to
attract new deposit accounts within the Bank's market areas, increasing the rate
paid on interest-bearing deposit accounts, and raising deposits, primarily time
certificates of deposit, outside the Bank's market area through the use of
brokered certificates of deposit or the use of national certificate of deposit
quotation services. The Bank has not obtained brokered certificates of deposit
in the past and does not currently have any brokered certificates of deposit on
its books.
Capital adequacy is generally quantified by measures established by
regulatory agencies and requires the Company and the Bank to maintain minimum
amounts of capital and ratios of capital to assets. Overall capital is monitored
by management on a daily basis and reported to the Company's Board of Directors
on a monthly basis. The following table reflects the Company's capital ratios as
of September 30, 2000 compared to the minimum regulatory requirement and the
minimum requirement for "well-capitalized" institutions.
<TABLE>
<CAPTION>
WELL
COMPANY BANK MINIMUM CAPITALIZED
------- ---- ------- -----------
<S> <C> <C> <C> <C>
Leverage Ratio 9.4% 7.6% 4.0% 5.0%
Tier 1 Risk-Based Capital Ratio 11.9% 9.7% 4.0% 6.0%
Total Risk Based Capital Ratio 13.1% 10.9% 8.0% 10.0%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is
subject.
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 SECURITY HOLDERS - Nome
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the Exhibit Index to this report are
furnished herewith and incorporated by reference.
(b) Form 8-K, pertaining to a Definitive Agreement and Plan of
Reorganization and Merger was filed on September 27, 2000.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company duly caused this report to be signed by the undersigned thereunto duly
authorized.
<TABLE>
<CAPTION>
<S> <C>
November 8, 2000 BY: /s/ RANDALL A. SHELL
-------------------------------- ------------------------------------
Date Randall A. Shell
Senior Vice President &
Chief Financial Officer
November 8, 2000 BY: /s/ WILLIAM P. ELLISON
-------------------------------- ------------------------------------
Date William P. Ellison
President & Chief Executive
Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule Worksheet
</TABLE>
