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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
/_/ 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 Identification No.)
incorporation or organization
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
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock; No Par Value; 1,713,694 shares outstanding (March 6, 2000)
(Title of Class)
Aggregate market value of the voting stock held by non-affiliates: $18,594,240
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. /X/
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT TO SECURITY HOLDERS FOR FISCAL
YEAR ENDED DECEMBER 31, 1999 (PART II)
PROXY STATEMENT FOR 2000 ANNUAL MEETING OF SHAREHOLDERS (PART III)
The Index of Exhibits is located on page 11
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TABLE OF CONTENTS
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PART I.....................................................................................................2
ITEM 1. BUSINESS........................................................................................2
ITEM 2. PROPERTIES.......................................................................................6
ITEM 3. LEGAL PROCEEDINGS................................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................7
ITEM (*) EXECUTIVE OFFICERS OF THE REGISTRANT...........................................................7
PART II....................................................................................................7
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................7
ITEM 6. SELECTED FINANCIAL DATA..........................................................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.......................................................7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............7
PART III...................................................................................................7
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................8
ITEM 11. EXECUTIVE COMPENSATION.........................................................................8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................8
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................8
SIGNATURES.................................................................................................9
INDEX OF EXHIBITS.........................................................................................11
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PART I
ITEM 1. BUSINESS
GENERAL. Tehama Bancorp (the "Company") was organized as a California
corporation in January 1997 for the purpose of reorganizing Tehama Bank (the
"Bank") as the wholly-owned subsidiary of the Company. This transaction was
approved by the shareholders of the Bank at the 1997 Annual Meeting of the Bank,
and was made effective as of the close of business June 30, 1997. The Company is
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and reports annually to and is examined by the
Federal Reserve Board. The Common Stock of the Company is registered with the
Securities and Exchange Commission (the "SEC") pursuant to section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
Company files periodic reports and proxy materials with the SEC pursuant to
sections 13 and 14 of the Exchange Act.
The Bank is the Company's only subsidiary, and the Company engages in no
business other than indirectly in the business conducted by the Bank, which was
incorporated as a California banking corporation under the name Tehama County
Bank on March 15, 1984, and received its Certificate of Authority to commence
banking operations on August 30, 1984. Effective February 11, 1997, the Bank
changed its name to Tehama Bank.
OFFICES. The Bank's headquarters is located at 239 South Main Street and its
main office is located at 333 Main Street, Red Bluff, Tehama County, California.
Branch offices are located at 7843 Highway 99E, in the unincorporated community
of Los Molinos, Tehama County; at 2025 Pillsbury Road, Chico, Butte County; at
301 Walker Street, Orland, Glenn County; at 160 North Butte Street, Willows,
Glenn County, and 1770 Pine Street, Redding, Shasta County.
The Bank's main office in Red Bluff, its Chico, Orland, Willows and Redding
offices all maintain the same lobby hours (9:00 A.M. through 5:00 P.M., Monday
through Thursday, and 9:00 A.M. through 6:00 P.M. on Fridays). The Bank's Los
Molinos office maintains lobby hours of 9:00 A.M. through 4:00 P.M., Monday
through Thursday, and 9:00 A.M. through 5:00 P.M. on Friday. The Red Bluff,
Chico, Orland and Willows offices also maintain drive-up windows for
transactions during the hours of 8:00 A.M. through 5:30 P.M., Monday through
Thursday, and 8:00 A.M. through 6:00 P.M. on Friday. The Redding office
maintains a drive-up window for transactions during the hours of 8:00 A.M.
through 5:00 P.M., Monday through Thursday, and 8:00 A.M. through 6:00 P.M. on
Friday. Additionally, ATMs are available at the Red Bluff, Chico, Orland,
Willows and Redding offices. The Los Molinos office does not have either a
drive-up window or an ATM.
SERVICES. The Bank conducts a commercial banking business including accepting
demand, savings and time deposits, issuing letters of credit, and making
commercial, real estate, and consumer loans. It also offers installment note
collection, issues cashier's checks, sells traveler's checks, acts as a licensed
merchant bankcard sales clearer, and provides the following: 24-hour automated
teller service, bank-by-mail and night depository services, safe deposit boxes,
and other customary banking services. For more information about the Bank's
Merchant Card Processing segment, refer to Footnote 17, Segment Information, in
the Notes to Consolidated Financial Statements. Most of the Bank's customers are
individuals and small businesses. The Bank is a member bank of the Federal
Reserve System, and the accounts of its depositors are insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank does not offer trust services
or international banking services and does not plan to do so in the near future.
LEASING ACTIVITIES. During 1996, the Bank entered into a joint venture with
Humboldt Bank, Eureka, California ("Humboldt"), to organize and share equally in
a subsidiary leasing company. Bancorp Financial Services ("BFS") was organized
as a California corporation on November 25, 1996, and the Bank and Humboldt each
contributed $2 million towards its capitalization as of January 2, 1997. Both
Humboldt and the Bank extend credit to BFS and purchase (on a non-recourse
basis) leases originated by BFS, both of which types of transactions provide
additional funding for its operations. BFS' offices are located at 3 Park Center
Drive, Suite 100, in Sacramento, California. The company engages in equipment
leasing in the so-called "small ticket" segment of the industry, which includes
leases of $100,000 or less. BFS' business plan is to acquire such leases from
independent lessors or brokers through brokerage or discount, to service them
and, at predetermined intervals, package and resell them to investors. Income to
the company is generated through spreads on its lease portfolio, gains on sales,
and ongoing fees and charges. The company's board of directors includes BFS
Chief Executive Officer Kevin D. Cochrane, three members from the Humboldt Board
of Directors and three members from the Bank's Board of Directors. Effective
April 1, 1998 the Bank transferred its interest in BFS to Tehama Bancorp, the
Bank's parent Holding Company.
LENDING ACTIVITIES. As of the close of business on December 31, 1999, the Bank's
loan portfolio consisted of $68.1 million in real estate loans (including $9.0
million in real estate construction loans and $23.7 million in commercial real
estate loans), $33.8 million in commercial loans (including $6.2 million in
commercial leases), and $43.2 million in installment loans to individuals for
household, family and other personal expenditures. Comparable segments of the
loan portfolio as of December 31, 1998 were carried at values of $59.3 million,
$31.4 million, and $31.9 million, respectively.
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As of December 31, 1999 and 1998, the bank had outstanding credit commitments
(including standby letters of credit) of $27.4 million and $18 million,
respectively. The Bank expects 40 percent of its commitments to lend as of
December 31, 1999 will not be exercised within the current year.
At December 31, 1999, the Bank's loan limit to individual customers for
unsecured loans was $2.5 million and the limit for unsecured and secured loans
combined was $4.3 million. For customers desiring loans in excess of the Bank's
lending limits, the Bank may loan on a participation basis, with its
correspondent banks taking the amount of the loan in excess of the Bank's
lending limits. In other cases, the Bank may refer such borrowers to larger
banks or other lending institutions. No material portion of the Bank's loans is
concentrated within a single industry or group of related industries.
DEPOSITS. Approximately 48% of the Bank's deposits are attracted from and around
the city of Red Bluff. A material portion of the Bank's deposits has not been
obtained from a single person or a few persons, the loss of any one or more of
which would have a materially adverse effect on the business of the Bank.
Furthermore, (1) the extent to which the business of the Bank is seasonal is
insignificant; (2) the importance of, and risks attendant to, foreign sources
and applications of the Bank's funds is negligible; and (3) the Bank as of
December 31, 1999 held $70,203 in United States agency deposits and $1,946,730
in local agency deposits.
EMPLOYEES. At March 1, 2000 the Bank employed 126 persons (34 of whom were
part-time employees), including 5 principal officers and a total of 54 other
officers. None of the Bank's employees is presently represented by a union or
covered under a collective bargaining agreement. Management of the Bank believes
that its employee relations are excellent.
COMPETITION. The Bank's primary service areas include Tehama, Butte, Glenn
and Shasta counties, and contain a total of 88 competitive banking offices,
of which 37 are offices of major chain banking systems and 51 are offices of
other independent banks. On June 30, 1999, amounts reported by state and
federal agencies indicated that these banking offices held approximately $3.1
billion in total deposits, averaging approximately $35.2 million per office.
The service areas also contain the offices of 11 savings and loan
associations, with approximately $694 million in total deposits as of June
30, 1999.
The banking business in California generally, and in the Bank's primary service
areas specifically, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank are their ability to finance wide ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. Such banks offer certain services such as trust services and
international banking which are not offered directly by the Bank (but are
offered indirectly through correspondent institutions) and, by virtue of their
greater total capitalization (legal lending limits to an individual customer are
limited to a percentage of a bank's total capital accounts), such banks have
substantially higher lending limits than does the Bank. Other entities, both
governmental and private, seeking to raise capital through the issuance and sale
of debt or equity securities, also provide competition for the Bank in the
acquisition of deposits.
Commercial banks also compete with other types of financial institutions
(savings associations and credit unions) and with other markets for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for available funds with money market
instruments. In periods of high interest rates, such money market funds have
provided substantial competition to banks for deposits, and it is anticipated
they may continue to do so in the future.
In order to compete with other financial institutions in its primary service
areas, the Bank relies principally upon (a) direct personal contact by officers,
directors, employees and shareholders, (b) extended lobby hours, and (c)
specialized promotions. The Bank focuses its promotional activities on the
advantages of dealing with an independent bank.
SUPERVISION AND REGULATION. The Company and the Bank currently are directly
supervised and regulated by the California Commissioner of Financial
Institutions (the "Commissioner"), the Federal Reserve Board and the FDIC, which
govern most aspects of their business, including capital requirements, loans,
investments, mergers and acquisitions, borrowings, dividends, branch locations
and other matters.
In addition, the Bank's business is affected by general economic conditions and
by the monetary and fiscal policies of the United States. These policies
influence, for example, the Federal Reserve Board's open market operations in
U.S. government securities, the reserve requirements imposed upon commercial
banks, the discount rates applicable to borrowings from the Federal Reserve
System by member banks, and other similar matters which impact the growth of the
Bank's loans, investments and deposits and the interest rates which the Bank
charges and pays.
Proposals to change the laws and regulations governing the operations and
taxation of financial institutions are frequently made in Congress, in the
California legislature and before various regulatory and professional agencies.
The likelihood of any major changes
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and the impact such changes might have are difficult to predict with accuracy.
Certain significant recent laws and regulations are discussed below.
INTERSTATE BANKING. Since 1995, California and federal law have (1) permitted
interstate merger transactions; (2) prohibited interstate branching through the
acquisition of a branch business unit located in California without acquisition
of the whole business unit of the California bank; and (3) prohibited interstate
branching through de novo establishment of California branch offices. Initial
entry into California by an out-of-state institution must be accomplished by
acquisition of or merger with an existing whole bank which has been in existence
for at least five years.
CAPITAL REQUIREMENTS. Federal regulation imposes upon all FDIC-insured financial
institutions a variable system of risk-based capital guidelines designed to make
capital requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the Federal
Reserve Board's risk-based capital guidelines, the Company (on a consolidated
basis) and the Bank are required to maintain total risk-based capital equal to
at least 8 percent of risk-weighted assets. Assets and off-balance sheet items
are categorized by the guidelines according to risk, and certain assets
considered to present less risk than others permit maintenance of capital at
less than the 8 percent ratio. The guidelines establish two categories of
qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2
comprising supplementary capital requirements. At least one-half of the required
capital must be maintained in the form of Tier 1 capital. For the Bank and the
Company, Tier l capital includes only common stockholders' equity and retained
earnings, but qualifying perpetual preferred stock would also be included
without limit if the Company or the Bank were to issue such stock. Tier 2
capital includes, among other items, certain types of intermediate term and
perpetual preferred stock, mandatory convertible debt securities, subordinated
debt and a limited amount of the allowance for loan and lease losses.
The guidelines also require all insured institutions to maintain a minimum
leverage ratio of 3 percent Tier 1 capital to total average assets (the
"leverage ratio"). The Federal Reserve Board emphasizes that the leverage ratio
constitutes a minimum requirement for the most well-run banking organizations.
All other banking organizations are required to maintain a minimum leverage
ratio ranging generally from 4 to 5 percent. The Company's and the Bank's
required minimum leverage ratio is 4 percent.
Federal regulations require that insured banks with significant "trading
activity" adjust their risk-based capital calculations in order to maintain
adequate capital against such market risk exposures as changes in the general
level of interest rates, equity prices, foreign exchange rates and commodity
prices. The Bank currently has no trading assets or liabilities. However, the
Uniform Financial Institutions Rating System (the "CAMELS" system) applicable to
the Bank has included for all bank regulatory examinations since 1997 a rating
for sensitivity to market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange rates, commodity
prices or equity prices may adversely affect an institution's earnings and
capital.
As of December 31, 1999, the Company's and the Bank's total risk-based capital
ratios were approximately 13.9 percent and 12.0 percent, and their leverage
ratios were approximately 9.4 percent and 7.9 percent, respectively. It is not
expected that compliance with the risk-based capital guidelines or minimum
leverage requirements will have a materially adverse effect on the business of
the Company or the Bank in the reasonably foreseeable future. Nor does the Bank
expect that its sensitivity to market risk will adversely affect its overall
CAMELS rating.
DEPOSIT INSURANCE ASSESSMENTS. The Bank's deposit insurance assessment rate is
at the lower end of the range (from $0 to $0.27 per $100 of deposits) imposed by
the FDIC in 1995. The Bank does not anticipate that its deposit insurance
assessment for 2000 will differ materially from its assessment for 1999
($18,236).
PROMPT CORRECTIVE ACTION. Prompt Corrective Action Regulations (the "PCA
Regulations") of the federal bank regulatory agencies establish five capital
categories in descending order (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized), assignment to which depends upon the institution's total
risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio.
Institutions classified in one of the three undercapitalized categories are
subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as a well-capitalized bank since adoption of the PCA Regulations.
COMMUNITY REINVESTMENT ACT. Community Reinvestment Act ("CRA") regulations
effective as of July 1, 1995 evaluate banks' lending to low and moderate income
individuals and businesses across a four-point scale from "outstanding" to
"substantial noncompliance," and are a factor in regulatory review of
applications to merge, establish new branches or form bank holding
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companies. In addition, any bank rated in "substantial noncompliance" with the
CRA regulations may be subject to enforcement proceedings. The Bank has a
current rating of "satisfactory" CRA compliance.
SAFETY AND SOUNDNESS STANDARDS. Federal bank regulations establish for insured
financial institutions safety and soundness standards for (1) internal controls,
information systems and internal audit systems; (2) loan documentation; (3)
credit underwriting; (4) interest rate exposure; (5) asset growth; (6)
compensation, fees and benefits; and (7) excessive compensation. If an agency
determines that an institution fails to meet any standard established by the
guidelines, the agency may require the financial institution to submit to the
agency an acceptable plan to achieve compliance with the standard. Agencies may
elect to initiate enforcement action in certain cases where failure to meet one
or more of the standards could threaten the safe and sound operation of the
institution. The Bank has not been and does not expect to be required to submit
a safety and soundness compliance plan because of a failure to meet any of the
safety and soundness standards.
THE FINANCIAL SERVICES MODERNIZATION ACT OF 1999. The Financial Services
Modernization Act of 1999 (the "Act), potentially the most significant banking
legislation in many years, eliminates most of the remaining depression-era
"firewalls" between banks, securities firms and insurance companies. This
liberalization of United States banking and financial services regulation
applies both to domestic institutions and foreign institutions conducting
business in the United States. The common ownership of banks, securities firms
and insurance firms is now possible, as is the conduct of commercial banking,
merchant banking, investment management, securities underwriting and insurance
within a single financial institution using a "financial holding company"
structure authorized by the Act.
Before the Act, significant restrictions existed on the affiliation of banks
with securities firms and on the direct conduct by banks of securities dealing
and underwriting and related securities activities. Banks were also (with minor
exceptions) prohibited from engaging in insurance activities or affiliating with
insurers. The Act removes these restrictions.
The Banking Act of 1933, known as the Glass-Steagall Act ("Glass-Steagall)
sought to insulate banks as depository institutions from the perceived risks of
securities dealing and underwriting, and related activities. The Act repeals
Section 20 of Glass-Steagall which prohibited banks from affiliating with
securities firms. Bank holding companies that can qualify as "financial holding
companies" can now acquire securities firms or create them as subsidiaries, and
securities firms can now acquire banks or start banking activities through a
financial holding company.
The Act substantially eliminates the prohibition under the Bank Holding Company
Act of 1956 (the "BHCA") on affiliations between banks and insurance companies.
Bank holding companies which qualify as financial holding companies can now
insure, guarantee, or indemnify against loss, harm, damage, illness, disability,
or death; issue annuities; and act as a principal, agent, or broker regarding
such insurance services. As a result, a foreign bank with U.S. operations and a
foreign insurer, which previously would have been required to divest either its
insurance or banking operations, may now freely affiliate. Likewise, a foreign
bank or insurer may now acquire a U.S. insurer or bank.
The BHCA created the system of bank holding companies: a bank holding company is
any company which has direct or indirect control of a bank. By establishing a
bank holding company, a bank could enter into non-banking activities "closely
related to banking" through operating subsidiaries of the bank holding company.
While the list of activities "closely related to banking" has been expanded and
its interpretation liberalized over the years by the Federal Reserve Board, the
list of such activities (consistent with the restrictions of Glass-Steagall) has
been the principal constraint on affiliations between banks, securities firms
and insurance companies and on other financial activities in which banks wished
to engage.
In order for a commercial bank to affiliate with a securities firm or an
insurance company pursuant to the new Act, its bank holding company must qualify
as a financial holding company. A bank holding company will qualify if (i) its
banking subsidiaries are "well capitalized" and "well managed" and (ii) it files
with the Federal Reserve Board a certification to such effect and a declaration
that it elects to become a financial holding company.
At the core of the changes effected by the Act is its amendment to the BHCA,
which permits bank holding companies that qualify as financial holding companies
to engage in activities, and acquire companies engaged in activities, that are
financial in nature or incidental to such financial activities. Financial
holding companies are also permitted to engage in activities that are
complementary to financial activities if the Federal Reserve Board determines
that the activity does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system in general. These standards
expand upon the list of activities "closely related to banking" which have to
date defined the permissible activities of bank holding companies.
One further effect of the Act is to require that federal banking and securities
regulatory agencies prescribe regulations to implement the policy that financial
institutions must respect the privacy of their customers and protect the
security and confidentiality of customers' non-public personal information.
Implementing regulations have recently been issued for comment by all of the
federal bank regulatory agencies and the SEC. These regulations will require, in
general, that financial institutions
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(1) may not disclose non-public personal information of customers to
non-affiliated third parties without notice to their customers, who must have
opportunity to direct that such information not be disclosed; (2) may not
disclose customer account numbers except to consumer reporting agencies; and (3)
must give prior disclosure of their privacy policies before establishing new
customer relationships.
The Company and the Bank have not determined whether or when either of them may
seek to acquire and exercise new powers or activities under the Act, and the
extent to which competition will change among financial institutions affected by
the Act has not yet become apparent.
The above description of the business of the Company and the Bank should be read
in conjunction with the Management's Discussion and Analysis of Financial
Condition and Results of Operations (Item 7 of this report) contained in the
Company's 1999 Annual Report to Shareholders, which is incorporated here by
reference.
ITEM 2. PROPERTIES.
The Bank leases its Orland and Redding branch offices, and owns the land and
buildings in which its Chico, Los Molinos and Willows branch offices are
located. The Bank leases from a director of the Bank the building in which its
Red Bluff branch office is located, leases the building in which its Red Bluff
administrative headquarters is located and, subject to the ground lease
described below, owns the building (adjacent to its administrative offices and
operations center) in which its loan servicing operations are conducted. The
Bank's total rentals for premises and equipment for fiscal year 1999 were
approximately $202,933 and its minimum future commitments under operating
leases, as of December 31, 1999, totaled $1,310,319.
The Bank acquired the right to purchase its former head office in which its loan
servicing operations are now conducted, by assignment in 1988 from two of the
Bank's directors, Orville Jacobs and John Koeberer. The building, a two-story
commercial building with approximately 7,700 square feet of space, was acquired
for a price of $25,000. The assignment contains a right of first refusal in
favor of Messrs. Jacobs and Koeberer whereby they have the right to repurchase
the building from the Bank in the event that the Bank elects to sell, vacate or
sublet the building to a party other than a financial institution. This right of
first refusal has a term concurrent with the terms of the underlying ground
lease. The ground lease provides for an initial term of eight (8) years that
terminated on December 31, 1988. It further provides for four (4) additional
options to extend the term of the ground lease for a period of eight (8) years
each, or a total of 32 years. The base rent is to be adjusted during each
extension term in accordance with the fair market rental value of the land as of
the commencement of the applicable extension term. The current lease term, at a
monthly rental of $2,310, expires December 31, 2004.
The Bank's administrative offices are leased for an initial term of ten (10)
years, and further provides for one (1) additional option to extend the term of
the lease for a period of five (5) years. The current lease term, at a monthly
rental of $2,860, expires March 15, 2004.
The Bank's operations center is leased on a month-to-month basis, with a sixty
(60) day notice of termination requirement, for a monthly rental of $500.
The Bank acquired the Willows office at a combined value (land and building) of
approximately $340,000 in connection with its 1997 acquisition of deposits and
assets on Wells Fargo Bank branches located in Willows and Orland, California.
The building area is approximately 6,400 square feet. The Orland office is a
leased facility also acquired in connection with the Wells Fargo Bank
transaction. The Bank assumed existing leases on the building and adjacent
parking lot with the second of three five-year options commencing August 1,
1997. Monthly payments on the building and lot leases are $2,210 and $350,
respectively.
The Bank during 1999 moved its main office in Red Bluff to a building which,
with an adjacent parking area, the Bank leases from director Harry Dudley. The
leases provides for an initial term of five (5) years, and further provides for
four (4) additional options to extend the term of the lease for a period of five
(5) years each, or a total of twenty (20) years. The current lease term, at a
monthly rental of $2,900 for the building and $575 for the parking lot, expires
August 1, 2004. The base monthly rents are to be increased by 2% for each
successive twelve month period of the leases beginning in year two and
continuing through year ten, encompassing the initial period and the first
extension option period. Monthly lease payments in years eleven through
twenty-five, encompassing the second through fourth extension option periods
shall be negotiated each time the lease is extended.
The Redding office is currently leased for an initial term of ten (10) years,
and further provides for two (2) additional options to extend the term of the
lease for a period of five (5) years each, or a total of ten (10) years. The
current lease term, at a monthly rental of $7,454, expires July 15, 2008.
See further information concerning the Bank's properties in Exhibits 10.1, 10.2
and 10.3, which are incorporated here by reference.
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ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to the Company's and the Bank's business, to which
the Company or the Bank is a party or of which any of their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item (*) Executive Officers of the Registrant.
The following table presents certain information regarding the
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) SINCE
---- --- ----------- -----
<S> <C> <C> <C>
William P. Ellison 51 President, 1991
Chief Executive
Officer
Wayne Shaffer 56 Senior Vice President, 1997
Chief Credit Officer
W. Steven Gilman 44 Senior Vice President, 1995
Chief Operating Officer
Randall A. Shell 49 Senior Vice President, 2000
Chief Financial Officer
Helen M. McIntosh 41 Senior Vice President, 1984
Director of Operations
and Technology
</TABLE>
(*) Included pursuant to General Instruction G(3).
PART II
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Those portions of the Company's 1999 Annual Report to Shareholders
which are incorporated by reference in Items 5-8 below are filed as Exhibit 13
to this report. Those portions not so incorporated are not filed and are
provided for information of the SEC only.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
See information under the caption "Market for the Company's Stock" in
the Company's 1999 Annual Report to Shareholders, which information is
incorporated here by reference.
ITEM 6. SELECTED FINANCIAL DATA.
See information under the caption "Five Year Selected Financial Data"
in the Company's 1999 Annual Report to Shareholders, which information is
incorporated here by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1999
Annual Report to Shareholders, which information is incorporated here by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
See Independent Auditor's Report, Consolidated Balance Sheet,
Consolidated Statement of Income, Consolidated Statement of Changes in
Shareholders' Equity, Consolidated Statement of Cash Flows, and Notes to
Consolidated Financial Statements, in the Company's 1999 Annual Report to
Shareholders, which report, financial statements and notes are incorporated here
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
--------
7
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors required by this item is
incorporated by reference from the Company's definitive proxy statement for the
2000 Annual Meeting of Shareholders of the Company filed with the SEC,
including, under the caption "Election of Directors of the Company," (i) the
table of directors (not including the share information included therein nor the
footnotes thereto), and (ii) the description of the business experience of
director-nominees.
The information concerning executive officers required by this item is
presented at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference
from the Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders of the Company filed with the SEC, including all information
under the caption "Compensation and Certain Transactions" except for
information under the subheadings "Indebtedness of Management" and
"Transactions with Management." See also the starred (*) exhibits in the list
of exhibits in item 14, which are incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference
from the Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders of the Company filed with the SEC, including information under
the caption "Principal Shareholders" and, under the caption "Election of
Directors of the Company," share information in the table of directors and
footnotes thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference
from the Company's definitive proxy statement for the 2000 Annual Meeting of
Shareholders filed with the SEC, including under the caption "Compensation
and Certain Transactions" all information under the subheadings "Indebtedness
of Management" and "Transactions with Management."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
The following financial statements of Tehama Bancorp included in the
Annual Report of the Company to its Shareholders for the year ended December 31,
1999, are incorporated by reference in Item 8 of this report:
Independent Auditor's Report dated February 3, 2000 (page 1 of Annual
Report).
Consolidated Balance Sheet: December 31, 1999 and 1998 (page 2 of
Annual Report).
Consolidated Statement of Income: Years Ended December 31, 1999, 1998
and 1997 (page 3 of Annual Report).
Consolidated Statement of Changes in Shareholders' Equity: Years
Ended December 31, 1999, 1998 and 1997
(pages 4-5 of Annual Report).
Consolidated Statement of Cash Flows: Years Ended December 31,
1999, 1998 and 1997 (pages 6-7 of Annual Report).
Notes to Consolidated Financial Statements (pages 8 through 31 of
Annual Report).
(a)(2) Financial Statement Schedules:
All Schedules are omitted because they are not applicable or not
required, or because the information is included in the financial statements
or the notes thereto or is not material.
(a)(3) Exhibits filed with this report are listed in the Index to Exhibits
below, which is incorporated here by reference:
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TEHAMA BANCORP
By: /S/ William P. Ellison
---------------------------
William P. Ellison
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 24, 2000 /s/ William P. Ellison
------------------------------------------------------------------------
William P. Ellison, President and Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 2000 /s/ Randall A. Shell
------------------------------------------------------------------------
Randall A. Shell, Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: March 24, 2000 /s/Henry C. Arnest, III
------------------------------------------------------------------------
Henry Clay Arnest III, Director
Date: March 24, 2000 /s/ Louis J. Bossetti
------------------------------------------------------------------------
Louis J. Bossetti, Director
Date: March 24, 2000 /s/ Harry Dudley
------------------------------------------------------------------------
Harry Dudley, Director
Date: March 24, 2000 /s/ William P. Ellison
------------------------------------------------------------------------
William P. Ellison, Director
Date: March 24, 2000 /s/ Garry D. Fish
------------------------------------------------------------------------
Garry D. Fish, Director
Date: March 24, 2000 /s/ Max M. Froome
------------------------------------------------------------------------
Max M. Froome, Director
Date: March 24, 2000 /s/ Orville K. Jacobs
------------------------------------------------------------------------
Orville K. Jacobs, Director
Date: March 24, 2000 /s/ Gary C. Katz
------------------------------------------------------------------------
Gary C. Katz, Director
Date: March 24, 2000 /s/ John W. Koeberer
------------------------------------------------------------------------
John W. Koeberer, Director and Chairman of the Board
Date: March 24, 2000 /s/ Raymond C. Lieberenz
------------------------------------------------------------------------
Raymond C. Lieberenz, Director and Secretary of the Board
Date: March 24, 2000 /s/ Leslie L. Melburg
------------------------------------------------------------------------
Leslie L. Melburg, Director
Date: March 24, 2000 /s/ Gary L. Napier
------------------------------------------------------------------------
Gary L. Napier, Director and Vice Chairman of the Board
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Date: March 24, 2000 /s/ Eugene F. Penne
------------------------------------------------------------------------
Eugene F. Penne, Director
Date: March 24, 2000 /s/ John D. Regh
------------------------------------------------------------------------
John D. Regh, Director
Date: March 24, 2000 /s/ Terrance A. Rust
------------------------------------------------------------------------
Terrance A. Rust, Director
</TABLE>
10
<PAGE>
INDEX OF EXHIBITS
-----------------
<TABLE>
<S> <C>
3.1+ Articles of Incorporation
3.2!! Bylaws, as amended
10.1+ (A) Lease Assignment Agreement dated February 22, 1988 (B) Ground lease
dated July 31, 1980 (C) Addendum to Lease dated February 6, 1981
10.1a Commercial Property Lease Agreement with Harry Dudley dated August 1,
1999.
10.2+ Assignment and Assumption of Agreement and Right of First Refusal, dated
February 25, 1988
10.3+ Purchase and Assumption Agreement dated October 15, 1996, between the
Bank and Wells Fargo Bank, N.A.
10.4* + (A) Tehama County Bank 1994 Stock Option Plan
X (E) Tehama Bancorp 1999 Stock Option Plan
10.5+ (A) Merchant Services Agreement with Cardservice International, Inc.,
effective July 1, 1994
(B) Lead Principal Member Agreement dated April 17, 1991
10.6 Addendum 2 to Merchant Services Agreement with Cardservice
International, Inc., dated March 24, 1999
10.7+ Service Agreement with First Data Resources, Inc., dated June 3, 1991,
as amended June 29, 1992, February 8, 1993, March 15, 1994, March 15,
1994 and March 1, 1994
10.7* +(A) Executive Salary Continuation Agreement dated June 17, 1993 with
William P. Ellison
++(B) Executive Salary Continuation Agreement dated September 24, 1997
with W. Steven Gilman
#(C) Amendment to Executive Salary Continuation Agreement with
William P. Ellison, dated January 1, 1998
10.7* # Tehama Bancorp Director Emeritus Program
10.10 PARA Shareholder Protection Rights Agreement dated July 23, 1999
13 The portions of the Tehama Bancorp 1999 Annual Report to Shareholders
which have been incorporated by reference in Items 5-8 herein are filed
with the SEC.
23 Consent of Perry-Smith & Co., LLP
27 Financial Data Schedule
(*) Indicates management contract or compensatory plan or arrangement.
(+) Incorporated by reference from the Company's Registration Statement on
Form S-4 No. 333-23525, filed with the SEC on March 18, 1997.
(++) Incorporated by reference from the Company's Report on Form 10-Q for the
quarterly period ended September 30, 1997, filed with the SEC.
(#) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, filed with the SEC.
(X) Incorporated by reference to the Company's Registration Statement No.
333-77241 on Form S-8 filed with the SEC on April 28, 1999
(PARA) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the SEC on July 28, 1999
(!!) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the SEC.
</TABLE>
11
<PAGE>
EXHIBIT 10.1A
COMMERCIAL PROPERTY LEASE AGREEMENT
THIS LEASE, between Harry Dudley HEREAFTER designated as Owner, And Tehama Bank
HEREAFTER designated as Tenant is executed in duplicate and is made and
effective as of August 1, 1999.
IT IS AGREED between the parties hereto as follows:
1. DESCRIPTION OF PREMISES: The Owner hereby leases to Tenant and Tenant
leases from Owner the following two premises: (1) premises located at 333
Main Street, in the city of Red Bluff, county of Tehama, State of California,
and (2) lot located on Washington Street, between Sycamore St. and Ash St.,
in the city of Red Bluff, county of Tehama, State of California, further
described on legal description attached. Each of these properties are further
described on the attached legal descriptions (Attachment A).
2. TERM: The term of this lease shall be for an initial period of five (5)
years, commencing on August 1, 1999, with four successive five year Extension
Option Periods. Landlord shall deliver possession of the premises to Tenant
by August 1, 1999. Any Tenant improvements necessary to prepare premise
number one for use as a bank facility are the responsibility of Tenant and
shall be constructed in accordance with paragraph 8 of this lease. Any
improvements, and their costs, necessary to prepare premise number two above
to be used as a parking facility are the responsibility of the Owner. Options
to extend the initial terms of this lease must be exercised at least ninety
days prior to the expiration of any lease period.
3. LEASE PAYMENTS: Tenant will pay Owner as follows:
PREMISE #1: $2,900.00 per month for the first twelve months, commencing
on the first date that Tenant makes premises open to the public
for Bank Business, with the lease payment for the first month
pro-rated from the date of opening to the end of the month.
Monthly lease payment for each successive twelve month period of
this lease, in years two through ten (this period encompasses
the initial period and the first Extension Option Period) shall
be increased by 2% of the amount of the preceding period.
Monthly lease payment in years eleven through twenty-five
(Extension Option Periods two, three and four) shall be
negotiated each time the lease is extended.
PREMISE #2: $575.00 per month for the first twelve months, commencing on
the first date that Tenant makes premises open to the public for
Bank Business, with the lease payment for the first month
pro-rated from the date of opening to the end of the month.
Monthly lease payment for each successive twelve month period of
this lease, in years two through ten (this period encompasses
the initial period and the first Extension Option Period) shall
be increased by 2% of the amount of the preceding period.
Monthly lease payment in years eleven through twenty-five
(Extension Option Periods two, three and four) shall be
negotiated each time the lease is extended.
All rents shall be paid to Owner pursuant to the instructions set forth
in attachment B.
4. USE: The premises are to be used for the operation of a Branch Banking
Office (premise #1), a parking facility (premise #2) and any other legally
permitted uses incidental thereto.
Tenant shall not vacate premises and subsequently assign or sublet premises
without the written consent of the Owner. Such consent shall not be
unreasonably withheld, delayed or conditioned. No consent shall be required
for any assignment to an affiliated entity (parent, subsidiary or other
affiliate) or to a successor entity (by stock or asset purchase or by
merger). No consent shall be required for the Bank to permit concurrent use
of part of the premises by any business acceptable to Tenant and compatible
with Tenant's business. Any assignment or subletting subject to Owner's
consent, without such consent, shall be void and, at the option of the Owner,
may terminate this lease.
12
<PAGE>
5. REPAIRS AND MAINTENANCE: Tenant shall at all times maintain both of the
premises in a clean, neat, and orderly condition.
Tenant shall keep and maintain each of the premises, including but not
limited to, the exterior entry and exit doors, cooling and heating units,
plumbing, plate glass and glazing, in good order, condition, and repair and
in compliance with all laws and regulations applicable thereto, during the
term of this lease.
Tenant shall pay for all utilities, licenses, permits, fees, and services
supplied to the premises in connection with the operation of the business
Tenant is conducting on these premises.
Tenant shall keep and maintain the roof, exterior walls, and all underground
plumbing in good repair.
6. INDEMNIFICATION OF OWNER: Tenant agrees to protect, indemnify, and save
Owner harmless from and against any and all liability to third parties
resulting from Tenant occupation and the use of the premises. Specifically
including, without limitation, any claim, liability, loss or damage arising
out of the death or injury to a person, work performed on the premises, and
the Tenant's failure to perform any duty. Tenant also agrees the indemnity
includes the cost of defense, attorney fees and court costs. Any damages,
claims or liability arising from the negligent or willful act or omission of
Owner or its agents, employees, contractors or invitees are excluded from the
indemnity.
7. INSURANCE: Tenant agrees to obtain liability insurance and keep said policy
or policies in force at all times during the term of the lease. Tenant shall
request insurer that Owner be placed on policy as additional insured. The
liability under such insurance shall not be less than $1,000,000.00.
Tenant agrees to obtain fire insurance on building, fixtures, equipment,
inventory of at least 80% of the insurable value and keep said policy in
force at all times during term of this lease. Tenant shall request insurer
that Owner be placed on the policy as a loss payee.
Tenant agrees to obtain and keep in force worker's compensation insurance
required by the laws of the State of California.
8. ALTERATIONS AND IMPROVEMENTS: Tenant shall be allowed to make
non-structural alterations, as it sees necessary to conduct its normal course
of business. Tenant agrees to remove improvements and restore premises to
original condition at the end of the Lease term unless Owner's written
approval of improvements is, or was previously, obtained. Ownership rights of
any alterations or improvements shall remain with Tenant.
Tenant shall keep the premises and the property in the premises free and
clear of any liens arising out of work performed, materials furnished, or any
obligation incurred by Tenant, and shall indemnify Owner and the premises and
improvements placed thereon from all claims, liens, demands, charges,
encumbrances, or litigation, and shall reimburse Owner for all loss, damage,
and expense, including attorney's fees, which Owner may suffer.
9. REMOVAL OF TRADE FIXTURES OF TENANT AT END OF TERM: Upon condition that
Tenant is in full and complete compliance with all provisions of this lease,
Tenant may remove all unattached moveable items belonging to Tenant. If certain
fixtures, alterations or improvements have occurred or been allowed per
paragraph 8, they may be removed if Tenant returns the premises to as good a
condition as existed before installation of same. Should damage occur to the
building due to such removal, Tenant agrees to repair said damage at its own
expense.
10. ACCEPTANCE OF PREMISES AS IS - SURRENDER AT END OF TERM: By entry
hereunder, Tenant accepts the premises as being in good and sanitary
condition and repair. Tenant agrees on the last day of said term or sooner
termination of this lease, to surrender unto Owner the premises in the same
condition as when received, reasonable use and wear, acts of God or damage
beyond the control of Tenant excepted. Tenant also agrees to remove all signs
relating to the Tenant.
11. CONDEMNATION: In the event of any assertion or claim by any governmental
entity against all or part of the premises, by way of condemnation or eminent
domain, the Tenant shall have the right to terminate the lease if it deems that
the claim adversely affects its ability to continue to conduct its business at
that location. Should the Tenant exercise its right to terminate the lease and
vacate the premises, any condemnation award would belong to the Owner. Should
the Tenant not exercise its right to terminate the lease and vacate the
premises, any condemnation award received would be made available by the Owner
to alter or improve the premises, or access to the premises, to correct any
deficiency that is a result of the condemnation/eminent domain action.
12. TAXES: Payment of property taxes on all premises is the responsibility of
the Tenant. The Owner is responsible for forwarding the property tax bill in a
timely manner to the Tenant.
13. WAIVER OF SUBROGATION: Owner and Tenant waive, for themselves and their
insurers, any claims they may have against each other to the extent that the
claims are covered by insurance.
14. DEFAULTS/REMEDIES: Tenant shall not be considered in default of any of the
terms or obligations of this lease unless it fails to pay or perform within
seven days after written notice of monetary default is received from Owner or it
fails to pay or perform within thirty days after written notice of non-monetary
default is received from Owner.
13
<PAGE>
15. COVENANT OF QUIET ENJOYMENT: Owner agrees not to disturb Tenant's rights
in the premises so long as Tenant performs and observes its obligations under
the lease.
16. FORCE MAJEURE: Tenant shall be excused from any failure to perform its
obligations if and so long as the failure is due to circumstances beyond its
reasonable control.
17. BINDING ON SUCCESSORS. The covenants and conditions herein contained
shall, subject to the provisions as to assignment, inure to the benefit of
and be binding on the heirs, successors, executors, administrators and
assigns of all parties hereto.
18. ENTIRE AGREEMENT: Owner and Tenant agree that there are no other
documents, agreements or understandings that define the nature of their
relationship, and that this lease agreement comprises the entire agreement
between the parties.
19. ATTORNEY FEES: Should any issue or dispute relative to this lease result
in litigation, the prevailing party in such litigation shall be entitled to
reimbursement of all attorney fees as a result of that litigation.
20. AMENDMENTS TO BE IN WRITING: This lease may be modified or amended only
by a writing duly authorized and executed by both Owner and Tenant. It may
not be amended or modified by oral agreement or understanding between parties
unless the same shall be reduced to writing duly authorized and executed by
both Tenant and Owner.
21. TENANT TERMINATION: Should Tenant wish to terminate this lease earlier
than the years agreed upon, Owner will release Tenant from its obligations
provided Tenant pays in US funds the equivalent of six months rent.
22. HOLDING OVER: Any holding over after the expiration of the term, with
the consent of Owner, shall be construed to be tenancy from month to month,
at the same rent Tenant was paying during the immediately preceding lease
term, and shall be on the same terms and conditions herein specified, so far
as applicable.
EXECUTED AT RED BLUFF, CALIFORNIA ON SEPTEMBER 22, 1999.
OWNER: TENANT: TEHAMA BANK
BY: /S/ HARRY DUDLEY BY: ./S/ WILLIAM P. ELLISON
---------------------------- -------------------------------
Harry Dudley William P. Ellison
Owner CEO, Tehama Bank
Tenant
14
<PAGE>
EXHIBIT 10.6
ADDENDUM 2
This is an addendum to the Agreement entered into by and between Cardservice
International, Inc., hereinafter "CARDSERVICE", and Tehama Bank, hereinafter
"BANK", on July 1, 1994.
The parties mutually desire amend the agreement as follows:
SECTION 2.1:
The August 1, 1996 Addendum to this Section is hereby revoked and is replaced
with the following:
Beginning March 1, 1999, and continuing each month there after the BANK
shall retain for itself that portion of the Merchant Fees for COVERED MERCHANTS
as follows:
<TABLE>
<S> <C>
Months 1 through 5 $90,000
Months 6 through 12 $80,000
Months 13 through 18 $70,000
Months 19 through 24 $60,000
Months 25 through 60 $50,000
</TABLE>
Additionally, BANK shall pay or credit CARDSERVICE monthly with 50% of the
earnings on all non-disbursed funds held in the Operating Account(s), Security
Account(s) and the Bancontrol Account(s). BANK shall provide a report showing
the earnings calculation.
Except for those amounts identified in sections 1.3, 1.4 and 2.3 a), b), c), d),
f), g), AND h), of this Agreement, CARDSERVICE shall be entitled to all
remaining funds.
SECTION 2.5:
This new section is to be added:
Processing Volume: The following are maximum volumes of Net Bankcard Sales to be
permitted each month:
<TABLE>
<S> <C>
Months 1 through 12 $120,000,000
Months 12 through 24 $140,000,000
Months 25 through 36 $160,000,000
Months 37 through 48 $180,000,000
Months 49 through 60 $200,000,000
</TABLE>
SECTION 3.2:
The existing Section 3.2 is hereby revoked and replaced with the following:
BANK agrees that until March 1, 2001, CARDSERVICE shall be the BANK'S exclusive
outside provider of merchant credit card marketing and business development
services.
At the termination of this agreement BANK shall assign, convey, and transfer to
CARDSERVICE any and all of BANK'S rights, titles and interests, including any
security interests, in the Covered Merchants without any additional
consideration and subject to applicable Card Association Rules. Accordingly,
BANK shall permit and authorize CARDSERVICE to transfer the Covered Merchants to
another financial institution selected by CARDSERVICE, and BANK agrees to fully
cooperate with CARDSERVICE and use its best efforts to carry out the transfers
contemplated by this Addendum. Without limiting the foregoing, at termination
BANK agrees, at CARDSERVICE'S request, to immediately transfer BINS, ICA's and
all Bancontrol and Security Deposits to another financial institution selected
by CARDSERVICE.
15
<PAGE>
BANK hereby agrees that, during the term of this Agreement, including any
renewal or extension thereof, and for a period of three (3) years following the
termination of this Agreement, BANK shall keep confidential and shall not use,
disclose or divulge for any purposes, other than a non-merchant BANK
relationship, any and all information with respect to Covered Merchants which
BANK has obtained, directly or indirectly, as a consequence of this Agreement.
SECTION 10:
This section shall have the following modification:
Unless renewed this Agreement shall terminate on March 1, 2004.
All other terms and conditions of the Agreement remain in force.
Any breach of this addendum shall constitute a breach of the July 1, 1994
Agreement and the August 1, 1996 Addendum.
IN WITNESS WHEREOF, each of the parties has caused this Addendum to be executed
on its behalf by a duly authorized representative on the day written below.
<TABLE>
<CAPTION>
TEHAMA BANK CARDSERVICE INTERNATIONAL, INC.
<S> <C>
NAME: /s/ WILLIAM E. ELLISON NAME: /s/ DON HEADLUND
--------------------------------------- ----------------------------------------
TITLE: PRESIDENT & CEO TITLE: CHIEF FINANCIAL OFFICER
--------------------------------------- ----------------------------------------
DATE: 3/24/99 DATE: 3/24/99
--------------------------------------- ----------------------------------------
</TABLE>
16
<PAGE>
EXHIBIT 13 TO 10-K
TEHAMA BANCORP 1999 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
AND
INDEPENDENT AUDITOR'S REPORT
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Tehama Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Tehama
Bancorp and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tehama Bancorp and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Perry-Smith & Co., LLP
Certified Public Accountants
Sacramento, California
February 3, 2000
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,157,451 $ 8,362,664
Federal funds sold 14,400,000
Investment securities (market value of $38,400,500 in 1999 and
$47,440,300 in 1998) (Note 2) 38,513,743 47,092,556
Loans and leases, less allowance for loan and lease losses of
$2,148,074 in 1999 and $2,080,831 in 1998 (Notes 3, 9 and 13) 143,025,745 119,009,536
Bank premises and equipment, net (Note 4) 2,716,042 2,337,327
Investment in leasing company (Note 5) 2,793,416 2,335,967
Accrued interest receivable and other assets (Notes 7, 12 and 16) 7,587,728 6,243,914
--------------- ---------------
$ 211,794,125 $ 199,781,964
--------------- ---------------
--------------- ---------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 50,686,125 $ 39,191,013
Interest bearing (Note 6) 137,781,272 141,319,598
--------------- ---------------
Total deposits 188,467,397 180,510,611
Short-term borrowings (Notes 2 and 8) 2,100,000
Accrued interest payable and other liabilities 2,588,756 1,560,096
--------------- ---------------
Total liabilities 193,156,153 182,070,707
--------------- ---------------
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
Preferred stock - no par value; 2,000,000 shares authorized;
none issued
Common stock - no par value; 4,000,000 shares authorized; 1,713,694 and
1,672,129 shares issued and outstanding
in 1999 and 1998, respectively 13,189,875 12,824,202
Retained earnings 6,301,718 4,908,485
Accumulated other comprehensive loss (Notes 2, 5 and 14) (853,621) (21,430)
--------------- ---------------
Total shareholders' equity 18,637,972 17,711,257
--------------- ---------------
$ 211,794,125 $ 199,781,964
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
2
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,171,325 $ 11,213,700 $ 10,135,028
Interest on Federal funds sold 374,576 1,146,637 626,727
Interest on investment securities:
Taxable 1,852,955 905,625 1,269,062
Exempt from Federal income taxes 611,767 583,934 583,198
-------------- --------------- --------------
Total interest income 14,010,623 13,849,896 12,614,015
Interest expense:
Interest on deposits (Note 6) 5,094,019 5,604,825 5,224,556
Interest on short-term borrowings (Note 8) 15,842 9,642
-------------- --------------- --------------
Total interest expense 5,109,861 5,614,467 5,224,556
-------------- --------------- --------------
Net interest income 8,900,762 8,235,429 7,389,459
Provision for loan and lease losses (Note 3) 1,325,000 1,113,000 1,705,000
-------------- --------------- --------------
Net interest income after provision for
loan and lease losses 7,575,762 7,122,429 5,684,459
-------------- --------------- --------------
Non-interest income:
Service charges 777,786 711,977 549,488
Gain on sale of loans 181,875 108,366 49,199
Gain on sale and call of investment securities
(Note 2) 9,546 28,885
Loan servicing fees 47,239 57,283 74,133
Merchant processing fees 1,072,419 1,335,672 1,322,564
Automatic teller machine servicing fees 451,530
Loan packaging fees 260,871
Undistributed income of investment in leasing
company (Note 5) 444,364 300,711 35,256
Other income 495,084 257,733 159,909
-------------- --------------- --------------
Total non-interest income 3,740,714 2,800,627 2,190,549
-------------- --------------- --------------
Other expenses:
Salaries and employee benefits (Notes 3 and 12) 4,289,689 3,790,753 2,796,756
Occupancy (Notes 4 and 9) 1,077,927 945,899 831,656
Other (Note 11) 2,892,647 2,325,734 2,332,830
-------------- --------------- --------------
Total other expenses 8,260,263 7,062,386 5,961,242
-------------- --------------- --------------
Income before income taxes 3,056,213 2,860,670 1,913,766
Income taxes (Note 7) 809,000 852,000 613,000
-------------- --------------- --------------
Net income $ 2,247,213 $ 2,008,670 $ 1,300,766
-------------- --------------- --------------
-------------- --------------- --------------
Basic earnings per share (Note 10) $ 1.32 $ 1.21 $ .81
------- ------- ------
------- ------- ------
Diluted earnings per share (Note 10) $ 1.32 $ 1.17 $ .78
------- ------- ------
------- ------- ------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
\<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- RETAINED
SHARES AMOUNT EARNINGS
------------ ------------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997 1,610,940 $ 12,225,722 $ 2,905,644
Comprehensive income (Note 14):
Net income 1,300,766
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities
Total comprehensive income
Stock options exercised and related tax benefit (Note 10) 17,351 112,042
Cash dividend - $.40 per share (644,376)
---------- ------------ -----------
Balance, December 31, 1997 1,628,291 12,337,764 3,562,034
Comprehensive income (Note 14):
Net income 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities
Total comprehensive income
Retirement of common stock (Note 10) (18,803) (260,559)
Stock options exercised and related tax benefit (Note 10) 62,641 746,997
Cash dividend - $.40 per share (662,219)
---------- ------------ -----------
Balance, December 31, 1998 1,672,129 12,824,202 4,908,485
---------- ------------ -----------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
(LOSS) INCOME EQUITY INCOME
--------------- ------------- -------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ (18,190) $ 15,113,176
Comprehensive income (Note 14):
Net income 1,300,766 $ 1,300,766
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities 28,070 28,070 28,070
------------
Total comprehensive income $ 1,328,836
============
Stock options exercised and related tax benefit (Note 10) 112,042
Cash dividend - $.40 per share (644,376)
------------ --------
Balance, December 31, 1997 9,880 15,909,678
Comprehensive income (Note 14):
Net income 2,008,670 $ 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (31,310) (31,310) (31,310)
------------
Total comprehensive income $ 1,977,360
============
Retirement of common stock (Note 10) (260,559)
Stock options exercised and related tax benefit (Note 10) 746,997
Cash dividend - $.40 per share (662,219)
------------ -----------
Balance, December 31, 1998 (21,430) 17,711,257
------------ -----------
</TABLE>
(Continued)
4
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- RETAINED
SHARES AMOUNT EARNINGS
------------ ------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1998 1,672,129 $ 12,824,202 $ 4,908,485
Comprehensive income (Note 14):
Net income 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities
Total comprehensive income
Retirement of common stock (Note 10) (18,684) (236,647)
Stock options exercised and related tax benefit (Note 10) 60,249 602,320
Cash dividend - $.50 per share (853,980)
---------- ------------ ------------
Balance, December 31, 1999 1,713,694 $ 13,189,875 $ 6,301,718
========= ============= ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) SHAREHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
----------------- -------------- -------------
Balance, December 31, 1998 $ (21,430) $ 17,711,257
Comprehensive income (Note 14):
Net income 2,247,213 $ 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (832,191) (832,191) (832,191)
-------------
Total comprehensive income $ 1,415,022
=============
Retirement of common stock (Note 10) (236,647)
Stock options exercised and related tax benefit (Note 10) 602,320
Cash dividend - $.50 per share (853,980)
------------- ------------
Balance, December 31, 1999 $ (853,621) $ 18,637,972
============= ============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Disclosure of reclassification amount, net of taxes (Note 14):
Unrealized holding losses arising during the year $ (839,548) $ (12,508)
Add: unrealized holding gains resulting from investment in leasing company 13,085
Less: reclassification adjustment for gains included in net income 5,728 18,802
----- ------
Net unrealized losses on available-for-sale investment securities $ (832,191) $ (31,310)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,247,213 $ 2,008,670 $ 1,300,766
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 1,325,000 1,113,000 1,705,000
Depreciation and amortization 424,756 331,672 263,929
Gain on sales and calls of investment
securities (9,546) (28,885)
(Accretion) amortization of investment
security (discounts) premiums, net (125,091) 1,668 27,823
Deferred loan origination (costs) fees, net (673,254) 63,383 (91,971)
Undistributed earnings of investment in
leasing company (444,364) (300,711) (35,256)
Provision for losses on other real estate 60,000
Gain on sale of other real estate (16,710) (23,959)
Write down of other assets 6,500
Loss on sale of other assets 1,095 45,226 45,399
(Increase) decrease in loans held for sale (47,923) 304,428 (229,428)
Increase in cash surrender value of life
insurance policies (150,769) (117,602) (65,204)
(Increase) decrease in accrued interest
receivable and other assets (297,053) 122,584 (220,378)
Increase (decrease) in accrued interest
payable and other liabilities 1,028,660 418,803 (312,331)
Deferred taxes 87,000 (122,000) (219,000)
Other 32,610
------------ ------------ ------------
Net cash provided by operating activities 3,388,124 3,840,236 2,205,390
------------ ------------ ------------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets
and liabilities of another bank 17,031,577
Proceeds from sales and calls of available-for-sale
investment securities 4,504,512 15,502,130 8,240,138
Proceeds from called held-to-maturity investment
securities 355,250 641,350 80,000
Proceeds from matured available-for-sale investment
securities 40,368,261 1,540,000 1,095,000
Proceeds from matured held-to-maturity investment
securities 1,767,800
Purchases of available-for-sale investment
securities (39,165,876) (33,188,997) (6,059,041)
Purchases of held-to-maturity investment
securities (996,037) (3,229,579) (225,000)
Principal payments received from mortgage-backed
available-for-sale investment securities 487,012 43,599 53,201
Net increase in loans (24,962,227) (1,762,474) (28,593,443)
Purchases of premises and equipment (758,237) (680,996) (508,258)
Purchases of other real estate (15,448)
Proceeds from sale of other real estate 266,365 399,271 49,618
Proceeds from sale of other foreclosed assets 76,684 207,333 143,506
Investment in leasing company (2,000,000)
Purchase of life insurance policies (380,000) (995,000) (355,000)
------------ ------------ ------------
Net cash used in investing activities (18,451,941) (21,523,363) (11,047,702)
------------ ------------ ------------
</TABLE>
(Continued)
6
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
and savings accounts $ 10,706,132 $ 21,951,669 $ 6,908,625
Net (decrease) increase in time deposits (2,749,346) 5,887,885 6,018,014
Proceeds from exercise of stock options 492,445 601,437 98,942
Net increase in short-term borrowings 2,100,000
Payment of cash dividends (853,980) (662,219) (644,376)
Retirement of common stock (236,647) (260,559)
------------ ------------ ------------
Net cash provided by financing activities 9,458,604 27,518,213 12,381,205
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents (5,605,213) 9,835,086 3,538,893
Cash and cash equivalents at beginning of year 22,762,664 12,927,578 9,388,685
------------ ------------ ------------
Cash and cash equivalents at end of year $ 17,157,451 $ 22,762,664 $ 12,927,578
============ =========== =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 5,125,173 $ 5,609,794 $ 5,028,411
Income taxes $ 70,000 $ 854,000 $ 875,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 216,706 $ 110,295 $ 78,957
Other assets acquired through foreclosure of
consumer loans $ 74,060 $ 198,067 $ 228,903
Net change in unrealized (loss) gain on
available-for-sale investment securities $ (1,392,529) $ (52,923) $ 48,498
Unrealized gain resulting from investment in
leasing company $ 13,085
Supplemental schedule related to acquisition:
On February 21, 1997, the Bank acquired or
assumed the following assets and liabilities
of another bank (Note 16):
Deposits assumed $ 18,141,712
Premises and equipment (480,226)
Loans (18,633)
Other liabilities assumed 47,218
------------
17,690,071
Premium paid for deposits (658,494)
------------
Cash acquired $ 17,031,577
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
-------
Tehama Bancorp (the "Company") was incorporated on January 15, 1997 and
subsequently obtained approval of the Board of Governors of the Federal
Reserve System to be a bank holding company. On June 30, 1997, Tehama
Bank (the "Bank") consummated a merger with Tehama Bancorp that was
effected through the exchange of one share of the Company's stock for
each share of the Bank's stock. The Bank is engaged in consumer and
commercial banking, offering products and services to individuals and
businesses in a four-county region.
The accounting and reporting policies of the Company and its subsidiary
conform with generally accepted accounting principles and prevailing
practices within the banking industry.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All material
intercompany transactions and accounts have been eliminated in
consolidation.
The Company's fifty percent investment in Bancorp Financial Services,
Inc., a leasing company, is accounted for by the equity method.
Although the Company owns fifty percent of the outstanding stock of the
leasing company, it does not have the ability to significantly
influence the financial and operating policies of Bancorp Financial
Services, Inc.
INVESTMENT SECURITIES
---------------------
Investments are classified into one of the following categories:
- Available-for-sale securities reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
- Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost, adjusted
for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on
the specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
LOANS HELD FOR SALE
-------------------
Loans held for sale consist of mortgage loans and are carried at the
lower of cost or market value. Market value is determined using the
specific identification method as of the balance sheet date. Unrealized
losses and realized gains and losses are determined on the specific
identification method and are reflected in non-interest income or other
expense. Loans held for sale are included on the consolidated balance
sheet in accrued interest receivable and other assets.
8
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
-----
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower of
principal balance or market value at the date of transfer adjusted for
accretion of discounts. Interest is accrued daily based upon
outstanding loan balances. However, when, in the opinion of management,
loans are considered to be impaired and the future collectibility of
interest and principal is in serious doubt, loans are placed on
nonaccrual status and the accrual of interest income is suspended. Any
interest accrued but unpaid is charged against income. Payments
received are applied to reduce principal to the extent necessary to
ensure collection. Subsequent payments on these loans, or payments
received on nonaccrual loans for which the ultimate collectibility of
principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical matter, at the loan's observable market price or the
fair value of collateral if the loan is collateral dependent. A loan is
considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due
(including both principal and interest) in accordance with the
contractual terms of the loan agreement.
Loan origination fees, commitment fees, direct loan origination costs
and purchase premiums and discounts on loans are deferred and
recognized as an adjustment of yield, to be amortized to interest
income over the contractual term of the loan. The unamortized balances
of deferred fees and costs and unearned loan discounts are reported as
components of net loans.
TRANSFERS AND SERVICING OF LOANS
--------------------------------
Servicing rights acquired through 1) a purchase or 2) the origination
of loans which are sold or securitized with servicing rights retained
are recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
subsequently amortized in proportion to and over the period of the
related net servicing income or expense. Servicing assets and
liabilities are periodically evaluated for impairment. Servicing assets
and liabilities were not material for the years ended December 31, 1999
and 1998.
Servicing rights on loans serviced for others with unpaid balances of
$14,630,000 were sold in December 1999. Loans with unpaid balances of
approximately $2,698,000 and $19,509,000 were being serviced for others
at December 31, 1999 and 1998, respectively. A gain of $85,500 is
reflected in non-interest income.
ALLOWANCE FOR LOAN AND LEASE LOSSES
-----------------------------------
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can
be expected to occur in the normal course of business. The
determination of the allowance is based on estimates made by
management, to include consideration of the character of the loan and
lease portfolio, specifically identified problem loans and leases,
potential losses inherent in the portfolio taken as a whole and
economic conditions in the Bank's service area. These estimates are
particularly susceptible to changes in the economic environment and
market conditions. The allowance is established through a provision for
loan and lease losses which is charged to expense.
OTHER REAL ESTATE
-----------------
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property,
net of estimated selling costs, is charged against the allowance for
loan and lease losses. A valuation allowance for losses on other real
estate is maintained to provide for temporary declines in value.
Subsequent gains or losses on sales or writedowns resulting from
permanent impairment are recorded in other income or expense as
incurred. On the balance sheet, other real estate is included in
accrued interest receivable and other assets.
9
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
BANK PREMISES AND EQUIPMENT
---------------------------
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of furniture, fixtures
and equipment are estimated to be three to ten years. Leasehold
improvements are amortized over the life of the related lease, or the
life of the asset, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
and amortization are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred.
INCOME TAXES
------------
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
The Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income taxes to the subsidiary represents
its proportionate share of the consolidated provision for income taxes.
CASH AND CASH EQUIVALENTS
-------------------------
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
EARNINGS PER SHARE
------------------
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS.
MERCHANT BANK CARD PROCESSING
-----------------------------
The Bank serves as a merchant processor, under contract with a third
party, for processing credit card transactions of selected merchants.
Processing fees are recorded as non-interest income and were based upon
a contractual percentage of valid credit card transactions processed
each month through February 1999. Beginning in March 1999, the Bank
earns a flat fee based on minimum processing levels. Prior to 1999,
selected direct costs of the Bank's merchant card processing personnel
were reimbursed by the program's marketing agent. The credit card
processing equipment and related software are assets of the third party
and are not reflected in the consolidated financial statements.
AUTOMATED TELLER MACHINE CASH SERVICES
--------------------------------------
The Bank supplies cash to selected privately-owned automated teller
machines (ATM's). Fees are recorded as non-interest income based upon a
contractual percentage of the cash supplied each month.
USE OF ESTIMATES
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
10
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
------------------------
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
NEW FINANCIAL ACCOUNTING STANDARD
---------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY, which was
subsequently amended by SFAS 137 to delay the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. This
Statement 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 in the
balance sheet and measure those instruments at fair value. Management
does not believe that the adoption of SFAS 133 will have a significant
impact on its financial position and results of operations when
implemented.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 1999 and 1998 consisted of the following:
AVAILABLE-FOR-SALE:
------------------
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
corporations and agencies $ 9,506,988 $ - $ (341,988) $ 9,165,000
Obligations of states and political
subdivisions 198,996 (24,996) 174,000
Government guaranteed mortgage-
backed securities 10,525,346 1,327 (753,673) 9,773,000
Collateralized mortgage obligations 7,003,596 (308,596) 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 616,300 616,300
------------ ------------ ------------ ------------
$ 28,218,426 $ 1,327 $ (1,429,253) $ 26,790,500
============ ============ ============ ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $1,427,926 were recorded net of $561,220 in tax benefits as
accumulated other comprehensive loss within shareholders' equity at
December 31, 1999. Proceeds and gross realized gains on sales and calls
of available-for-sale investment securities for the year ended December
31, 1999 totaled $4,504,512 and $4,296, respectively.
11
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
AVAILABLE-FOR-SALE: (Continued)
------------------
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 16,211,356 $ 42,535 $ (36,891) $ 16,217,000
Obligations of states and political
subdivisions 140,000 1,000 141,000
Commercial paper 5,988,631 (7,631) 5,981,000
Government guaranteed mortgage-
backed securities 10,992,410 2,535 (36,945) 10,958,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 569,100 569,100
------------ ------------ ---------- ------------
$ 34,268,697 $ 46,070 $ (81,467) $ 34,233,300
============ ============ ========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $35,397 were recorded net of $13,967 in tax benefits as
accumulated other comprehensive loss within shareholders' equity at
December 31, 1998. Proceeds and gross realized gains on called
available-for-sale investment securities for the year ended December
31, 1998 totaled $15,502,130 and $21,389, respectively.
HELD-TO-MATURITY:
----------------
<TABLE>
1999
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 11,723,243 $ 110,732 $ (223,975) $ 11,610,000
============ ========== ========== ============
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1999 totaled $355,250 and
$5,250, respectively. There were no sales or transfers of
held-to-maturity investment securities during the year ended December
31, 1999.
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 12,859,256 $ 347,744 $ - $ 13,207,000
============= =========== ========= =============
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1998 totaled $641,350 and
$7,496, respectively. There were no sales or transfers of
held-to-maturity investment securities during the years ended December
31, 1998 or 1997.
12
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year $ - $ - $ 525,315 $ 529,000
After one year through five years 9,506,988 9,165,000 4,437,891 4,480,000
After five years through ten years 5,775,768 5,679,000
After ten years 198,996 174,000 984,269 922,000
---------- --------- ----------- -----------
9,705,984 9,339,000 11,723,243 11,610,000
Investment securities not due
at a single maturity date:
Government guaranteed
mortgage-backed
securities 10,525,346 9,773,000
Collateralized mortgage
obligations 7,003,596 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank
stock 616,300 616,300
---------- --------- ----------- -----------
$ 28,218,426 $ 26,790,500 $ 11,723,243 $ 11,610,000
============= ============= ============= =============
</TABLE>
Investment securities with amortized costs of approximately $24,008,000
and $2,228,000 and estimated market values of $22,719,000 and
$2,243,000 were pledged to secure deposits and short-term borrowing
arrangements at December 31, 1999 and 1998, respectively. Additionally,
investment securities with amortized costs of $2,982,000 and $2,000,000
and estimated market values of $2,867,000 and $2,000,000 were pledged
to VISA at December 31, 1999 and 1998 in conjunction with the Bank's
merchant processing services.
3. LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Commercial $ 27,576,401 $ 22,679,709
Commercial real estate 23,717,451 11,781,897
Real estate - construction 9,034,743 8,873,686
Real estate - mortgage 35,410,666 38,673,581
Leases 6,212,446 8,744,942
Installment 43,212,382 31,953,756
-------------- -------------
145,164,089 122,707,571
Unearned discount (695,730) (1,649,410)
Deferred loan origination costs, net 705,460 32,206
Allowance for loan and lease losses (2,148,074) (2,080,831)
-------------- -------------
$ 143,025,745 $ 119,009,536
============= =============
</TABLE>
13
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,080,831 $ 1,705,200 $ 896,733
Provision charged to operations 1,325,000 1,113,000 1,705,000
Losses charged to allowance (1,438,474) (962,480) (978,709)
Recoveries 180,717 225,111 82,176
------------ ------------ ------------
Balance, end of year $ 2,148,074 $ 2,080,831 $ 1,705,200
============ ============ ============
</TABLE>
At December 31, 1999 and 1998, nonaccrual loans totaled $750,600 and
$253,900, respectively. Interest foregone on nonaccrual loans totaled
approximately $70,200, $44,500 and $29,400 for the years ended December
31, 1999, 1998 and 1997, respectively. The recorded investment in loans
that were considered to be impaired at December 31, 1999 and 1998
totaled $258,600 and $1,352,900, respectively. The related allowance
for loan and lease losses for these loans at December 31, 1999 and 1998
was $78,200 and $459,100, respectively. The average recorded investment
in impaired loans for the years ended December 31, 1999, 1998 and 1997
was $677,300, $287,400 and $123,800, respectively. The Bank recognized
no interest income on impaired loans during these same periods.
Salaries and employee benefits totaling $603,000, $154,000 and $259,000
have been deferred as loan origination costs for the years ended
December 31, 1999, 1998 and 1997, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Land $ 200,840 $ 200,840
Bank premises 945,713 878,406
Furniture, fixtures and equipment 2,614,738 2,046,561
Leasehold improvements 405,944 313,288
-------------- --------------
4,167,235 3,439,095
Less accumulated depreciation and amortization (1,451,193) (1,101,768)
-------------- --------------
$ 2,716,042 $ 2,337,327
============== ==============
</TABLE>
Depreciation and amortization included in occupancy expense totaled
$379,522, $299,299 and $233,319 for the years ended December 31, 1999,
1998 and 1997, respectively.
5. INVESTMENT IN LEASING COMPANY
On January 2, 1997, the Bank invested $2,000,000 in a joint venture
with another community bank to form Bancorp Financial Services, Inc.
(Bancorp). In March 1998, ownership of the investment in Bancorp was
transferred to the holding company through a dividend from the Bank.
Bancorp principally engages in the business of originating, purchasing
and selling lease contracts. The lease contracts provide financing
primarily for the acquisition of computers, medical and other business
equipment. All equipment leased is acquired from unrelated parties. The
Company's fifty percent interest in Bancorp's net income for the years
ended December 31, 1999, 1998 and 1997 totaled $444,364, $300,711 and
$35,256, respectively.
In 1999, Bancorp had other comprehensive income of $26,170, net of
$18,186 in tax liabilities. The Company's fifty percent interest in
Bancorp's other comprehensive income for the year ended December 31,
1999 totaled $13,085.
14
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Savings $ 15,574,850 $ 14,815,345
Money market 37,554,451 39,779,595
NOW accounts 13,508,011 12,831,352
Time, $100,000 or more 15,238,417 15,568,599
Other time 55,905,543 58,324,707
-------------- -------------
$ 137,781,272 $ 141,319,598
============== ==============
</TABLE>
Aggregate annual maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $ 66,195,805
2001 4,729,234
2002 196,492
2003 22,429
--------------
$ 71,143,960
==============
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Savings $ 348,498 $ 411,548 $ 394,557
Money market 1,309,145 1,185,336 1,033,029
NOW accounts 181,236 234,125 208,777
Time, $100,000 or more 645,163 752,158 692,358
Other time 2,609,977 3,021,658 2,895,835
--------------- --------------- ---------------
$ 5,094,019 $ 5,604,825 $ 5,224,556
=============== =============== ===============
</TABLE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31,
1999, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
1999
----
Current $ 481,000 $ 241,000 $ 722,000
Deferred 70,000 17,000 87,000
----------- ----------- -----------
Income tax expense $ 551,000 $ 258,000 $ 809,000
=========== =========== ===========
1998
----
Current $ 686,000 $ 288,000 $ 974,000
Deferred (102,000) (20,000) (122,000)
----------- ----------- -----------
Income tax expense $ 584,000 $ 268,000 $ 852,000
=========== =========== ===========
1997
----
Current $ 576,000 $ 256,000 $ 832,000
Deferred (168,000) (51,000) (219,000)
----------- ----------- -----------
Income tax expense $ 408,000 $ 205,000 $ 613,000
=========== =========== ===========
</TABLE>
15
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 584,000 $ 655,000
Salary continuation expense 322,000 272,000
Future benefit of state tax deduction 76,000 85,000
Unrealized loss on available-for-sale investment securities 561,000 14,000
Capitalization of organization costs 20,000 28,000
Other real estate 13,000
----------- ------------
Total deferred tax assets 1,563,000 1,067,000
----------- ------------
Deferred tax liabilities:
Bank premises and equipment (83,000) (85,000)
Future liability of state deferred tax asset (57,000) (65,000)
Undistributed interest in earnings of leasing company (66,000) (27,000)
Federal Home Loan Bank stock dividends (7,000)
----------- ------------
Total deferred tax liabilities (213,000) (177,000)
----------- ------------
Net deferred tax assets $ 1,350,000 $ 890,000
=========== ============
</TABLE>
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to operating income
before income taxes. The tax effects for these differences are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- -------------------- --------------------
AMOUNT RATE % AMOUNT RATE % AMOUNT RATE%
----------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense, at
statutory rate $ 1,039,112 34.0 $ 972,628 34.0 $ 650,680 34.0
State franchise tax, net of Federal tax
effect 166,913 5.5 151,661 5.3 128,402 6.7
Interest on obligations of states and
political subdivisions (193,784) (6.3) (171,124) (6.0) (180,281) (9.4)
Dividends received deduction from
investment in leasing company (120,867) (4.0) (81,793) (2.9)
Net increase on cash surrender value of
officer life insurance (50,827) (1.7) (39,985) (1.4) (22,169) (1.1)
Other (31,547) (1.0) 20,613 .8 36,368 1.8
----------- ------- --------- ------- --------- -------
Total income tax expense $ 809,000 26.5 $ 852,000 29.8 $ 613,000 32.0
=========== ======= ========= ======= ========= =======
</TABLE>
8. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a $7,500,000 unsecured borrowing arrangement with one of
its correspondent banks. At December 31, 1999, the Bank had outstanding
borrowings of $2,100,000 under this arrangement at an interest rate of
5.75%. There were no borrowings outstanding under this arrangement at
December 31, 1998. Interest expense was $15,842 and $9,642 for the
years ended December 31, 1999 and 1998, respectively.
At December 31, 1999, the Bank could also borrow up to twenty-five
percent of its total assets from the Federal Home Loan Bank, secured by
investment securities with amortized costs totaling $17,483,000 and
estimated market values totaling $16,421,000. There were no borrowings
under this arrangement at December 31, 1999 or 1998.
16
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Continued)
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Bank leases premises and equipment under non-cancelable operating
leases. These leases expire on various dates through 2008 and have
various renewal options ranging from five to ten years.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
2000 $ 219,938
2001 220,783
2002 206,280
2003 191,794
2004 151,002
Thereafter 320,522
------------
$ 1,310,319
============
</TABLE>
Rental expense for premises and equipment included in occupancy expense
totaled approximately $203,000, $156,000 and $111,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit
is represented by the contractual amount of those instruments.
Management uses the same credit policies in making commitments and
letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Commitments to extend credit $ 27,109,000 $ 17,847,000
Letters of credit $ 285,000 $ 140,000
</TABLE>
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 some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Management evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include
real estate, accounts receivable, deposit accounts and personal
property.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 1999, commercial loan commitments represent
approximately 69% of total commitments and are generally unsecured.
Real estate loan commitments represent 18% of total commitments and are
generally secured by
17
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
property with a loan-to-value ratio not to exceed 80%. Unsecured credit
cards and consumer lines of credit represent the remaining 13% of total
commitments. In addition, the majority of the Bank's commitments have
variable interest rates.
The Bank's financial instruments also include commitments to sell
loans. Commitments to sell loans are agreements to sell to another
party, loans originated by the Bank. The Bank only sells loans to third
parties without recourse. As long as the Bank has fulfilled its
obligations as stated in the sales commitment on such loans, the Bank
is not exposed to credit loss if the borrower fails to perform
according to the promissory note.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants real estate mortgage, real estate construction,
commercial and installment loans to customers throughout Tehama, Butte,
Glenn and Shasta counties.
Although the Bank has a diversified loan portfolio, a substantial
portion of its portfolio is secured by commercial and residential real
estate. Additionally, automobiles, trucks and recreational vehicles
secure a substantial portion of the Bank's installment loans. However,
personal and business income represents the primary source of repayment
for a majority of these loans.
MERCHANT BANK CARD PROCESSING
The Bank has a merchant transaction servicing agreement for the
processing of credit card transactions with First Data Resources, Inc.
(FDRI). The Bank is contingently liable for undetected fraud on
third-party credit card transactions processed under its agreement with
FDRI. However, the Bank is reimbursed on a monthly basis by the
marketing agent of the program, CardService International, Inc. (CSI),
for losses incurred. The Bank has not incurred any losses to date for
transactions processed under this program.
DATA PROCESSING
The Bank has also entered into a data processing service agreement with
Bank Processing, Inc. Under this agreement, the Bank's minimum payments
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $ 152,904
2001 152,904
2002 89,194
-----------
$ 395,002
===========
</TABLE>
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $10,239,315 at December 31, 1999.
CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not
materially affect the financial position or results of operations of
the Company.
18
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Continued)
10. SHAREHOLDERS' EQUITY
DIVIDENDS
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. The
Company's only present source of income with which to pay dividends is
dividends from the Bank. The California Financial Code restricts the
total cash dividend payment of any state bank at any time to the lesser
of (1) the Bank's retained earnings or (2) the Bank's net income for
its last three fiscal years, less distributions made to shareholders
during the same three-year period. At December 31, 1999, the Bank had
$3,243,078 in retained earnings available for dividend payments to the
Company.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF
NET SHARES PER SHARE
FOR THE YEAR ENDED INCOME OUTSTANDING AMOUNT
------------------ ------ ------------ ----------
<S> <C> <C> <C>
DECEMBER 31, 1999
Basic earnings per share $ 2,247,213 1,701,552 $ 1.32
==========
Effect of dilutive stock options 5,977
----------- -----------
Diluted earnings per share $ 2,247,213 1,707,529 $ 1.32
============ ============ ==========
DECEMBER 31, 1998
Basic earnings per share $ 2,008,670 1,663,956 $ 1.21
==========
Effect of dilutive stock options 51,289
----------- -----------
Diluted earnings per share $ 2,008,670 1,715,245 $ 1.17
============ =========== ==========
DECEMBER 31, 1997
Basic earnings per share $ 1,300,766 1,615,122 $ .81
==========
Effect of dilutive stock options 59,535
----------- -----------
Diluted earnings per share $ 1,300,766 1,674,657 $ .78
============ =========== ==========
</TABLE>
The following options were not included in the computation of diluted
earnings per share because their exercise prices were greater than the
average market prices of the common shares during the same periods:
options to purchase 33,500 shares of common stock at prices ranging
from $13.25 to $16.81 outstanding during the first quarter of 1999;
options to purchase 52,585 shares of common stock at prices ranging
from $12.27 to $16.81 outstanding during the second quarter of 1999;
options to purchase 138,085 shares of common stock at prices ranging
from $11.88 to $16.81 outstanding during the third and fourth quarters
of 1999; options to purchase 34,390 shares of common stock at prices
ranging from $16.81 to $17.50 outstanding during the second and third
quarters of 1998; and options to purchase 52,280 shares of common stock
at prices ranging from $14.00 to $17.50 outstanding during the fourth
quarter of 1998.
STOCK OPTIONS
In 1999 and 1994, the Board of Directors established stock option plans
for which 503,129 shares of common stock are reserved for issuance to
employees and directors under incentive and nonstatutory agreements.
The Company assumed all obligations under the 1994 plan as of July 1,
1997 and options to purchase shares of the Company's common stock were
substituted for options to purchase shares of common stock of the Bank.
The plans require that the option price may not be less than the fair
market value of the stock at the date the option is granted, and that
the stock must be paid in full at the time the option is exercised.
Options granted generally vest at twenty percent each
19
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(Continued)
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
year. The options under the plans expire on dates determined by the
Board of Directors, but not later than ten years from the date of
grant. Outstanding options under the 1994 Plan are exercisable until
their expiration date; however, no new options will be granted under
this plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly, no compensation expense has been recognized
for its stock option plans. Had compensation cost been determined based
on the fair value at grant date for awards in 1999 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below. Pro forma compensation expense is recognized in the
years the options become vested.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net earnings - as reported $ 2,247,213 $ 2,008,670
Net earnings - pro forma $ 2,191,458 $ 1,982,003
Basic earnings per share - as reported $ 1.32 $ 1.21
Basic earnings per share - pro forma $ 1.29 $ 1.19
Diluted earnings per share - as reported $ 1.32 $ 1.17
Diluted earnings per share - pro forma $ 1.28 $ 1.16
</TABLE>
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998
--------------- ------------
<S> <C> <C>
Dividend yield 3.54% 2.50%
Expected volatility 48.94% 59.54%
Risk-free interest rate 5.94% 4.68%
Expected option life 5 years 5 years
</TABLE>
20
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (CONTINUED)
A summary of combined activity within the plans follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 158,496 $ 11.96 172,520 $ 9.46 195,826 $ 9.21
Options granted 92,500 $ 11.76 52,280 $ 16.12 12,000 $ 12.00
Options exercised (60,249) $ 8.71 (62,641) $ 8.75 (17,351) $ 8.84
Options canceled (13,382) $ 11.00 (3,663) $ 8.94 (17,955) $ 9.04
------- -------- -------
Options outstanding,
end of year 177,365 $ 13.03 158,496 $ 11.96 172,520 $ 9.46
======= ======== =======
Options exercisable,
end of year 64,180 $ 13.20 98,738 $ 10.19 120,016 $ 9.08
======= ======== =======
Weighted average fair
value of options granted
during the year $ 2.42 $ 3.94
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------------------
NUMBER OF WEIGHTED NUMBER OF
OPTIONS AVERAGE OPTIONS
OUTSTANDING REMAINING EXERCISABLE
DECEMBER 31, CONTRACTUAL DECEMBER 31,
RANGE OF EXERCISE PRICES 1999 LIFE 1999
------------------------ --------------- ---------------- ----------------
<S> <C> <C> <C>
$ 10.75 5,000 1 year 4,000
$ 12.27 19,085 1 year 15,268
$ 12.00 10,500 2 years 6,300
$ 15.13 5,000 3 years 2,000
$ 16.81 21,500 3 years 8,600
$ 17.50 10,890 3 years 4,356
$ 14.00 10,890 3 years 4,356
$ 14.50 2,000 3 years 800
$ 13.25 5,000 4 years 1,000
$ 10.50 12,500 10 years 2,500
$ 11.88 75,000 10 years 15,000
------- ------
177,365 64,180
======= ======
</TABLE>
COMMON STOCK REPURCHASE PROGRAM
During 1997, the Board of Directors authorized the repurchase of up to
$500,000 of the Company's common stock. Repurchases will generally be
made at market prices. Shares were purchased for $236,647 and $260,559
during the years ended December 31, 1999 and 1998, respectively.
21
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL
The Company and the Bank are subject to certain regulatory capital
requirements administered by the Board of Governors of the Federal
Reserve System (FRB). Failure to meet these minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. Each of these components is defined
in the regulations. Management believes that the Company and the Bank
meet all their capital adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the Federal Depository
Insurance Corporation (FDIC) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ---- ----------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
LEVERAGE RATIO
Tehama Bancorp and subsidiary $18,941,300 9.4% $ 17,137,200 9.4% $15,271,900 9.4%
Tehama Bank $15,752,500 7.9% $ 14,222,200 7.9% $15,118,600 9.3%
Minimum requirement for "Well-
Capitalized" institution $10,096,000 5.0% $ 9,073,500 5.0% $ 8,127,700 5.0%
Minimum regulatory requirement $ 8,076,800 4.0% $ 7,258,800 4.0% $ 6,502,200 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
Tehama Bancorp and subsidiary $18,941,300 12.6% $ 17,137,200 13.6% $15,271,900 12.7%
Tehama Bank $15,752,500 10.7% $ 14,222,200 11.5% $15,118,600 12.5%
Minimum requirement for "Well-
Capitalized" institution $ 9,019,400 6.0% $ 7,562,900 6.0% $ 7,236,200 6.0%
Minimum regulatory requirement $ 6,012,900 4.0% $ 5,042,000 4.0% $ 4,824,200 4.0%
TOTAL RISK-BASED CAPITAL RATIO
Tehama Bancorp and subsidiary $20,823,700 13.9% $ 18,719,024 14.9% $16,787,300 13.9%
Tehama Bank $17,596,900 12.0% $ 15,772,281 12.8% $16,634,000 13.8%
Minimum requirement for "Well-
Capitalized" institution $15,032,300 10.0% $ 12,604,900 10.0% $12,041,500 10.0%
Minimum regulatory requirement $12,025,800 8.0% $ 10,083,900 8.0% $ 9,633,200 8.0%
</TABLE>
22
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
-------------- -------------- ----------------
<S> <C> <C> <C>
Data processing fees $ 270,145 $ 258,618 $ 220,909
Professional services 300,407 236,966 392,863
Directors' fees 189,600 170,450 155,350
Stationery and supplies 202,984 143,070 231,170
Advertising 111,470 154,297 118,708
Telephone 191,481 121,571 93,700
Other 1,626,560 1,240,762 1,120,130
------------ ------------ ------------
$ 2,892,647 $ 2,325,734 $ 2,332,830
============ ============ ============
</TABLE>
12. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
In 1987, the Bank adopted an employee stock ownership plan. This plan
is designed to invest primarily in securities of the Company, purchased
on the open market. The Company's contributions to the plan are at the
sole discretion of the Board of Directors. Contributions are limited on
a participant-by-participant basis to the lesser of $30,000 or
twenty-five percent of the participant's compensation for the plan
year. Employee contributions are not permitted. The Company made
contributions of $38,332, $39,403 and $29,875 for the years ended
December 31, 1999, 1998 and 1997, respectively.
PROFIT SHARING PLAN
During 1992, the Bank adopted the Tehama Bank 401(k) Profit Sharing
Plan. The plan is available to all employees of the Bank. The Bank's
contribution to the plan is discretionary and is allocated at
twenty-five percent of each participant's annual contribution.
Aggregate contributions to the profit sharing plan totaled $54,632,
$38,868 and $30,795 for the years ended December 31, 1999, 1998 and
1997, respectively.
SALARY CONTINUATION PLANS
The Bank has salary continuation plans for key executives. Under these
plans, the Bank is obligated to provide the executives, or their
designated beneficiaries, with annual benefits for fifteen years after
retirement or death. These benefits are substantially equivalent to
those available under insurance policies purchased by the Bank on the
lives of the executives. In addition, the estimated present value of
these future benefits are accrued over the period from the effective
date of the plans until each of the executive's expected retirement
date. The expense recognized under these plans for the years ended
December 31, 1999, 1998 and 1997 totaled $163,207, $114,620 and
$136,293, respectively.
Under these plans, the Bank invested in single premium life insurance
policies with cash surrender values totaling $3,477,561 and $2,946,792
at December 31, 1999 and 1998, respectively. On the consolidated
balance sheet, the cash surrender value of life insurance policies is
included in accrued interest receivable and other assets.
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company and Bank enter into
transactions with related parties, including Directors and affiliates.
These transactions are on substantially the same terms and conditions
as those prevailing for comparable transactions with unrelated parties
and include borrowings from the Bank, the purchase of casualty
insurance and advertising through Directors, and the leasing of the Red
Bluff branch from a Director.
23
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS (Continued)
The following is a summary of the aggregate lending activity involving
related party borrowers for the year ended December 31, 1999:
<TABLE>
<S> <C>
Balance, beginning of year $ 4,700,000
Disbursements 2,600,000
Amounts repaid (3,000,000)
Balance, end of year $ 4,300,000
=============
Undisbursed commitments to related parties, December 31, 1999 $ 1,343,000
=============
</TABLE>
During 1998 and 1997, the Bank purchased a total of approximately
$8,802,000 in leases from Bancorp Financial Services, Inc. at the same
price offered to other lease purchasers. Leases were evaluated for
creditworthiness in accordance with the Bank's normal underwriting
procedures. At December 31, 1999 and 1998, the remaining balances on
these leases totaled $5,050,000 and $8,427,000, respectively. There
were no leases purchased during 1999.
14. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income that historically has not been recognized in the calculation of
net income. Unrealized gains and losses on the Bank's
available-for-sale investment securities are included in other
comprehensive income. Total comprehensive income and the components of
accumulated other comprehensive income (loss) are presented in the
Statement of Changes in Shareholders' Equity.
For the years ended December 31, 1999, 1998 and 1997, the Bank held
securities classified as available-for-sale which had unrealized
(losses) gains as follows:
<TABLE>
<CAPTION>
TAX
BEFORE (EXPENSE) AFTER
TAX BENEFIT TAX
------ --------- -------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Other comprehensive loss:
Unrealized holding losses $ (1,382,983) $ 543,435 $ (839,548)
Less: reclassification adjustment for
gains included in net income 9,546 (3,818) 5,728
------------ ---------- ----------
(1,392,529) 547,253 (845,276)
Add: unrealized holding gains resulting
from investment in leasing company 22,178 (9,093) 13,085
------------ ---------- ----------
Total other comprehensive loss $ (1,370,351) $ 538,160 $ (832,191)
============ ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (20,846) $ 8,338 $ (12,508)
Less: reclassification adjustment for
gains included in net income 28,885 (10,083) 18,802
------------ ---------- ----------
Total other comprehensive loss $ (49,731) $ 18,421 $ (31,310)
============ ========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1997
Other comprehensive income:
Unrealized holding gains $ 48,498 $ (20,428) $ 28,070
============ ========== ==========
</TABLE>
24
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures include estimated fair values for financial instruments for
which it is practicable to estimate fair value. These estimates are
made at a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for sale
at one time, nor do they attempt to estimate the value of anticipated
future business related to the instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by management to
estimate the fair value of its financial instruments at December 31,
1999 and 1998:
CASH AND CASH EQUIVALENTS: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
INVESTMENT SECURITIES: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
LOANS: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. Fair values of loans held for sale are estimated using quoted
market prices for similar loans. Fair values for other loans are
estimated using discounted cash flow analyses, using interest rates
being offered at each reporting date for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of
accrued interest receivable approximates its fair value.
LIFE INSURANCE POLICIES: The fair values of life insurance policies are
based on current cash surrender values at each reporting date as
provided by the insurers.
DEPOSITS: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at each reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow analysis using
interest rates being offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
SHORT-TERM BORROWINGS: Short-term borrowings were originated near year
end. The carrying amount is estimated to be fair value.
TREASURY TAX AND LOAN AGREEMENT: For the Treasury Tax and Loan
Agreement, which is included in accrued interest payable and other
liabilities on the consolidated balance sheet, the carrying amount is
estimated to be fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit are
primarily for adjustable rate loans and letters of credit. For these
commitments, there are no differences between the committed amounts and
fair values. Commitments to fund fixed rate loans are at rates which
approximate fair value at each reporting date.
25
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 17,157,451 $ 17,157,451 $ 8,362,664 $ 8,362,664
Federal funds sold 14,400,000 14,400,000
Investment securities 38,513,743 38,400,500 47,092,556 47,440,300
Loans 143,025,745 141,427,964 119,009,536 121,472,837
Accrued interest receivable 1,339,557 1,339,557 1,213,291 1,213,291
Cash surrender value of life
insurance policies 3,477,561 3,477,561 2,946,792 2,946,792
---------------- ------------- -------------- ------------
$ 203,514,057 $ 201,803,033 $ 193,024,839 $ 195,835,884
============== ============= ============= =============
Financial liabilities:
Deposits $ 188,467,397 $ 188,354,076 $ 180,510,611 $ 180,715,000
Short-term borrowings 2,100,000 2,100,000
Accrued interest payable 436,635 436,635 451,947 451,947
Treasury tax and loan
agreement 373,041 373,041 191,014 191,014
---------------- ------------- -------------- -------------
$ 191,377,073 $ 191,263,752 $ 181,153,572 $ 181,357,961
================ ============= ============== =============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 27,109,000 $ 27,109,000 $ 17,847,000 $ 17,847,000
Standby letters of credit 285,000 285,000 140,000 140,000
---------------- ------------- ------------- -------------
$ 27,394,000 $ 27,394,000 $ 17,987,000 $ 17,987,000
================ ============= ============= =============
</TABLE>
16. BRANCH ACQUISITION
The Bank acquired certain assets and liabilities of the Willows and
Orland branches of Wells Fargo Bank on February 21, 1997 summarized as
follows:
<TABLE>
<S> <C>
Cash $ 17,031,577
Fair value of assets and liabilities acquired, net 451,641
Premium paid for deposits 658,494
----------------
Deposits assumed $ 18,141,712
================
</TABLE>
The deposit premium is included on the consolidated balance sheet in
accrued interest receivable and other assets and is being amortized
using the straight-line method over fifteen years. Amortization expense
totaled $45,234, $32,373 and $30,611 for the years ended December 31,
1999, 1998 and 1997, respectively.
26
<PAGE>
17. SEGMENT INFORMATION
Operating segments are components of an enterprise about which
separate financial information is availabe 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 decising how to allocate resources to
segments.
The Company has two reportable segments: Retail and Commercial
Banking and Merchant Card Processing. 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. Results of operations from
segments below the quantitative thresholds are attributable to two
operating segments of the Company. Those segments include ATM Cash
Services and Bancorp, the Bank's holding company. Neither of those
segments has ever met any of the quantitative thresholds for
determining reportable segments.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies.
The following table includes selected financial information for the
years ended December 31, 1999, 1998 and 1997 for each business
segment:
<TABLE>
<CAPTION>
RETAIL AND COMMERCIAL BANKING MERCHANT CARD PROCESSING
---------------------------------- ---------------------------------
(Dollars in thousands) 1999 1998 1997 1999 1998 1997
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 14,011 $ 13,849 $ 12,614 $ - $ - $ -
Interest expense (5,110) (5,614) (5,225)
--------- --------- -------- -------- --------- ---------
Net interest income
8,901 8,235 7,389
--------- --------- -------- -------- --------- ---------
Provision for loan and lease losses (1,325) (1,113) (1,705)
--------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan and lease
losses 7,576 7,122 5,684
Non-interest income 1,760 1,210 868 1,085 1,341 1,323
Depreciation expense (365) (295) (229) (4) (5) (4)
Other non-interest expense (7,006) (6,483) (5,453) (346) (193) (171)
--------- --------- -------- -------- --------- ---------
Income before income taxes $ 1,965 $ 1,554 $ 870 $ 735 $ 1,143 $ 1,148
========= ========= ========= ====== ======= =======
Segment assets $ 199,827 $ 197,224 $ 169,673 $ 12 $ 16 $ 15
========= ========= ========= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
ALL OTHER CONSOLIDATED TOTAL
---------------------------------- ---------------------------------
(Dollars in thousands) 1999 1998 1997 1999 1998 1997
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ - $ - $ - $ 14,011 $ 13,849 $ 12,614
Interest expense (5,110) (5,614) (5,225)
--------- --------- -------- -------- --------- ---------
Net interest income
8,901 8,235 7,389
--------- --------- -------- -------- --------- ---------
Provision for loan and lease losses (1,325) (1,113) (1,705)
--------- --------- -------- -------- --------- ---------
Net interest income after
provision for loan and lease
losses 7,576 7,122 5,684
--------- --------- -------- -------- --------- ---------
Non-interest income 896 251 3,741 2,802 2,191
Depreciation expense (11) (380) (300) (233)
Other non-interest expense (529) (87) (104) (7,881) (6,763) (5,728)
--------- --------- ------- -------- --------- ---------
Income before income taxes $ 356 $ 164 $ (104) $ 3,056 $ 2,861 $ 1,914
========= ========= ======= ======== ========= =========
Segment assets $ 11,955 $ 2,542 $ 34 $211,794 $ 199,782 $ 169,722
========= ========= ======= ======== ========= =========
</TABLE>
27
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 165,475 $ 373,445
Investment in subsidiary 15,436,106 14,796,283
Investment in leasing company 2,793,416 2,335,967
Other assets 242,975 205,562
------------- -------------
$ 18,637,972 $ 17,711,257
============= =============
SHAREHOLDERS' EQUITY
Common stock $ 13,189,875 $ 12,824,202
Retained earnings 6,301,718 4,908,485
Accumulated other comprehensive loss (853,621) (21,430)
------------- -------------
$ 18,637,972 $ 17,711,257
============= =============
</TABLE>
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Income:
Dividends declared by subsidiary - eliminated
in consolidation $ 500,000 $ 662,219 $ 125,000
------------- ------------ -----------
Expenses:
Professional fees 163,255 82,478 79,571
Other expenses 22,944 4,318 24,006
------------- ------------ -----------
Total expenses 186,199 86,796 103,577
------------- ------------ -----------
Income before equity in undistributed income of
subsidiary and undistributed income of
investment in leasing company 313,801 575,423 21,423
Equity in undistributed income of investment in leasing
company 444,364 251,135
Equity in undistributed income of subsidiary 1,485,099 1,156,112 374,759
------------- ------------ -----------
Income before income taxes 2,243,264 1,982,670 396,182
Income tax benefit 3,949 26,000 33,000
------------ ------------ -----------
Net income $ 2,247,213 $ 2,008,670 $ 429,182
============ ============ ===========
</TABLE>
28
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- RETAINED
SHARES AMOUNT EARNINGS
------------ ------------- -----------
<S> <C> <C> <C>
Stock issued to effect merger with the Bank 1,610,940 $ 12,225,722 $ 3,132,852
Comprehensive income:
Net income 429,182
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities
Total comprehensive income
Stock options exercised and related tax
benefit 17,351 112,042
--------- ---------- ------------
Balance, December 31, 1997 1,628,291 12,337,764 3,562,034
Comprehensive income:
Net income 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities
Total comprehensive income
Retirement of common stock (18,803) (260,559)
Stock options exercised and related tax
benefit 62,641 746,997
Cash dividend - $.40 per share (662,219)
--------- ---------- ------------
Balance, December 31, 1998 1,672,129 12,824,202 4,908,485
--------- ---------- ------------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) SHAREHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
------------- ------------- -------------
<S> <C> <C> <C>
Stock issued to effect merger with the Bank $ 44,728 $ 15,403,302
Comprehensive income:
Net income 429,182 $ 429,182
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (34,848) (34,848) (34,848)
------------
Total comprehensive income $ 394,334
============
Stock options exercised and related tax
benefit 112,042
------------- -------------
Balance, December 31, 1997 9,880 15,909,678
Comprehensive income:
Net income 2,008,670 $ 2,008,670
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (31,310) (31,310) (31,310)
------------
Total comprehensive income $ 1,977,360
============
Retirement of common stock (260,559)
Stock options exercised and related tax
benefit 746,997
Cash dividend - $.40 per share (662,219)
------------- -------------
Balance, December 31, 1998 (21,430) 17,711,257
------------- -------------
</TABLE>
(Continued)
29
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- RETAINED
SHARES AMOUNT EARNINGS
------------ ------------- -----------
<S> <C> <C> <C>
Balance, December 31, 1998 1,672,129 $ 12,824,202 $ 4,908,485
Comprehensive income:
Net income 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities
Total comprehensive income
Retirement of common stock (18,684) (236,647)
Stock options exercised and related tax benefit 60,249 602,320
Cash dividend - $.50 per share (853,980)
--------- ------------- ------------
Balance, December 31, 1999 1,713,694 $ 13,189,875 $ 6,301,718
========= ============= ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) SHAREHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (21,430) $ 17,711,257
Comprehensive income:
Net income 2,247,213 $ 2,247,213
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (832,191) (832,191) (832,191)
------------
Total comprehensive income $ 1,415,022
============
Retirement of common stock (236,647)
Stock options exercised and related tax benefit 602,320
Cash dividend - $.50 per share (853,980)
--------- -------------
Balance, December 31, 1999 $ (853,621) $ 18,637,972
============ =============
</TABLE>
30
<PAGE>
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,247,213 $ 2,008,670 $ 429,182
Adjustments to reconcile net income to net
cash used by operating activities:
Undistributed income of leasing company (444,364) (251,135)
Undistributed income of subsidiary (1,485,099) (1,156,112) (374,759)
Increase in other assets (37,413) (72,620) (132,942)
------------- ------------- ------------
Net cash provided by (used in)
operating activities 280,337 528,803 (78,519)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 602,320 746,997 98,942
Payment of cash dividends (853,980) (662,219)
Retirement of common stock (236,647) (260,559)
------------- -------------
Net cash (used in) provided by financing
activities (488,307) (175,781) 98,942
------------- -------------
(Decrease) increase in cash and cash
equivalents (207,970) 353,022 20,423
Cash and cash equivalents at beginning of
period 373,445 20,423
------------- ------------- ------------
Cash and cash equivalents at end of year $ 165,475 $ 373,445 $ 20,423
============= ============= ============
Non-cash investing activities:
Net change in unrealized (loss) gain on
available-for-sale investment securities $ (1,392,529) $ (52,923) $ 58,785
Unrealized gain resulting from investment in
leasing company $ 13,085
Dividend of investment in leasing company
from the Bank to the Company $ 2,084,832
Non-cash financing activities:
Issuance of common stock in exchange for
assets and liabilities of the Bank $ 15,403,302
</TABLE>
31
<PAGE>
TEHAMA BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
In addition to the historical information contained herein, this Annual Report
contains certain forward-looking statements. The reader of this Annual Report
should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan and lease losses, expenses,
rates charged on loans and earned on securities investments, rates paid on
deposits, competition effects, fee and other non-interest income earned, general
economic conditions, nationally, regionally and in the operating market areas of
the Company and the Bank, changes in the regulatory environment, changes in
business conditions and inflation, changes in securities markets, as well as
other factors. This entire Annual Report should be read to put such
forward-looking statements in context and to gain a more complete understanding
of the uncertainties and risks involved in the Company's business. The purpose
of this discussion is to focus on information about the Company's financial
condition and results of operations which is not otherwise apparent from the
financial statements in this annual report. Reference should be made to those
statements and accompanying notes and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis.
BUSINESS ORGANIZATION
Tehama Bank (the "Bank"), chartered as Tehama County Bank in Red Bluff,
California in 1984, was created by local business people with $2,500,000 in
initial capital. Tehama Bancorp, the Bank's parent holding company (the
"Company") was created in 1997 with the Bank as its only subsidiary. The Red
Bluff Branch remains the Bank's main office and largest of six branch locations.
The Bank has branches in Los Molinos (Tehama County), Chico (Butte County),
Willows and Orland (Glenn County), and Redding (Shasta County). Branch support
services are provided by centralized operations and loan centers located in the
Tehama Bank Business Center in Red Bluff, adjacent to the Bank and Company
administrative offices.
Throughout its history, the Bank has engaged in basic consumer and commercial
banking, offering a diverse range of banking products and services to
individuals, businesses and the professional community. The Bank's Merchant Card
Processing Department processes third-party credit card transactions for
selected merchants under contract to a third party. During 1999, the Bank
installed a wide area computer network to link its branches and operating
departments, which provides enhanced communication and customer service. The
Bank also has a website at "tehamabank.com", which offers extensive product
information, rate charts, interactive calculators to assist customers with their
savings plans and loan payment calculations, and on-line banking, which enables
customers to view their account information, pay bills, and transfer funds
between accounts. Late in the fourth quarter of 1998, the Bank expanded its
Manufactured Housing lending activities by establishing a dedicated department
to meet the needs of this segment of its business. At the same time, the Bank
also established an ATM Services department to furnish cash to automated teller
machines (ATMs) owned by third parties throughout the United States.
OVERVIEW
The Company experienced another year of growth and expansion in 1999. Earnings
for the year ended December 31, 1999 were $2,247,000, representing an 11.9%
increase over the $2,009,000 for 1998. Shareholders' equity totaled $18,638,000
at year-end, compared to $17,711,000 in 1998. Diluted earnings per share for
1999, 1998 and 1997 were $1.32, $1.17 and $.78, respectively.
For the year 1999, net interest income increased $666,000 (8.09%) to $8,901,000
from $8,235,000 in 1998. The interest income component was up $161,000 (1.16%)
to $14,011,000, due to an $11,851,000 (7.0%) increase in average earning assets.
The yield on average earning assets decreased by 46 basis points in 1999, to
7.70%, from 8.16% in 1998. Average loans increased $9,354,000, however, the
yield decreased by 69 basis points, to 8.56% from 9.25%, resulting in a $43,000
net decrease in interest income on loans, to $11,171,000 in 1999 from
$11,214,000 in 1998. Interest income on securities increased $976,000 (65.5%) to
$2,465,000 from $1,489,000 in 1998 due to an increase in average securities of
$16,657,000 and an increase of 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
basis points in yield, to 5.66% in 1999 from 5.53% in 1998. Average fed funds
sold decreased by $14,160,000 and the yield decreased by 43 basis points to
4.79%. Interest expense on deposits decreased by $511,000 (9.12%) to $5,094,000.
Non-interest income increased $939,000 to $3,740,000. Third-party ATM servicing
fees, a service started at the end of 1998, provided $452,000 of the increase.
Loan packaging fees from the manufactured housing division provided $261,000 and
income from Bancorp Financial Services provided $143,000.
Non-interest expense overall increased $1,198,000 (16.96%) to $8,260,000 versus
$7,062,000 in 1998. This increase was attributed to increases in salary and
related benefits expenses of $499,000 (13.2%), occupancy expenses of $132,000
(14.0%), and all other non-interest expenses of $567,000 (24.4%). These
increases were the results of opening of a branch in Redding in September 1998,
installation of a Wide Area Network connecting all branches, support
departments, and administration, start-up costs for unique lending and specialty
departments, relocation of the Red Bluff branch and loan center, and overall
general expansion.
Assets of the Company were $211,794,000 at December 31, 1999, which was an
increase of $12,012,000, or 6.01% from the $199,782,000 at year end 1998. Loan
balances at year end 1999 were $145,164,000, up $22,456,000 (18.30%) from
$122,708,000 at year end 1998. Nonperforming loans were $1,368,000 at the end of
1999 versus $931,000 at the end of 1998. Deposits grew $7,956,000 (4.41%) to
$188,467,000 at December 31, 1999.
For 1999, the Company realized a return on average assets of 1.11% and a return
on average shareholders' equity of 12.52% versus 1.10% and 11.91%, respectively,
in 1998.
Tehama Bancorp ended 1999 with a Tier 1 capital ratio of 12.6% and a total
risk-based capital ratio of 13.9%. The leverage ratio was 9.4% at December 31,
1999.
The following chart presents, for comparison purposes, selected balance sheet,
income statement, and share data, along with selected financial ratios.
<TABLE>
<CAPTION>
FIVE YEAR SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
- ----------------------------------------
Interest income $ 14,011 $ 13,850 $ 12,614 $ 10,274 $ 9,424
Interest expense 5,110 5,615 5,225 4,357 3,879
--------- --------- --------- --------- --------
Net interest income 8,901 8,235 7,389 5,917 5,545
Provision for loan and lease losses 1,325 1,113 1,705 570 330
--------- --------- --------- --------- --------
Net interest income after provision for loan and
lease losses 7,576 7,122 5,684 5,347 5,215
Non-interest income 3,740 2,801 2,191 1,860 1,775
Non-interest expense 8,260 7,062 5,961 4,309 4,102
--------- --------- --------- --------- --------
Income before income taxes 3,056 2,861 1,914 2,898 2,888
Provision for income taxes 809 852 613 959 1,039
--------- --------- --------- --------- --------
Net income $ 2,247 $ 2,009 $ 1,301 $ 1,939 $ 1,849
SHARE DATA
- ----------------------------------------
Diluted earnings per share $ 1.32 $ 1.17 $ 0.78 $ 1.18 $ 1.12
Cash dividend paid per share $ 0.50 $ 0.40 $ 0.40 -- --
Stock dividend paid per share -- -- -- 10% 10%
BALANCE SHEET DATA
- ----------------------------------------
Total assets $ 211,794 $ 199,782 $ 169,722 $ 138,122 $ 127,826
Total loans, gross 145,164 122,708 122,064 93,691 82,018
Total deposits 188,467 180,511 152,671 121,603 113,587
Total shareholders' equity 18,638 17,711 15,910 15,113 13,086
SELECTED FINANCIAL RATIOS
- ----------------------------------------
Return on average assets 1.11% 1.10% .80% 1.47% 1.58%
Return on average shareholders' equity 12.52% 11.91% 8.39% 13.93% 15.44%
Leverage ratio 9.40% 9.40% 9.40% 11.50% 10.20%
Total risk-based capital ratio 13.90% 14.90% 13.90% 17.70% 16.40%
Allowance for loan and lease losses to total
loans outstanding at year end 1.48% 1.70% 1.40% 0.96% 0.99%
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NET INTEREST INCOME / NET INCOME
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net
interest income for 1999 totaled $8,901,000 and was up 8.1% ($666,000) over the
prior year. The interest income component was up $161,000 to $14,011,000. Most
of the increase was attributable to growth in average earning assets, primarily
in commercial loans, which increased $9,386,000 in 1999 over 1998. Average
outstanding loan balances of $130,565,000 for 1999 reflected a 7.7% increase
over 1998 balances. This increase contributed an additional $865,000 to interest
income. This increase was offset by an average 69 basis point decrease in loan
yields that caused a reduction of $908,000 in interest income. Competitive
pressures on loan pricing and increases in the outstanding volume of indirect
auto loans, which generally have lower interest rates than commercial or
commercial real estate loans, contributed to the lower yields. Average balances
on the investment portfolio grew $16,657,000 (61.9%) which added $923,000 to
interest income. The average yield received on securities was up 13 basis points
and added $53,000 to interest income. Interest income on Federal funds sold
decreased $772,000 as the average balances were $14,160,000 (64.4%) lower.
Interest expense decreased $505,000 (9.0%) in 1999 over 1998. The average
balances of interest bearing liabilities increased $10,888,000 (8.5%). The
higher balances were due largely to growth in interest-bearing demand deposit
accounts. Interest expense attributable to the higher volume was $294,000. Lower
rates paid on all interest bearing liabilities and the increased proportion of
lower rate demand deposits more than offset the higher expense by $805,000. Net
interest margin for 1999 was 4.89% versus 4.86% in 1998. Net interest income for
1998 totaled $8,235,000 and was up 11.5% ($846,000) over 1997.
Average earning assets were $170,128,000 in 1998 for an increase of $18,172,000
over 1997. In 1998, interest income increased by $1,236,000 to $13,850,000. The
average yield received on all interest earning assets fell 14 basis points to
8.16%. Interest expense increased $390,000 (7.5%) in 1998 over 1997. Average
balances of interest bearing liabilities increased $12,223,000 in 1998. Net
interest margin for 1998 and 1997 was 4.86%.
The first of the following two tables presents, for the periods indicated, the
Bank's interest income from average earning assets, interest expense on average
interest-bearing liabilities, and the Bank's net interest income and net
interest margins. The second table presents a summary of the effect of the
changes in volumes and rates for each major component of earning assets and
interest-bearing liabilities and their contribution to net interest income. It
shows the portion attributable to changes in average rates versus the portion
attributable to changes in average volumes for the periods indicated. Changes in
interest income and expense resulting from combined rate and volume changes have
been allocated based on the magnitude of the individual volume and rate changes.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST YIELDS/RATES
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- ----------------------------
AVERAGE INCOME / YIELD / AVERAGE INCOME / YIELD / AVERAGE INCOME / YIELD /
(In thousands) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------- ---------- --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Commercial loans (1) $ 34,481 $ 3,494 10.13% $ 25,095 $ 2,411 9.61% $ 13,460 $ 1,433 10.65%
Real estate loans (1) 61,158 4,878 7.98% 59,336 5,462 9.21% 54,372 4,974 9.15%
Installment loans (1) 34,926 2,799 8.02% 36,780 3,341 9.08% 41,255 3,728 9.04%
------- ----- -------- ------- ----- -------- ------- ----- --------
Sub-total loans 130,565 11,171 8.56% 121,211 11,214 9.25% 109,087 10,135 9.29%
Federal funds sold 7,825 375 4.79% 21,985 1,147 5.22% 11,630 627 5.39%
Investments (2) 43,589 2,465 5.66% 26,932 1,489 5.53% 31,239 1,852 5.93%
------- ----- -------- ------- ----- -------- ------- ----- --------
Total earning assets 181,979 14,011 7.70% 170,128 13,850 8.14% 151,956 12,614 8.30%
------ ------ ------
Less: Allowance for loan losses (1,953) (1,905) (1,095)
Less: Unearned discount (836) (1,807) (1,414)
Cash and due from banks 10,919 5,455 5,011
Other real estate owned 105 97 482
Premises and equipment, net 2,570 2,070 1,791
Cash surrender value of
life insurance 3,348 2,544 1,571
Accrued interest receivable
and other assets 6,505 5,963 4,805
-------- -------- ------
Total Assets $202,637 $182,545 $163,107
======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 55,129 $ 1,490 2.70% $ 42,968 $ 1,419 3.30% $ 36,871 $ 1,242 3.37%
Savings accounts 15,534 349 2.25% 14,166 412 2.91% 13,187 394 2.99%
Time deposits 67,845 3,255 4.80% 70,632 3,774 5.34% 65,383 3,589 5.49%
Other short-term borrowings 308 16 5.19% 162 10 6.17% 264
--- -- -------- ---- -- -------- --- ------- -----
Total interest-bearing
liabilities 138,816 5,110 3.68% 127,928 5,615 4.39% 115,705 5,225 4.52%
----- ----- -----
Non-interest bearing deposits 43,507 35,900 30,769
Other liabilities 2,365 1,846 1,118
------- ------- -------
Total liabilities 184,688 165,674 147,592
-------- -------- -------
Common stock 13,165 12,703 12,255
Retained earnings 5,517 4,150 3,351
Accumulated other
comprehensive (loss) income (733) 18 (91)
---- ------ --------
Total shareholders'
equity 17,949 16,871 15,515
------- ------- -------
Total liabilities and
shareholders'
equity $202,637 $182,545 $163,107
========= ========= =========
Net interest income $ 8,901 $ 8,235 $ 7,389
======== ======= =======
Interest income as a percentage
of average earning assets 7.70% 8.16% 8.30%
Interest expense as a percentage
of average earning assets 2.81% 3.30% 3.44%
Net yield on average earning
assets (net interest margin) 4.89% 4.86% 4.86%
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest income
has been included only for the period prior to the loan being placed on a
nonaccrual basis. Loan interest income includes loan fees of approximately
$195,000, $639,000, and $392,000 at December 31, 1999, 1998 and 1997
respectively.
(2) Applicable nontaxable yields have not been calculated on a
taxable-equivalent basis.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
CHANGES IN VOLUME/RATE
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 COMPARED TO 1998 1998 COMPARED TO 1997
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- -------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ (738) $ (34) $ (772) $ 557 $ (37) $ 520
Investment securities 923 53 976 (255) (108) (363)
Loans 865 (908) (43) 1,127 (48) 1,079
-------- ----- -------- ------- ------- -------
Total 1,050 (889) 161 1,429 (193) 1,236
-------- ----- -------- ------- ------- -------
Borrowed funds 8 (2) 6 (6) 1 (5)
Interest-bearing demand and savings accounts 443 (435) 8 236 (41) 195
Time certificates (149) (370) (519) 287 (87) 200
-------- ----- -------- ------- ------- -------
Total 302 (807) (505) 517 (127) 390
-------- ----- -------- ------- ------- -------
Increase (decrease) in net interest income $ 748 $ (82) $ 666 $ 912 $ (66) $ 846
========= ====== ======== ======= ======== =======
</TABLE>
(1) A change due to both volume and rate has been allocated to the change in
volume and rate in proportion to the relationship of the dollar amount of the
change in each.
(2) Changes calculated on nontaxable securities have not
considered tax equivalent effects.
Total interest income increased $161,000 or 1.2 percent in 1999 to $14,011,000.
During 1998, interest income increased $1,236,000 or 9.8 percent to $13,850,000.
Interest expense in 1999 decreased $505,000 or 9.0 percent to $5,110,000 from
$5,615,000 in 1998. In 1998, interest expense increased by $390,000 or 7.7
percent. Net interest income for 1999 increased by $666,000 or 8.1 percent. The
Company's net interest margin increased to 4.89 percent in 1999 from 4.86
percent in 1998. Net interest margin was 4.86% in 1998 and 1997. Average earning
assets increased by $11,851,000 in 1999 to $181,979,000 compared to $170,128,000
in 1998. For the year ended December 31, 1999, growth in average earning assets
was paced by growth in average loans outstanding of 7.7 percent, growth in
average investments of 61.8 percent, and a decline in average federal funds sold
of 64.4 percent. Average interest bearing liabilities grew by $10,888,000
overall in 1999 to $138,816,000 from $127,928,000 in 1998. For the year ended
December 31, 1998, average interest-earning assets increased $18,172,000 to
$170,128,000, compared to $151,956,000 in 1997. In 1998, growth in average
interest earning assets was spread over all earning asset categories with
federal funds sold increasing 89.0 percent, investments decreasing 13.8 percent
and loans increasing 11.1 percent. Average interest bearing liabilities grew by
$12,223,000 in 1998 to $127,928,000 from $115,705,000 in 1997. All major
interest bearing liability categories grew during 1998 with the exception of
federal funds purchased.
NON-INTEREST INCOME AND EXPENSE
NON-INTEREST INCOME
The Company receives a significant portion of its income from non-interest
sources related both to activities conducted by the Bank (loan originations,
servicing and depositor service charges), as well as from merchant bank card
processing fees, ATM servicing fees, income from the leasing subsidiary, and
loan packaging fees. The following table presents the dollar amount of the
Company's non-interest income for the years ended December 31, 1999, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
NON-INTEREST INCOME:
Service charges $ 778 $ 712 $ 549
Gain on sale of loans 182 108 49
Gain on sale and call of investment securities 10 29 -
Loan servicing fees 47 57 74
Merchant processing fees 1,072 1,336 1,323
ATM servicing fees 452 - -
Loan packaging fees 261 - -
Undistributed income of investment in leasing company 444 301 35
Other income 495 258 160
----------- ------------ ------------
Total non-interest income $ 3,741 $ 2,801 $ 2,191
=========== ============ ============
</TABLE>
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Non-interest income increased $940,000 or 33.6 percent in 1999 to $3,741,000.
The increase was primarily the result of an increase of $452,000 in other income
resulting from the Bank's entry into the business of servicing third party ATM
machines and $261,000 in loan packaging fees on manufactured housing loans.
Additional non-interest income categories reflecting an increase in 1999
included: depositor service charges, up $66,000 primarily as a result of growth
in the Company's deposit base; income from the Company's 50% investment in
Bancorp Financial Services, up $143,000 as a result of increased volume of
leasing activity; and gains on the sale of real estate mortgages, up $74,000.
All other non-interest income decreased by $56,000 from 1998.
In 1991, the 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. (FDRI) for the processing of merchant credit card transactions.
Fee income to the Bank after payment of obligations to CSI and FDRI totaled
$1,072,000 in 1999, $1,336,000 in 1998, and $1,323,000 in 1997.
For the year ended December 31, 1998, non-interest income increased $610,000 or
27.8 percent to $2,801,000 from $2,191,000 in 1997. The overall increase in
non-interest income was primarily the result of increased income from Bancorp
Financial Services, up $266,000, service charges on deposit accounts, up
$163,000, and gains on sale of real estate mortgages, up $59,000.
NON-INTEREST EXPENSE
Non-interest expense reflects the costs of products, services, systems,
facilities and personnel for the Company. The following table presents the
Company's non-interest expense for the years ended December 31, 1999, 1998 and
1997 respectively.
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
----------- ------------ ----------
<S> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and related benefits $ 4,290 $ 3,791 $ 2,797
Occupancy 1,078 946 832
Data processing fees 270 259 221
Professional services 300 237 393
Directors' fees 190 170 155
Stationery and supplies 203 143 231
Advertising 111 154 119
Telephone 191 122 94
Other 1,627 1,240 1,119
----------- ----------- ----------
Total non-interest expense $ 8,260 $ 7,062 $ 5,961
=========== =========== ==========
</TABLE>
SALARIES AND RELATED BENEFITS
Salary and related benefits expense increased $499,000 (13.2%) to $4,290,000 in
1999 from $3,791,000 in 1998. At the end of 1999, the full time equivalent (FTE)
staff was 116 versus 105 at the end of 1998. Salaries and employee related
benefits expense for 1998 was $3,791,000, an increase of 35.5% over the
$2,797,000 incurred in 1997. Increases in salary expense during these periods
are attributable to the hiring of additional branch, administrative, unique
lending and other specialty department personnel due to the significant growth
recorded by the Bank during those years. In 1998, the FTE staff increased 14
positions from the end of 1997. Statement of Financial Accounting Standards No.
91 requires the Bank to defer loan origination costs (salary and related
benefits) associated with the origination of loans, which results in recording
salary expense at an amount less than that actually paid by the Bank. The
difference amounted to $603,000 in 1999, $154,000 in 1998, and $259,000 in 1997.
OCCUPANCY AND FURNITURE AND EQUIPMENT
Occupancy expenses, including equipment expenses, were $1,078,000 in 1999. This
was an increase of $132,000 (14.0%) over 1998. For 1998, occupancy expenses
increased $114,000 or 13.7% to $946,000 over 1997. Increases during these
periods are attributable to the opening of a branch in Redding, California,
installation of a Wide Area Network, start-up costs associated with unique
lending and other specialty departments and relocation of the Red Bluff branch
and loan center.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER EXPENSES
All other non-interest expenses increased $567,000 (24.4%) to $2,892,000 in 1999
from $2,325,000 in 1998. Increases in all other non-interest expenses primarily
consisted of increases in professional services expenses of $63,000 (26.6%),
primarily due to additional legal expenses related to collection efforts in
certain credit relationships, implementation of a stock option plan, and
implementation of a shareholder rights plan. In addition, there were increases
in stationery and supplies expenses of $60,000 (42.0%), increases in telephone
expenses of $69,000 (56.6%), increases in all other expenses of $375,000
(20.6%), all of which increased primarily due to the addition of the Redding
branch, start-up costs associated with unique lending and specialty departments,
relocation of the Red Bluff branch and loan center, and overall general
expansion during 1999. All other non-interest expenses were relatively unchanged
in 1998 compared to 1997, decreasing only $7,000 (0.3%) during that period.
PROVISION FOR TAXES
The effective tax rate on income was 26.5%, 29.8%, and 32.0% in 1999, 1998 and
1997, respectively. The primary factor reducing the effective tax rate of the
Company in 1999 was due to permanent differences in tax accounting from
obligations of state political subdivisions and for income from the Company's
investment in Bancorp Financial Services.
BALANCE SHEET ANALYSIS
LOANS AND LEASES
The Bank concentrates its lending activities in four principal areas:
installment loans (including indirect auto loans); real estate mortgage loans
(including construction); commercial real estate loans and commercial loans
(including agricultural loans). At December 31, 1999, these four categories
accounted for approximately 30%, 31%, 16%, and 19% of the Banks' loan portfolio,
respectively, as compared to 26%, 39%, 10%, and 19% at December 31, 1998. The
increase in commercial real estate loans reflects the Bank's emphasis on
commercial and business-related loans, while growth in installment loans
occurred as a result of continued growth in the indirect auto loan portfolio.
The following table summarizes the composition of the loan and lease portfolio
for the past five years as of December 31:
Loans and leases are comprised of the following at December 31, 1999, 1998,
1997, 1996, and 1995 respectively:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Commercial $ 27,576 19.0% $ 22,680 18.5% $ 15,455 12.7% $10,064 10.7% $ 10,594 12.9%
Commercial real estate 23,718 16.3% 11,782 9.7% 11,221 9.2% 8,959 9.6% 10,035 12.2%
Real estate
construction 9,035 6.2% 8,874 7.2% 11,141 9.1% 5,824 6.2% 5,602 6.8%
Real estate mortgage 35,411 24.4% 38,673 31.5% 39,891 32.6% 31,456 33.6% 26,624 32.5%
Leases 6,212 4.3% 8,745 7.1% 2,405 2.0% 471 0.5% - 0.0%
Installment 43,212 29.8% 31,954 26.0% 41,951 34.4% 36,916 39.4% 29,163 35.6%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Subtotal 145,164 100.0% 122,708 100.0% 122,064 100.0% 93,690 100.0% 82,018 100.0%
Less:
Unearned discount (696) (1,649) (1,722) (1,110) (594)
Net deferred loan
fees & costs 706 32 95 4 (32)
Allowance for loan
and lease losses (2,148) (2,081) (1,705) (897) (810)
------- ------- ------- ----- -----
Total loans, net $143,026 $119,010 $118,732 $91,687 $ 80,582
======== ======== ======== ======= ========
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table represents the maturity distribution of the loan portfolio
as of December 31, 1999:
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER THREE BUT AFTER FIVE BUT FIFTEEN OR
WITHIN ONE WITHIN THREE WITHIN FIVE WITHIN FIFTEEN MORE
(In thousands) YEAR YEARS YEARS YEARS YEARS TOTAL
------------- ------------- ---------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial and
leases $ 10,490 $ 7,304 $ 5,754 $ 6,253 $ 3,988 $ 33,789
Real estate 8,355 7,566 13,983 25,122 13,137 68,163
Installment 1,605 9,103 17,233 15,097 174 43,212
------ ------ ------- ------- ---- -------
Total $ 20,450 $ 23,973 $ 36,970 $ 46,472 $ 17,299 $ 145,164
=========== =========== =========== =========== =========== ==========
</TABLE>
The majority of the Bank's loans are direct loans made to individuals, local
businesses and agri-businesses. Direct loans are originated at each of the
Bank's branch offices and by various loan specialists who cover the Bank's
entire service area. The Bank also purchases installment loan contracts for the
purchase of new and used automobiles from area automobile dealers and originates
loans for the purchase of manufactured homes for sale to third parties. The Bank
relies substantially on local promotional activity, and personal contacts by
bank officers, directors and employees to compete with other financial
institutions. The Bank makes loans to borrowers whose applications include a
sound purpose, a viable repayment source and a plan of repayment established at
inception and generally backed by a secondary source of repayment. Commercial
loans are diversified as to industries and types of business, with no material
industry or specific borrower concentrations. These loans are generally made to
small and mid-size businesses and professionals. Commercial loans consist of
credit lines for operating needs, loans for equipment purchases, working
capital, and various other business loan products. Most of these loans have
floating rates with the majority tied to the Bank's reference rate, which is set
based on the prime rate established by the Bank's primary correspondent bank.
The primary source of repayment on most commercial loans is cash flow from
primary business operations. Collateral in the form of real estate, cash
deposits, accounts receivable, inventory, equipment or other financial
instruments is often obtained as a secondary source of repayment. Leases are
secured by equipment and, while sold to the Bank, are serviced by the Company's
jointly owned leasing company, Bancorp Financial Services. Interest recorded on
these leases is reflected in the Bank's interest income category.
Installment loans include a range of traditional consumer loan products offered
by the Company such as personal lines of credit and loans to finance purchases
of autos, boats, recreational vehicles, mobile homes and various other consumer
items. The construction loans are generally composed of commitments to customers
within the Company's service area for construction of both commercial properties
and single-family residences. Other real estate loans consist primarily of loans
to the Bank's depositors secured by first trust deeds on commercial and
residential properties typically with short-term maturities and original loan to
value ratios not exceeding 75%. Average loans in 1999 were $130,565,000
representing an increase of $9,354,000 or 7.7% over 1998. Average loans of
$121,211,000 in 1998 represented an increase of $12,124,000 or 11.1% from
$109,087,000 in 1997.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring and
established formal lending policies. Additionally, the Company contracts with an
outside loan review consultant to periodically grade new loans and to review the
existing loan portfolio. Management believes its ability to identify and assess
risk and return characteristics of the Company's loan portfolio is critical for
profitability and growth. Management emphasizes credit quality in the loan
approval process, active credit administration and regular monitoring. With this
in mind, management has designed and implemented a comprehensive loan review and
grading system that functions to continually assess the credit risk inherent in
the loan portfolio. Ultimately, credit quality may be influenced by underlying
trends in the economic and business cycles.
The Company's business is concentrated in Tehama, Shasta, Glenn and Butte
counties in California whose economy is highly dependent on the agricultural,
timber and tourism industries. As a result, the Company lends money to
individuals and companies dependent upon these industries.
The Company monitors the effects of current and expected economic conditions and
other factors on the collectibility of loans. When, in management's judgment,
these loans are impaired, an appropriate provision for losses is recorded. In
extending credit and commitments to borrowers, the Company generally requires
collateral and/or guarantees as security. The repayment of such
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
loans is expected to come from cash flow or from proceeds from the sale of
selected assets of the borrowers. The Company's requirement for collateral
and/or guarantees is determined on a case-by-case basis in connection with
management's evaluation of the credit-worthiness of the borrower. Collateral
held varies but may include accounts receivable, inventory, property, plant and
equipment, income-producing properties, residences and other real property. The
Company secures its collateral by perfecting its interest in business assets,
obtaining deeds of trust, or outright possession among other means.
Management believes that its lending policies and underwriting standards will
tend to minimize losses in an economic downturn, however, there is no assurance
that losses will not occur under such circumstances. The Banks' loan policies
and underwriting standards include, but are not limited to, the following: 1)
maintaining a thorough understanding of the Banks' service area and limiting
investments outside of this area, 2) maintaining a thorough understanding of
borrowers' knowledge and capacity in their field of expertise, 3) basing real
estate construction loan approval not only on salability of the project, but
also on the borrowers' capacity to support the project financially in the event
it does not sell within the original projected time period, and 4) maintaining
conforming and prudent loan to value and loan to cost ratios based on
independent outside appraisals and ongoing inspection and analysis by the Bank's
lending officers. In addition, the Bank strives to diversify the risk inherent
in the portfolio by avoiding concentrations to individual borrowers and on any
one project.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The Company's current policy is to cease accruing interest when a loan becomes
90-days past due as to principal or interest; when the full, timely collection
of interest or principal becomes uncertain; or when a portion of the principal
balance has been charged off, unless the loan is well secured and in the process
of collection. When a loan is placed on nonaccrual status, the accrued and
uncollected interest receivable is reversed and the loan is accounted for on the
cash or cost recovery method thereafter, until qualifying for return to accrual
status. Generally, a loan may be returned to accrual status when all delinquent
interest and principal become current in accordance with the terms of the loan
agreement or when the loan is both well secured and in process of collection.
The following table sets forth nonaccrual loans and loans past due 90 days or
more as of December 31, 1999, 1998, 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
NON-PERFORMING LOANS
- ------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ 75,000 $ 24,000 $ 94,000 $ 274,000 $ -
Commercial 516,000 536,000 164,000 - -
Installment and other 26,000 117,000 424,000 203,000 128,000
----------- ---------- ---------- ---------- --------
Total 617,000 677,000 682,000 477,000 128,000
----------- ---------- ---------- ---------- --------
Nonaccrual loans 751,000 254,000 595,000 123,000 136,000
----------- ---------- ---------- ---------- --------
Total nonperforming loans $ 1,368,000 $ 931,000 $ 1,277,000 $ 600,000 $ 264,000
=========== =========== ============ =========== ==========
Interest foregone $ 70,000 $ 45,000 $ 29,000 $ 4,000 $ 4,000
</TABLE>
At December 31, 1999, the recorded investment in loans that are considered
impaired was $259,000. Such impaired loans had a valuation allowance of $78,000.
The recorded investment in impaired loans at December 31, 1998 was $1,353,000
and the related allowance for loan and lease losses for these loans was
$459,000. The Company recognized no interest income on impaired loans during
these periods. There were no troubled debt restructurings or loan concentrations
in excess of 10% of total loans not otherwise disclosed as a category of loans
as of December 31, 1999. Management is not aware of any potential problem loans,
which were accruing and current at December 31, 1999, where serious doubt exists
as to the ability of the borrower to comply with the present repayment terms.
OTHER REAL ESTATE OWNED
Other real estate owned was $36,000, $50,000 and $339,000 at December 31, 1999,
1998 and 1997, respectively.
ALLOWANCE FOR LOAN AND LEASE LOSS ACTIVITY
The provision for loan and lease losses is based upon management's evaluation of
the adequacy of the existing allowance for loans and leases outstanding. The
allowance is increased by provisions charged to expense and reduced by loan
charge-offs net of recoveries. Management determines an appropriate provision
based upon the interaction of three primary factors: (1) the loan
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
and lease portfolio growth in the period, (2) a comprehensive grading and review
formula for total loans and leases outstanding, and (3) actual previous
charge-offs. The allowance for loan and lease losses totaled $2,148,000 or 1.48%
of total loans and leases at December 31, 1999 compared to $2,081,000 or 1.70%
at December 31, 1998 and $1,705,000 or 1.40% at December 31, 1997. The decrease
in the allowance as a percentage of total loans is primarily due to the increase
in loan balances in a generally strong economic environment. It is the policy of
management to maintain the allowance for loan and lease losses at a level
adequate for known and future risks inherent in the loan portfolio. Based on
information currently available to analyze credit loss potential, including
economic factors, overall credit quality, historical delinquency and a history
of actual charge-offs, management believes that the credit loss provision and
allowance is prudent and adequate. However, no prediction of the ultimate level
of loans charged off in future years can be made with any certainty.
The following table presents the activity within the allowance for loan and
lease losses for the years ended December 31, 1999, 1998, 1997, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 2,081 $ 1,705 $ 897 $ 810 $ 721
Provision charged to expense 1,325 1,113 1,705 570 330
----------- ------------ ------------ ------------ ------------
Charge-offs: Commercial (1,089) (168) (42) (131) (87)
Installment (349) (794) (937) (407) (163)
----------- ------------ ------------ ------------ ------------
Total Charge-offs (1,438) (962) (979) (538) (250)
----------- ------------ ------------ ------------ ------------
Recoveries: Commercial 89 73 16
Installment 91 152 82 39 9
----------- ------------ ------------ ------------ ------------
Total Recoveries 180 225 82 55 9
----------- ------------ ------------ ------------ ------------
Net Charge-offs (1,258) (737) (897) (483) (241)
----------- ------------ ------------ ------------ ------------
Balance, end of year $ 2,148 $ 2,081 $ 1,705 $ 897 $ 810
=========== ============ ============ ============ ============
Ratio of net charge-offs to average loans
outstanding 0.96% 0.61% 0.82% 0.55% 0.30%
</TABLE>
The following table represents the allocation of the allowance for loan losses
as at December 31, 1999, 1998, 1997, 1996, and 1995, respectively:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 816 38.0% $ 368 17.7% $ 187 11.0% $ 119 13.3% $ 170 21.0%
Real Estate 228 10.6% 404 19.4% 520 30.5% 147 16.4% 189 23.3%
Installment 1,104 51.4% 1,309 62.9% 998 58.5% 631 70.3% 451 55.7%
----- --------- ----- ----- --- ----- --- ----- --- -----
Total Allowance $ 2,148 100.0% $ 2,081 100.0% $ 1,705 100.0% $ 897 100.0% $ 810 100.0%
======== ====== ======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
INVESTMENT SECURITIES
The Company maintains a securities portfolio consisting of U.S. Treasury, U.S.
Government agencies and corporations, state and political subdivisions,
asset-backed and other securities. An independent custodian holds investment
securities in safekeeping. The provisions of Statement of Financial Accounting
Standards No. 115 require, among other things, that certain investments in debt
and equity securities be classified under three categories: securities
held-to-maturity; trading securities; and securities available-for-sale.
Securities classified as held-to-maturity are to be reported at amortized cost;
securities classified as trading securities are to be reported at fair value
with unrealized gains and losses included in operations; and securities
classified as available-for-sale are to be reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity, net of tax. If a security is sold, any gain
or loss is recorded as a charge to earnings and the equity adjustment is
reversed. At December 31, 1999, the Bank held $26,791,000 in securities
classified as available-for-sale, compared with $34,269,000 at year-end 1998. At
December 31, 1999, unrealized gains of $1,000 and unrealized losses of
$1,429,000, net of tax benefits of $561,000, related to these securities, was
reflected in shareholders' equity, compared with
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$46,000 and $81,000, respectively, for year-end 1998, net of tax benefits of
$14,000. The Company had $11,723,000 of amortized cost in securities classified
as held-to-maturity securities at December 31, 1999, compared with $12,859,000
at year-end 1998.
The following table sets forth the maturity distribution and estimated market
value of securities available-for-sale and the weighted-average yields of these
securities as of December 31, 1999:
<TABLE>
SECURITIES AVAILABLE-FOR-SALE (1) AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- ----------------- ----------------- ------------------ --------------
(In thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ------- ------- --------- -------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $ - - $ 9,165 5.62% $ - - $ - - $ 9,165 5.62%
Tax-Exempt Municipals - - - - - - 174 7.33% 174 7.33%
----- ------- ------- -------- -------- -------- ------ ----- ------- -----
Totals $ - - $ 9,165 5.62% $ - - $ 174 7.33% $ 9,339 5.65%
===== ======= ======= ===== ===== ======= ====== ===== ======= =====
Securities not due at a
single maturity date:
Mortgage Backed Securities $9,773 6.39%
Collateralized Mortgage
Obligations $6,695 5.98%
Federal Reserve Bank stock $ 367 6.00%
Federal Home Loan Bank stock $ 616 4.80%
</TABLE>
(1) Yields calculated on nontaxable securities have been adjusted for tax
equivalent effects.
The following table sets forth the securities held-to-maturity as of December
31, 1999 and weighted average yields of such securities:
<TABLE>
<CAPTION>
SECURITIES AFTER ONE BUT AFTER FIVE BUT
HELD-TO-MATURITY WITHIN WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
----------------- ----------------- ------------------ ----------------- ---------------
(In thousands) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- -------- ------- ---------- ------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of state
and political
subdivisions $ 525 8.04% $ 4,438 7.51% $ 5,776 7.50% $ 984 6.85% $ 11,723 7.47%
</TABLE>
The following table is a comparison of the amortized cost and approximate fair
value of the securities portfolio as of December 31, 1999, 1998, 1997, 1996 and
1995, respectively:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
(In thousands) COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- -------- ------- --------- ------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities
and obligations of
U.S. Government
corporations and
agencies $ 9,507 $ 9,165 $ 16,211 $16,217 $ 17,065 $ 17,079 $ 19,662 $ 19,623 $ 12,169 $ 12,225
Obligations of states and
political subdivisions 11,922 11,784 12,999 13,348 10,970 11,270 11,593 11,771 9,820 10,112
Commercial Paper 5,989 5,981
Mortgage Backed Securities 10,525 9,773 10,992 10,958
Collateralized Mortgage
Obligations 7,004 6,695
Other securities 984 984 936 936 375 375 367 367 303 303
-------- ------ -------- ------ -------- ------ -------- ------- -------- -------
Total Investment Securities $ 39,942 38,401 $ 47,127 47,440 $ 28,410 $28,724 $ 31,622 $ 31,761 $ 22,292 $22,640
======== ====== ======== ====== ======== ======= ======== ======== ======== =======
</TABLE>
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
DEPOSITS
Deposits represent the Bank's primary source of funds for investment. Deposits
are primarily core deposits in that they are demand, savings, and time deposits
generated from local businesses and individuals. These sources are considered to
be relatively more stable, long-term deposit relationships thereby enhancing
steady growth of the deposit base without major fluctuations in overall deposit
balances. The Bank normally experiences a seasonal decline in deposits in the
first quarter of each year. In order to assist in meeting its funding needs, the
Bank maintains an unsecured borrowing arrangement with a correspondent bank in
the amount of $7.5 million. During 1998, the Bank applied for, and was accepted
as a member of the Federal Home Loan Bank of San Francisco (the "FHLB"). At
December 31, 1999, the Bank held stock in the FHLB which would allow the Bank to
borrow up to twenty five percent of the Bank's total assets using various loans
or securities as collateral. The following table presents the composition of the
deposit mix at December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997 1996 1995
------------------ ------------------ ----------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing:
Demand $ 50,686 26.9% $ 39,191 21.7% $ 34,810 22.8% $ 22,939 18.9% $ 20,921 18.4%
--------- ----- --------- ----- --------- ------ --------- ----- -------- -----
Interest-bearing:
Savings 15,575 8.3% 14,815 8.2% 14,076 9.2% 10,046 8.3% 9,589 8.4%
Money market 37,554 19.9% 39,780 22.1% 25,415 16.7% 24,575 20.2% 25,953 22.9%
NOW accounts 13,508 7.2% 12,831 7.1% 10,365 6.8% 7,855 6.5% 8,938 7.9%
Time, $100,000 or more 15,238 8.1% 15,569 8.6% 13,173 8.6% 10,499 8.6% 10,206 9.0%
Other time 55,906 29.6% 58,325 32.3% 54,832 35.9% 45,689 37.5% 37,980 33.4%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total interest-bearing
deposits 137,781 73.1% 141,320 78.3% 117,861 77.2% 98,664 81.1% 92,666 81.6%
------- ----- ------- ----- ------- ------ ------ ----- ------ -----
Total deposits $ 188,467 100.0% $ 180,511 100.0% $ 152,671 100.0% $ 121,603 100.0% $ 113,587 100.0%
========= ======== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
The following table represents maturities of time deposits at December 31, 1999:
<TABLE>
<CAPTION>
THREE OVER THREE OVER ONE OVER
MONTHS THROUGH THROUGH THREE
(In thousands) OR LESS TWELVE MONTHS THREE YEARS YEARS TOTAL
----------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Maturities of time deposits:
$100,000 or more $ 3,224 $ 11,047 $ 967 $ - $ 15,238
=========== ============= ============ ========= ==========
Other time $ 17,466 $ 34,460 $ 3,958 $ 22 $ 55,906
=========== ============= ============ ========= ==========
</TABLE>
OFF-BALANCE SHEET ITEMS
The Bank has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. The Bank has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options etc. As of December 31, 1999, commitments to extend credit were
the only financial instruments with off-balance sheet risk. Loan commitments
increased to $27,109,000 from $17,847,000 at December 31, 1998 and standby
letters of credit increased to $285,000 from $144,000 at December 31, 1998. The
commitments represent 18.9% of total loans at year end 1999 versus 14.7% in
1998.
LIQUIDITY
Liquidity management refers to the Company's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Company's liquidity position. Short-term borrowing arrangements, short-term
investments and securities, and loan repayments contribute to liquidity, along
with deposit increases, while loan funding and deposit withdrawals decrease
liquidity. The Bank assesses the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions and individual client funding needs. Commitments to fund loans and
outstanding standby letters of credit at December 31, 1999, were approximately
$27,394,000. Such loans relate primarily to revolving lines of credit and other
commercial loans, and to real estate construction loans. The Company'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
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
A common measurement of liquidity for banks is the ratio of loans to deposits.
Tehama Bank's target range for this ratio is 70-80%. The lower this ratio, the
higher the Bank's liquidity, but at the cost of fewer assets in the loan
category, which is the highest yielding earning asset. This ratio for the Bank
was 77.0% as of December 31, 1999 compared to 67.1% as of December 31, 1998, and
77.8% as of December 31, 1997. Management monitors the likelihood of projected
funding requirements by reviewing historical funding patterns, current and
forecasted economic conditions, pending new loan fundings and individual
customer needs.
The principal cash requirements of the Company are for expenses incurred in the
support of administration and operations of the Bank. For nonbanking functions,
the Company is dependent upon the payment of cash dividends by the Bank to
service its commitments. The Company expects that the cash dividends paid by the
Bank to the Company will be sufficient to meet this payment schedule.
CAPITAL
The Company and Bank are subject to various minimum capital requirements as
defined by regulation. The current and projected capital position of the Company
and the impact of capital plans and long-term strategies are reviewed regularly
by Management. The Company's capital position represents the level of capital
available to support continued operations and expansion. The Company's primary
capital resource is shareholders' equity, which increased $927,000 or 5.2
percent from the previous year end, and in 1998 increased $1,801,000 or 11.3
percent from December 31, 1997. The ratio of total risk-based capital to
risk-adjusted assets was 13.9 percent at December 31, 1999, compared to 14.9
percent at December 31, 1998 and 13.9 percent at December 31, 1997. Tier 1
risk-based capital to risk-adjusted assets was 12.6 percent at December 31,
1999, compared to 13.6 percent at December 31, 1998 and 12.7 percent at December
31, 1997.
Federal regulation imposes upon all FDIC-insured financial institutions a
variable system of risk-based capital guidelines designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the Federal
Reserve Board's risk-based capital guidelines, the Company (on a consolidated
basis) and the Bank are required to maintain total risk-based capital equal to
at least 8 percent of risk-weighted assets. Assets and off-balance sheet items
are categorized by the guidelines according to risk, and certain assets
considered to present less risk than others permit maintenance of capital at
less than the 8 percent ratio. The guidelines establish two categories of
qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2
comprising supplementary capital requirements. At least one-half of the required
capital must be maintained in the form of Tier 1 capital. For the Bank and the
Company, Tier l capital includes only common stockholders' equity and retained
earnings, but qualifying perpetual preferred stock would also be included
without limit if the Company or the Bank were to issue such stock. Tier 2
capital includes, among other items, certain types of intermediate term and
perpetual preferred stock, mandatory convertible debt securities, subordinated
debt and a limited amount of the allowance for loan and lease losses.
The guidelines also require all insured institutions to maintain a minimum
leverage ratio of 3 percent Tier 1 capital to total average assets (the
"leverage ratio"). The Federal Reserve Board emphasizes that the leverage ratio
constitutes a minimum requirement for the most well-run banking organizations.
All other banking organizations are required to maintain a minimum leverage
ratio ranging generally from 4 to 5 percent. The Company's and the Bank's
required minimum leverage ratio is 4 percent.
Federal regulations require that insured banks with significant "trading
activity" adjust their risk-based capital calculations in order to maintain
adequate capital against such market risk exposures as changes in the general
level of interest rates, equity prices, foreign exchange rates and commodity
prices. The Bank currently has no trading assets or liabilities. However, the
Uniform Financial Institutions Rating System (the "CAMELS" system) applicable to
the Bank has included for all bank regulatory examinations since 1997 a rating
for sensitivity to market risk. Ratings in this category are intended to reflect
the degree to which changes in interest rates, foreign exchange rates, commodity
prices or equity prices may adversely affect an institution's earnings and
capital.
Prompt Corrective Action Regulations (the "PCA Regulations") of the federal bank
regulatory agencies establish five capital categories in descending order (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
critically undercapitalized), assignment to which depends upon the institution's
total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage
ratio. Institutions classified in one of the three undercapitalized categories
are subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as a well-capitalized bank since adoption of the PCA Regulations.
The risk-based capital ratios decreased in 1999 as the growth in total assets
outpaced the increase in equity. Capital increased by $2,247,000 from income,
$602,000 from the exercise of stock options, and related tax benefit, and
decreased $237,000 from the retirement of common stock through a common stock
repurchase program, $854,000 from the payment of a cash dividend, and $832,000
from the change in unrealized holding losses on available-for-sale investment
securities, net of tax. Capital ratios are reviewed on a regular basis to ensure
that capital exceeds the prescribed regulatory minimums and is adequate to meet
the Company's future needs. All ratios are in excess of the regulatory
definition of "well capitalized."
DISCLOSURE OF FAIR VALUE
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Statements," requires the disclosure of fair value of most
financial instruments, whether recognized or not recognized in the financial
statements. The intent of presenting the fair values of financial instruments is
to depict the market's assessment of the present value of net future cash flows
discounted to reflect both current interest rates and the market's assessment of
the risk that the cash flows will not occur. In determining fair values, the
Company used the carrying amount for cash, short-term investments, accrued
interest receivable, short-term borrowings and accrued interest payable as all
of these instruments are short term in nature. Securities are reflected at
quoted market values. Loans and deposits have a long term time horizon which
requires more complex calculations for fair value determination. Loans are
grouped into homogeneous categories and broken down between fixed and variable
rate instruments. Loans with a variable rate, which reprice immediately, are
valued at carrying value. The fair value of fixed rate instruments is estimated
by discounting the future cash flows using current rates. Credit risk and
repricing risk factors are included in the current rates. Fair value for
nonaccrual loans is reported at carrying value and is included in the net loan
total. Since the allowance for loan and lease losses exceeds any potential
adjustment for nonaccrual valuation, no further valuation adjustment has been
made. Demand deposits, savings and certain money market accounts are short term
in nature so the carrying value equals the fair value. For deposits that extend
over a period in excess of four months, the fair value is estimated by
discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities. At 1999 year end, the fair values
calculated on the Bank's assets are .84% below the carrying values versus 1.46%
above the carrying values at year end 1998. The change in the calculated fair
value percentage relates to the securities and loan categories and is the result
of changes in interest rates in 1999.
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation primarily
affects the Company indirectly through its effect on the ability of its
customers to repay loans, or its impact on market rates of interest, and thus
the ability of the Bank to attract loan customers. Inflation affects the growth
of total assets by increasing the level of loan demand, and potentially
adversely affects the Company's capital adequacy because loan growth in
inflationary periods may increase more rapidly than capital. Interest rates in
particular are significantly affected by inflation, but neither the timing nor
the magnitude of the changes coincides with changes in the Consumer Price Index,
which is one of the indicators used to measure the rate of inflation.
Adjustments in interest rates may be delayed because of the possible imposition
of regulatory constraints. In addition to its effects on interest rates,
inflation directly affects the Company by increasing the Company's operating
expenses. The effect of inflation during the three-year period ended December
31, 1999 has not been significant to the Company's financial position or results
of operations.
ASSET/LIABILITY MANAGEMENT
The goal for managing the assets and liabilities of the Bank is to maximize
shareholder value and earnings while maintaining a high quality balance sheet
without exposing the Bank to undue interest rate risk. The Board of Directors
has overall responsibility for the Company's interest rate risk management
policies. The Bank has an Asset/Liability Management Committee (ALCO) which
establishes and monitors guidelines to control the sensitivity of earnings to
changes in interest rates.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Generally, asset/liability management is a comprehensive integrated process for
overall financial management. The major purpose of asset/liability management is
to ensure that the Bank's primary financial objectives; profitability, capital
adequacy, risk tolerance, and liquidity are achieved. Through asset/liability
management, the Bank develops a methodology, which can be used to optimize the
critical risk/return tradeoff that the institution faces in pricing, maturity
selection, funds allocation, and other decisions every day. Correct asset
liability management enables the Bank to achieve earnings which are adequate and
consistent, thereby enabling the achievement of profitability and risk
objectives. The primary capital objective is capital preservation, which is
achieved by controlling interest rate and credit-related risk exposure, and by
the retention of ongoing earnings. The Bank will also strive to ensure that each
dollar of capital is optimally leveraged. The Bank's asset/liability management
program consists of four major disciplines; interest rate risk management, net
interest margin/spread management, capital management, and liquidity management.
The formal integration of these inter-related areas into an effective
asset/liability management program that includes a process of planning,
organizing, and controlling all of the Bank's financial resources will enable
the Bank to achieve a planned net interest margin over time within acceptable
risk levels. The Company's asset/liability management policy is designed to
ensure that the Bank is managed to provide adequate liquidity, maintain adequate
capital, and, provide a satisfactory and consistent level of profits, within
suitable interest rate risk constraints.
Activities involved in asset/liability management include but are not limited to
lending, accepting and placing deposits, investing in securities and issuing
debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin under changing interest environments.
OTHER SIGNIFICANT ISSUES
YEAR 2000
The passing of the century date change at year end 1999 created no significant
issues or disruption of services within the Bank or between the Bank and its
service vendors. Likewise, the Bank is not aware of any material problems
experienced by any of its loan customers that would have a potentially material
adverse impact on the ability of those customers to make timely repayment of
principal and interest on their loans.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
MARKET FOR THE COMPANY'S STOCK
There is limited trading in shares of the Common Stock of Tehama Bancorp, which
is not listed on a major exchange, but trading information is available on a
delayed basis on the OTC Bulletin Board. There were approximately 1,100
shareholders of record as of March 6, 2000.
The following table summarizes those trades of which management has knowledge,
setting forth the approximate high and low bid prices for the periods indicated.
For all periods prior to the quarter ending September 30, 1997, the information
presented represents trades of the common stock of Tehama Bank. Tehama Bancorp
paid cash dividends of $0.50 per share on May 13, 1999 and $0.40 per share on
May 15, 1998. Tehama Bank paid cash dividends of $0.40 per share on May 30,
1997.
<TABLE>
<CAPTION>
PRICE OF ESTIMATED DIVIDENDS DIVIDENDS
CALENDAR COMMON STOCK (1) TRADING PAID IN PAID IN
QUARTER ENDING LOW HIGH VOLUME COMMON STOCK CASH
- ----------------------- --------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
March 31,1997 $ 11.63 $ 12.63 26,700 -0- -0-
June 30, 1997 $ 12.38 $ 12.63 61,400 -0- $ 644,376
September 30, 1997 $ 13.25 $ 14.00 28,700 -0- -0-
December 31, 1997 $ 13.63 $ 14.38 55,600 -0- -0-
March 31, 1998 $ 16.50 $ 16.88 64,100 -0- -0-
June 30, 1998 $ 14.50 $ 15.00 50,300 -0- $ 662,219
September 30, 1998 $ 14.50 $ 15.00 21,900 -0- -0-
December 31, 1998 $ 13.00 $ 14.00 32,200 -0- -0-
March 31,1999 $ 12.25 $ 13.25 37,400 -0- -0-
June 30, 1999 $ 11.00 $ 13.25 39,200 -0- $ 853,980
September 30, 1999 $ 9.75 $ 11.50 57,500 -0- -0-
December 31, 1999 $ 10.00 $ 12.00 161,100 -0- -0-
</TABLE>
(1) As estimated by the Company based upon trades of which it was aware,
and not including purchases of stock pursuant to the exercise of stock
options or repurchase of shares by the Company. The Company is not
aware of the prices of some of the trades included in the Estimated
Trading Volume column, above. Information regarding trades was derived
from Hoefer & Arnett, Incorporated and there may have been trades of
which the Company is unaware.
47
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JOHN W. KOEBERER GARY L. NAPIER RAYMOND C. LIEBERENZ
CHAIRMAN OF THE BOARD VICE CHAIRMAN OF THE BOARD SECRETARY TO THE BOARD
Resort/Park Concessionaire Insurance Broker Teacher
HENRY C. ARNEST, III GARRY D. FISH LESLIE L. MELBURG
VP Sales & Marketing, Manufacturing Firm Optometrist Partner, Architectural Firm
LOUIS J. BOSETTI MAX M. FROOME EUGENE F. PENNE
Educational Consultant Licensed Real Estate Salesperson and Owner, Bowling Recreation Center
Antique Broker
HARRY DUDLEY ORVILLE K. JACOBS JOHN D. REGH
Construction Company Owner Real Estate Developer Owner, Office Equipment
Company
WILLIAM P. ELLISON GARY C. KATZ TERRANCE A. RUST
President & CEO, Tehama Bank Chairman and CEO, Private Investment Oral Surgeon
and Tehama Bancorp and Consulting Company
</TABLE>
<TABLE>
<CAPTION>
Shareholder Information
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stock Transfer Agent Sales & Purchases of Stock Sales & Purchases of Stock
U.S. STOCK TRANSFER CORPORATION HOEFER & ARNETT, INC./MARC ARNETT PAINEWEBBER/JAMES E. HENNIS
1745 Gardena Avenue 353 Sacramento Street, 10th Floor 1051 Mangrove Avenue
Glendale, CA. 91204-2991 San Francisco, CA. 94111 Chico, CA. 95926
(800) 835-8778 (800) 346-5544 (800) 472-3867
Sales & Purchases of Stock Sales & Purchases of Stock Sales & Purchases of Stock
DEAN WITTER REYNOLDS SUTRO & CO. VAN KASPER & COMPANY
James L. Horton Troy Norlander Steve Eddy
2150 Main Street PO Box 1688 600 California Street, Suite 1700
Red Bluff, CA. 96080 Big Bear Lake, CA. 92315 San Francisco, CA. 94108
(530) 527-1484 (800) 288-2811 (800) 652-1747
</TABLE>
If you are a shareholder who received this annual report through your broker and
would like to receive information about the bank throughout the year, please
contact the Company's Finance and Accounting Department at (530) 528-3000 or
mail your request to Tehama Bancorp, P.O. Box 890, Red Bluff, CA 96080 and we
will add your name to our shareholder mailing list.
<PAGE>
EXHIBIT 23 TO 10-K
CONSENT OF PERRY-SMITH & CO.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to the Tehama Bancorp 1999 Stock Option Plan
of our report dated February 3, 2000, with respect to the consolidated
financial statements of Tehama Bancorp and subsidiary included in its Form
10-K for the year ended December 31, 1999, filed with the Securities and
Exchange Commission.
/s/ Perry-Smith & Co., LLP
Certified Public Accountants
Sacramento, California
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, STATEMENT OF CASH
FLOWS, AND STATEMENT OF CHANGES IN SHAREHOLDER EQUITY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,157
<INT-BEARING-DEPOSITS> 137,781
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,791
<INVESTMENTS-CARRYING> 11,723
<INVESTMENTS-MARKET> 11,610
<LOANS> 143,026
<ALLOWANCE> 2,148
<TOTAL-ASSETS> 211,794
<DEPOSITS> 188,467
<SHORT-TERM> 2,100
<LIABILITIES-OTHER> 2,589
<LONG-TERM> 0
0
0
<COMMON> 13,190
<OTHER-SE> 6,302
<TOTAL-LIABILITIES-AND-EQUITY> 211,794
<INTEREST-LOAN> 11,171
<INTEREST-INVEST> 2,839
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,011
<INTEREST-DEPOSIT> 5,094
<INTEREST-EXPENSE> 5,110
<INTEREST-INCOME-NET> 8,901
<LOAN-LOSSES> 2,148
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 8,260
<INCOME-PRETAX> 3,056
<INCOME-PRE-EXTRAORDINARY> 3,056
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,247
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 7.70
<LOANS-NON> 751
<LOANS-PAST> 617
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,081
<CHARGE-OFFS> 1,438
<RECOVERIES> 181
<ALLOWANCE-CLOSE> 2,148
<ALLOWANCE-DOMESTIC> 2,148
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
