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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for fiscal year ended DECEMBER 31, 1999
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period from
______________ to ______________
Commission File Number 000-29105
CENTENNIAL FIRST FINANCIAL SERVICES
(Name of Small Business Issuer in its Charter)
Incorporated in the State of California
IRS Employer Identification Number 91-1995265
Address: 218 East State Street, Redlands, CA 92373
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer: (1) filed all reports required to be filed by
Telephone: (909) 798-3611 Section 13 or 15(d) of the Securities Exchange Act
during the past 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 / /
Check if there is no disclosure of delinquent filers in response to Item405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form10-KSB
or any amendment to this Form 10-KSB /X/
Revenues for the year ended December 31, 1999. $7,011,015.
As of March 1, 2000, the Company had 672,387 shares of common stock outstanding.
The aggregate market value of voting stock held by non-affiliates of the Company
was $6,943,326.75, based on the most recent over the counter price of $14.25 per
share on March 1, 2000.
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The following documents are incorporated by reference to the parts indicated of
this Form 10-KSB:
1. Portions of the Registrant's definitive proxy materials filed on March 17,
2000 are incorporated by reference herein with regards to Items 9, 10, 11, and
12 of this Form 10-KSB.
FORM 10-KSB CROSS REFERENCE INDEX
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PART I
ITEM 1 Business 2 - 16
ITEM 2 Properties 17
ITEM 3 Legal Proceedings 17
ITEM 4 Submission of Matters to a Vote of Security Holders 17
PART II
ITEM 5 Market for the Company's Common Stock and Related
Stockholder Matters 17 - 18
ITEM 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19 - 35
ITEM 7 Financial Statements and Supplementary Data
Independent Auditors' Report on the Financial Statements 36
Consolidated Statements of Condition at December 31, 1999 and 1998 37
Consolidated Statements of Earnings for the years ended
December 31, 1999 and 1998 38
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999 and 1998 39
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 40 - 41
Notes to Consolidated Financial Statements 42 - 62
ITEM 8 Changes in and Disagreements with Accountants and Financial Disclosure 63
PART III
ITEM 9 Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act 63 - 64
ITEM 10 Executive Compensation 64
ITEM 11 Security Ownership of Certain Beneficial Owners and Management 65
ITEM 12 Certain Relationships and Related Transactions 65
ITEM 13 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 65
Signatures 66
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PART I
ITEM 1. BUSINESS
GENERAL
Centennial First Financial Services (the "Company") was incorporated on
August 29, 1999, as a for-profit corporation under the California Corporate laws
for the principal purpose of engaging in banking and non-banking activities as
allowed for a bank holding company. The Company owns 100% of Redlands Centennial
Bank (the "Bank"). The Company's sole source of unconsolidated revenue at this
time is dividends from the Bank. While this source cannot be assured, and may be
limited, the Company has no direct cash needs other than limited expenses
related to corporate and regulatory compliance.
Compliance with environmental laws has not had a material impact on the
operations of the Bank or the Company, although the Bank faces potential
liability or losses if its borrowers fail to comply with such laws and the Bank
acquires contaminated properties in foreclosure.
BANK SUBSIDIARY
Redlands Centennial Bank, an independent California chartered
commercial banking corporation was chartered by the State of California on March
27, 1990. The Bank provides banking services to individuals and business
customers in Redlands and surrounding communities, as well as Small Business
Administration loans to customers in San Bernardino, Los Angeles and Orange
counties. The Bank offers its customers a wide variety of personal, consumer and
commercial services expected of a locally owned, independently operated bank.
The Bank's deposits are insured under the Federal Deposit Insurance Act to the
extent of applicable limits and subject to regulations by that federal agency
and to periodic examinations of its operations and compliance by the FDIC and
the California Department of Financial Institutions. The Bank is not a member of
the Federal Reserve Bank. As a bank holding company, CFFS is periodically
reviewed by the Federal Reserve Bank. The Bank's activities are conducted at its
principal office, 218 East State Street, Redlands, California and at its loan
production office in Santa Ana, California.
At December 31, 1999 the Bank had total assets, deposits and
stockholders' equity of $76,007,045, $69,139,598 and $6,327,816, respectively.
EMPLOYEES
At December 31, 1999 Centennial First Financial Services had no
employees. Its subsidiary Redlands Centennial Bank employed a total of 32 full
time equivalent persons.
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COMPETITION
All phases of the Bank's business, since inception, have been subject
to significant competitive forces. Although the Bank has increasing recognition
in its primary service area and San Bernardino County, it nevertheless has to
compete with other independent local banking institutions, including commercial
banks and savings and loan associations, as well as branch offices of regional
commercial banks, some of which have assets, capital and lending limits
substantially larger than the Bank, as well as wider geographic markets, more
support services and larger media advertising capabilities. The Bank also
competes with respect to its lending activities, as well as in attracting demand
deposits, with savings banks, savings and loan associations, insurance
companies, regulated small loan companies and credit unions, as well as
securities brokerage offices which can issue commercial paper and other
securities (such as shares in money market funds).
Among the advantages such institutions have over the Bank are their
ability to finance wide ranging advertising campaigns and to allocate their
investment assets to regions of highest yields and demand. Many institutions
offer certain services, such as trust services and international banking, which
the Bank does not currently offer or plan to offer. By virtue of their greater
total capital, such institutions have substantially higher lending limits than
the Bank (legal lending limits to an individual customer being limited to a
percentage of a bank's total capital accounts). These competitors may intensify
their advertising and marketing activities to counter any efforts by the Bank to
further attract new business as a commercial bank. In addition, as a result of
legislation enacted in the early 1990's, there is increased competition between
banks, savings and loan associations and credit unions for the deposit and loan
business of individuals. These activities may hinder the Bank's ability to
capture a significant market share.
To compete with the financial institutions in its primary service area,
the Bank intends to use the flexibility which its independent status will
permit. Its activities in this regard include an ability and intention to
respond quickly to changes in the interest rates paid on time and savings
deposits and charged on loans, and to charges imposed on depository accounts, so
as to remain competitive in the market place. It also will continue to emphasize
specialized services for the small to medium business and professional, and
personal contacts by the Bank's officers, directors and employees. If there are
customers whose loan demands exceed the Bank's lending limits, the Bank has the
ability to arrange for such loans on a participation basis with other financial
institutions. No assurance can be given, however, that the Bank's efforts to
compete with other financial institutions in its primary service area will be
successful.
The Bank provides a range of competitive retail and commercial banking
services. The deposit services offered include various types of personal and
business checking accounts, savings accounts, money market investment accounts,
certificates of deposit, and retirement accounts. Lending services include
consumer loans, various types of mortgage loans for residential and commercial
real estate, personal lines of credit, home equity loans, real estate
construction, accounts receivable financing, commercial loans to small and
medium size businesses and professionals, as well as SBA loans. The Bank also
provides night depository facilities for customer convenience. The Bank offers
safe deposit box facilities, cashiers' checks, travelers checks, U.S.
Savings Bonds, and wire transfers. The Bank does not provide trust services.
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COMPETITION (Continued)
While the Bank has the authority to engage in a wide range of banking
activities, and offers most of the types of banking services of a commercial
bank, over the past three years it has derived much of its profitability and
differentiated itself from its competitors through (i) commercial and real
estate loans guaranteed by the Small Business Administration ("SBA"); and (ii)
construction lending.
The Bank depends largely on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings, and the interest rate received by the Bank on loans extended
to its customers and securities held in the Bank's portfolio, comprise the major
portion of the Bank's earnings. These rates are highly sensitive to many factors
that are beyond the control of the Bank. Accordingly, the earnings and growth of
the Bank are subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment.
Monetary and fiscal policies of the federal government and the policies
of regulatory agencies, particularly the Federal Reserve Board, also impact on
the Bank's business. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in U.S. Government securities, by adjusting the
required level of reserves for financial intermediaries subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
SUPERVISION AND REGULATION
THE COMPANY
Future offers or sales of the stock of the Company will be subject to
the registration requirements of the Securities Act of 1933, and qualification
under the California Corporate Securities Act of 1968, and possibly other state
Blue Sky laws, (unless an exemption is available), although the Bank's Common
Stock is exempt from such requirements.
On December 23, 1999, after receipt of appropriate approvals, and/or
passage of notice periods without objection from the California Commissioner of
the Department of Financial Institutions, the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System and the
shareholders of the Bank, the Company acquired the Bank through a reverse
triangular merger (the "Merger"). As a result, by operation of law, each
outstanding share of common stock of the Bank prior to the Merger was converted
into a share of common stock of the Company, while the Company became the sole
owner of the newly issued shares of common stock of the Bank.
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THE COMPANY (Continued)
The Bank Holding Company Act of 1956, as amended, places the Company
under the supervision of the Board of Governors of the Federal Reserve System
(the "FRB"). The Company must generally obtain the approval of the FRB before
acquiring all or substantially all of the assets of any bank, or ownership or
control of any voting securities of any bank if, after giving effect to such
acquisition, the Company would own or control more than 5% of the voting shares
of such bank.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in non-banking activities unless the FRB, by order or
regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making such
determinations, the FRB considers whether the performance of such activities by
a bank holding company would offer advantages to the public which outweigh
possible adverse effects.
The FRB's Regulation "Y" sets out the non-banking activities which are
permissible for bank holding companies under the law, subject to the FRB's
approval in individual cases. Most of these activities are now permitted for
California banks that are well-capitalized. The Company and its subsidiaries
will also be subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
The Company will be required to file reports with the FRB and provide
such additional information as the FRB may require. The FRB will also have the
authority to examine the Company and each of its subsidiaries with the cost
thereof to be borne by the Company. Under California banking law, the Company
and its subsidiaries are also subject to examination by, and may be required to
file reports with the Commissioner of the California Department of Financial
Institutions.
The Company and any subsidiaries which it may acquire or organize after
the reorganization will be deemed affiliates of the Bank within the meaning of
the Federal Reserve Act. Pursuant thereto, loans by the Bank to affiliates,
investments by the Bank in affiliates' stock, and taking affiliates' stock by
the Bank as collateral for loans to any borrower will be limited to 10% of the
Bank's capital, in the case of any one affiliate, and will be limited to 20% of
the Bank's capital, in the case of all affiliates. Federal and State law place
other limitations on transactions between the Bank and its affiliates designed
to ensure that the Bank receives treatment in such transactions comparable to
that available from unaffiliated third parties.
The Company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, sale or
lease of property or furnishing of services. For example, with certain
exceptions, the Bank may not condition an extension of credit on a customer's
obtaining other services provided by it, the Company or any other subsidiary, or
on a promise from its customer not to obtain other services from a competitor.
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THE COMPANY (Continued)
The Financial Services Modernization Act ("FSMA") was enacted in late
1999. FSMA among other things repeals the Glass-Steagall Act. The Glass-Steagall
Act enacted in the Depression era prohibits banks from affiliating with
securities firms. In addition, FSMA will allow for a new type of bank holding
company under the Bank Holding Company Act. The new bank holding company will be
allowed to engage in insurance and securities underwriting, merchant banking and
insurance company portfolio investment activities. Currently, bank holding
companies are strictly limited in the amount of insurance and securities
underwriting activities that they may engage in.
FSMA will also allow bank holding companies to engage in any activity
considered "financial" in nature or incidental to such financial activities.
Under the existing Bank Holding Company Act, incidental activities are limited
to those that are "banking" in nature or incidental to such banking activities.
Financial activities include lending, providing insurance as an agent,
broker or as principal, issuing annuities, underwriting, and dealing in or
making a market in securities. All insurance activities that are to be conducted
must be conducted in compliance with applicable state laws. In connection with
insurance sales the United States Supreme Court case of BARNETT BANK OF MARION
COUNTY N.A. V. NELSON, 116 S. Ct. 1103 (1996) is followed by FSMA, and FSMA
further provides that "no state may, by statute, regulation, order,
interpretation, or other action, prevent or significantly interfere with the
ability of an insured depository institution, or a subsidiary or affiliate
thereof, to engage, directly or indirectly, either by itself or in conjunction
with a subsidiary, affiliate, or any other party, in any insurance sales,
solicitation, or cross-marketing activity."
The Community Reinvestment Act provisions in FSMA require that any new
bank holding company that is formed meet the conditions that all of the
Company's insured depository institutions are well capitalized and well managed
or received at least a satisfactory rating in the most recent Community
Reinvestment Act examination.
Other key aspects of FSMA include the following:
- streamlining bank holding company supervision by defining the
roles of the Federal Reserve and other federal and state
regulators;
- prohibiting FDIC assistance to affiliates and subsidiaries of
banks and thrifts;
- allowing a national bank that is well capitalized and well managed
to establish new operating subsidiaries that may engage in
financial activities other than insurance underwriting, merchant
banking, insurance company portfolio investments, real estate
development and real estate investment, so long as the aggregate
assets of all financial subsidiaries do not exceed 45% of the
parent's assets or $50 billion, whichever is less;
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THE COMPANY (Continued)
- permitting national banks to underwrite municipal bonds;
- securities activities conducted by a bank subsidiary will be
subject to regulation by the Securities and Exchange Commission;
- insurance activities conducted by a bank subsidiary will be
subject to regulation by the applicable state insurance
authority;
- broker-dealer exemptions allowed to banks will be replaced with
limited exemptions;
- de novo unitary thrift holding company applications received by
the OTS after May 4, 1999 shall not be approved;
- existing unitary thrift holding companies may only be sold to
financial companies;
- new privacy provisions allow customers to "opt out" of sharing
non-public personal information with nonaffiliated third parties
subject to certain exceptions;
- requires ATM's which impose a fee on noncustomers to disclose on
the ATM screen the amount of the fee prior to a transaction
becoming irrevocable on the ATM;
- regulatory relief is provided to smaller banks with respect to
the frequency of CRA examinations with less than $250 million in
total assets. The time between examinations may be as long as
five years for small banks and savings and loans; and
- plain language is required for federal banking agency
regulations.
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SUBSIDIARY BANK
Both federal and state law provide extensive regulation of the banking
business. State and federal statutes and regulations apply to many aspects of
the Bank's operations, including minimum capital requirements, reserves against
deposits, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and locations of branch offices. The
California Department of Financial Institutions and the FDIC provide primary
supervision, periodic examination and regulation of the Bank.
The FDIC, through its Bank Insurance Fund (the "BIF") insures the
Bank's deposits, currently up to a maximum of $100,000 per depositor. For this
protection, the Bank, like all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC. Although the
Bank is not a member of the Federal Reserve Bank, certain regulations of the
Federal Reserve Board also apply to its operations.
California law restricts the amount available for cash dividends by
state-chartered banks to the lesser of retained earnings or the bank's net
income for its last three fiscal years (less any distributions to stockholders
made during such period). Cash dividends may also be paid in an amount not
exceeding the net income for such bank's last preceding fiscal year after
obtaining the prior approval of the Commissioner. The FDIC also has authority to
prohibit the Bank from engaging in unsafe or unsound practices. The FDIC can use
this power, under certain circumstances, to restrict or prohibit a bank from
paying dividends.
Federal law imposes restrictions on banks with regard to transactions
with affiliates, including any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, its affiliates, as well as the
purchase of or investments in stock or other securities thereof, or the taking
of such securities as collateral for loans, and the purchase of assets of from
affiliates. These restrictions have the effect of preventing affiliates (such as
the Company) from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts. Secured loans and investments by
the Bank are limited to 10% of the Bank's capital and surplus (as defined by
federal regulations) in the case of any one affiliate, and 20% thereof in the
case of all affiliates. California law also imposes certain restrictions with
respect to transactions involving other controlling persons of the Bank.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. The Bank
cannot predict what, if any legislation or regulations will be enacted, or the
impact thereof on its business and profitability.
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CAPITAL STANDARDS
Government agencies have traditionally regulated bank capital through
explicit and implicit guidelines and rules. State law requires "adequate"
capital, without objective definition. Federal law and regulations require
minimum levels of "risk-based" and "leverage" capital.
FDIC guidelines implement the risk-based capital requirements. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles (using the
rough measures set forth therein) among banking organizations, take certain
off-balance sheet items into account in assessing capital adequacy and minimize
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
U.S. government securities, to 100% for relatively high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned. The
aggregate dollar amount of each category is then multiplied by the risk-weight
associated with that category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital.
Higher risk-based ratios are required to be considered "well capitalized" under
prompt corrective action provisions.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for loan and lease
losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock and related surplus;
(iii) hybrid capital instruments (instruments with characteristics of both debt
and equity), perpetual debt and mandatory convertible debt securities; and (iv)
eligible term subordinated debt and intermediate-term preferred stock with an
original maturity of five years or more, including related surplus, in an amount
up to 50% of Tier 1 capital. The inclusion of the foregoing elements of Tier 2
capital are subject to certain requirements and limitations of the federal
banking agencies.
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CAPITAL STANDARDS (Continued)
The FDIC imposes a minimum leverage ratio of Tier 1 capital to average
total assets of 3% for the highest rated banks, and 4% for all other banks.
Institutions experiencing or anticipating significant growth or those with other
than minimum risk profiles are expected to maintain capital at least 100-200
basis points above the minimum level.
In addition, the Federal Reserve Board and the FDIC have issued rules
to take into account interest rate risk, concentration of credit risk and the
risks of nontraditional activities in calculating risk-based capital.
For capital adequacy purposes, deferred tax assets that can be realized
from taxes paid in prior carry-back years, and from the future reversal of
temporary differences, are generally unlimited. However, deferred tax assets
that can only be realized through future taxable earnings, including the
implementation of a tax planning strategy, count toward regulatory capital
purposes only up to the lesser of (i) the amount that can be realized within one
year of the quarter-end report date or (ii) 10% of Tier 1 capital. The amount of
deferred taxes in excess of this limit, if any, would be deducted from Tier 1
capital and total assets in regulatory capital calculations.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets, including
dollar equivalents for certain off-balance sheet assets.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the concentration
of credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
Management of the Company does not believe that the Bank's assets and
activities, as currently structured, would lead the FDIC to require additional
capital under this rule.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses (the "ALLL") which
calls for the maintenance of the ALLL at a level at least equal to the
"estimated credit losses" in the bank's loan portfolio. "Estimated credit
losses" are defined as "an estimate of the current amount of the loan and lease
portfolio (net of unearned income) that is not likely to be collected; that is,
net charge-offs that are likely to be realized for a loan or pool of loans given
facts and circumstances as of the evaluation date." The policy statement also
suggests that a test of reasonableness be applied to the ALLL, which test is
satisfied if the ALLL equals or exceeds the sum of (a) assets classified loss;
(b) 50% of assets classified doubtful; (c) 15% of assets classified substandard;
and (d) estimated credit losses on other assets over the upcoming twelve months.
The Bank believes that its ALLL exceeds the amounts that would be required under
the terms of this policy statement and under such test of reasonableness.
However, the Bank cannot assure that losses ultimately incurred from the Bank's
portfolio will not exceed the amounts so provided.
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CAPITAL STANDARDS (Continued)
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall generally be deemed to be: (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1999, the Bank met the tests to be categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
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SAFETY AND SOUNDNESS STANDARDS
Federal law requires the federal banking regulatory agencies to
prescribe by regulation, standards for all insured depository institutions
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
federal banking agencies adopted final regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement
safety and soundness standards required by the FDIA. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before capital
becomes impaired. The agencies also proposed asset quality and earnings
standards, which would be added to the Guidelines. Under the final regulations,
if the FDIC determines that the Bank fails to meet any standard prescribed by
the Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC adopted regulations implementing a risk-based premium system
required by federal law. Under the regulations, which cover the assessment
periods commencing on and after January 1, 1994, insured depository institutions
were required to pay insurance premiums within a range of 23 cents per $100 of
deposits to 31 cents per $100 of deposits depending on their risk
classification. The FDIC, effective September 30, 1995, lowered assessments from
their rates of 23 cents to 31 cents per $100 of insured deposits to rates of 4
cents to 31 cents, depending on the health of the bank, as a result of the
re-capitalization of the BIF. Currently, the annual rate by risk classification
is 0 cents for risk classification 1A to 27 cents for 3C classifications. The
FDIC may alter the existing assessment rate structure for deposit insurance and
may change the base assessment rate by rulemaking with notice and comment as
deemed necessary to maintain the target designated reserve ratio 1.25 percent
(fund balance to estimated insured deposits).
The Financing Corporation (FICO), established by the Competitive
Equality Banking Act of 1987, is a mixed-ownership government corporation whose
sole purpose was to function as the financing vehicle for the Federal Savings &
Loan Insurance Corporation (FSLIC). Effective December 12, 1991, as provided by
the Resolution Trust Corporation Refinancing, Restructuring and Improvement Act
of 1991, the FICO's ability to issue new debt was terminated. Outstanding FICO
bonds, which are 30-year non-callable bonds with a principal amount of
approximately $8.1 billion, mature in 2017 through 2019.
The FICO has assessment authority, separate from the FDIC's authority
to assess risk-based premiums for deposit insurance, to collect funds from
FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC
acts as collection agent for the FICO. The Deposit Insurance Funds Act of 1996
(DIFA) authorized the FICO to assess both Bank Insurance Fund (BIF) and Savings
Association Insurance Fund (SAIF) insured deposits, and required the BIF
- 12 -
<PAGE>
PREMIUMS FOR DEPOSIT INSURANCE (Continued)
rate to equal one-fifth the SAIF rate through the year 1999, or until the
insurance funds are merged, whichever occurs first. Thereafter, BIF and SAIF
insured deposits will be assessed at the same rate by FICO.
The FICO assessment rate is adjusted quarterly to reflect changes in
the assessment basis of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the President signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
Under the Interstate Act, beginning one year after the date of enactment, a bank
holding company that is adequately capitalized and managed may obtain regulatory
approval to acquire an existing bank located in another state without regard to
state law. A bank holding company would not be permitted to make such an
acquisition if, upon consummation, it would control (a) more than 10% of the
total amount of deposits of insured depository institutions in the United States
or (b) 30% or more of the deposits in the state in which the bank is located. A
state may limit the percentage of total deposits that may be held in that state
by any one bank or bank holding company if application of such limitation does
not discriminate against out-of-state banks. An out-of-state bank holding
company may not acquire a state bank in existence for less than a minimum length
of time that may be prescribed by state law except that a state may not impose
more than a five year existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirement and conditions as for a merger
transaction.
The Interstate Act is likely to increase competition in the Bank's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Bank's operations.
On October 2, 1995, the "California Interstate Banking and Branching
Act of 1995" (the "1995 Act") became effective. The 1995 Act generally allows
out-of-state banks to enter California by merging with, or purchasing, a
California bank or industrial loan company, which is at least five years old.
Also, the 1995 Act repeals the California Interstate (National) Banking Act of
1986, which previously regulated the acquisition of California banks by
out-of-state bank
- 13 -
<PAGE>
INTERSTATE BANKING AND BRANCHING (Continued)
holding companies. In addition, the 1995 Act permits California state banks,
with the approval of the California Department of Financial Institutions, to
establish agency relationships with FDIC-insured banks and savings associations.
Finally, the 1995 Act provides for regulatory relief, including (i)
authorization for the Commissioner to exempt banks from the requirement of
obtaining approval before establishing or relocating a branch office or place of
business, (ii) repeal of the requirement of directors' oaths (Financial Code
Section 682), and (iii) repeal of the aggregate limit on real estate loans
(Financial Code Section 1230).
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements, reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act (the "CRA"). The CRA generally requires the federal banking
agencies to evaluate the record of financial institutions in meeting the credit
needs of their local community, including low and moderate income neighborhoods.
In addition to substantial penalties and corrective measures that may be
required for a violation of certain fair lending laws, the federal banking
agencies may take compliance with such laws and CRA into account when regulating
and supervising other activities.
The Community Reinvestment Act of 1977 ("CRA") and the related
Regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") are
intended to encourage regulated financial institutions to help meet the credit
needs of their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will assess the records of regulated financial institutions
in satisfying their continuing and affirmative obligations to help meet the
credit needs of their local communities as part of their regulatory examination
of the institution. The results of such examinations are made public and are
taken into account upon the filing of any application to establish a domestic
branch, to merge or to acquire the assets or assume the liabilities of a bank.
In the case of a bank holding company, the CRA performance record of the
subsidiary bank(s) involved in the transaction is reviewed in connection with
the filing of an application to acquire ownership or control of shares or assets
of a bank or to merge with any other bank holding company. An unsatisfactory
record can substantially delay or block the transaction.
In May 1995, the federal banking agencies issued final regulations,
which change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions' actual lending service and
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. In March 1994, the Federal Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending. The policy
statement describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact. Management of the Bank believes that
the Bank is in substantial compliance with all requirements under these
provisions. Following the Bank's most recent CRA examination, the Bank's rating
was "satisfactory".
- 14 -
<PAGE>
OTHER REGULATIONS AND POLICIES
The federal regulatory agencies have adopted regulations that implement
Section 304 of FDICIA, which requires federal banking agencies to adopt uniform
regulations prescribing standards for real estate lending. Each insured
depository institution must adopt and maintain a comprehensive written real
estate lending policy, developed in conformance with prescribed guidelines, and
each agency has specified loan-to-value limits in guidelines concerning various
categories of real estate loans.
Section 24 of the Federal Deposit Insurance Act (the "FDIA"), as
amended by the FDICIA, generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
REGULATORY ENFORCEMENT POWERS
Commercial banking organizations, such as the Bank, may be subject to
enforcement actions by the FDIC and the Commissioner for engaging in unsafe or
unsound practices in the conduct of their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits,
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the prompt corrective action provisions of
the FDICIA.
- 15 -
<PAGE>
CALIFORNIA AND FEDERAL BANKING LAW
The Federal Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of a bank or
holding company unless the appropriate federal regulatory agency has been given
60 days' prior written notice of such proposed acquisition and, within that time
period, has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to the expiration of the
disapproval period if the agency issues written notice of its intent not to
disapprove the action. The acquisition of more than 10% of a class of voting
stock of a bank (or holding company) with a class of registered under Section 12
of the Securities Exchange Act of 1934, as amended (such as Common Stock), is
generally presumed, subject to rebuttal, to constitute the acquisition of
control.
Under the California Financial Code, no person shall, directly or
indirectly, acquire control of a California licensed bank or a bank holding
company unless the Commissioner has approved such acquisition of control. A
person would be deemed to have acquired control of the Company under this state
law if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of the Company or (ii) to direct or cause the direction
of the management and policies of the Company. For purposes of this law, a
person who directly or indirectly owns or controls 10% or more of the Common
Stock would be presumed to control the Company, subject to rebuttal.
In addition, any "company" would be required to obtain the approval of
the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), before acquiring 25% (5% in the case of an acquirer that is, or is
deemed to be, a bank holding company) or more of the outstanding Common Stock
of, or such lesser number of shares as constitute control over, the Bank or the
Company.
RESEARCH
Neither the Company nor the Bank makes any material expenditures for
research and development.
DEPENDENCE UPON A SINGLE CUSTOMER
Neither the Company nor the Bank is dependent upon a single customer or
very few customers. The Bank's business is concentrated in, and largely
dependent upon the strength of the local economy in Redlands and the surrounding
communities of Southern California. The local economy is affected by both
national trends and by local factors.
- 16 -
<PAGE>
ITEM 2. PROPERTIES
Redlands Centennial Bank owns the real property located at 218 East
State Street, Redlands, California. The two-story building situated on the
property consists of 8,500 square feet and houses the executive and head offices
of Redlands Centennial Bank. Redlands Centennial Bank also leases 1,100 square
feet of space at 200 W. Santa Ana Blvd., Santa Ana, California as an office
providing Small Business Administration lending. The current lease term on that
property runs until January 8, 2001 and the monthly rental is $1,705.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to Redlands Centennial Bank's business pending against Redlands
Centennial Bank to which Redlands Centennial Bank is a party or of which any of
its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 1, 1999, the Bank held a special meeting of its
shareholders to adopt the terms of the Agreement and Plan of Reorganization and
Merger (the Agreement) as described in the Company's S-4 filing dated October
20, 1999. Of the 672,284 outstanding shares on the record date, 372,147 were
voted in favor of the Agreement, 5,246 were voted against the agreement and
2,636 shares abstained from voting on the Agreement. The remainder of the
outstanding shares at the record date were not voted.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF CENTENNIAL FIRST FINANCIAL SERVICES' COMMON STOCK
The shares of Centennial First Financial Services' common stock are
thinly traded. They are not listed on national exchanges and there is no
established public market for them. The high and low sales prices and volume of
trades concerning Redlands Centennial Bank's common stock are provided in the
chart below.
- 17 -
<PAGE>
PRICE RANGE OF REDLANDS CENTENNIAL BANK'S COMMON STOCK (Continued)
<TABLE>
<CAPTION>
Sales Prices (1)
Number of
Calendar Quarter High Low Shares Traded
---------------- ---- --- -------------
<S> <C> <C> <C>
1999
Fourth quarter $ 17.000 $ 14.500 21,300
Third quarter 15.250 14.500 11,100
Second quarter 15.375 14.313 68,700
First quarter 15.875 14.750 24,800
1998
Fourth quarter 15.750 13.695 6,700
Third quarter 11.060 9.710 34,800
Second quarter 11.250 9.000 10,100
First quarter 12.930 7.970 14,400
1997
Fourth quarter 8.160 7.730 9,300
Third quarter 7.850 7.260 43,378
</TABLE>
(1) Prior to forming the holding company, Redlands Centennial Bank has paid
the following stock dividends since the beginning of 1997: a 7% stock
dividend on December 1, 1997; and a 25% stock dividend on December 1,
1998. The sales prices have been retroactively adjusted for the stock
dividends.
DIVIDENDS
The payment of stock and cash dividends in the future is not
guaranteed, and subject to the discretion of the Board of Directors of
Centennial First Financial Services and will depend on earnings, financial
condition and other relevant factors, including applicable regulatory orders and
restrictions with respect to dividends. Prior to forming the holding company,
Redlands Centennial Bank paid a 25% stock dividend to shareholders of record on
November 1, 1998, and a 7% stock dividend to shareholders of record on November
1, 1997. On January 3, 2000, Centennial First Financial Services declared a 5%
stock dividend and 5 cents cash dividend to shareholders of record January 10,
2000, and payable January 21, 2000. Redlands Centennial Bank paid a $35,000 cash
dividend to Centennial First Financial Services and an additional $30,000 to pay
for the reorganization costs and initial capitalization and provide Centennial
First Financial Services with working capital. The payment of cash dividends by
the Company in the future is subject to the discretion of the Board of Directors
of the Company and will depend on Redlands Centennial Bank paying a cash
dividend to the Company. The Bank's ability to pay a cash dividend to the
Company will depend on the Bank's earnings, financial condition and other
relevant factors, including applicable regulatory orders and restrictions with
respect to dividends.
- 18 -
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The following discussion is intended to provide sufficient information
about Centennial First Financial Services and its subsidiary, Redlands
Centennial Bank, to enhance the reader's understanding of the Company's
financial condition and results of operations. Centennial First Financial
Services has not conducted any significant business activities independent of
Redlands Centennial Bank since its inception. Therefore, the following
discussion and analysis relates primarily to the Bank. In order to understand
this section in context, it should be read in conjunction with the audited
financial statements, including the notes thereto and other data presented.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-KSB, including without limitation
statements containing the words "believes," "anticipates," "intends," "expects,"
"pro forma" and words of similar import, constitute forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic conditions in the
Company's market areas; variances in interest rates; changes in or amendments to
regulatory authorities' capital requirements or other regulations applicable to
the Company, increased competition for loans and deposits; and other factors
referred to elsewhere in this Form 10-KSB. Given these uncertainties,
shareholders are cautioned not to place undue reliance on forward-looking
statements. The Company disclaims any obligation to update and such factors
which are not considered to be material or to publicly announce the result of
any revisions to any of the forward-looking statements included herein which are
not considered to be material to reflect future events or developments.
SUMMARY
The Company reported net income of $729,192 for the year ending
December 31, 1999, compared to net income totaling $627,188 for the year ending
December 31, 1998, an increase of 16.3%. Basic earnings per share for 1999 were
$1.09 versus $.95 for 1998. Diluted earnings per share, adjusted for the effect
of the exercise of stock options and stock dividends, resulted in earnings per
share of $1.02 in 1999 versus $.88 in 1998.
Total assets at December 31, 1999 reached a record of $76,007,045, an
increase of 9.2% or $6,412,600, compared to $69,594,445 at December 31, 1998.
Total assets at year-end 1998 exceeded year-end 1997 totals by $10,459,258, or
17.7%.
- 19 -
<PAGE>
SUMMARY (Continued)
At December 31, 1999, total deposits grew to a record level of
$69,139,598, an increase of $5,814,969 or 9.2% above year-end 1998. An increase
of 11.2%, or $3,619,694 in demand deposits, interest bearing and NOW accounts
was recorded, as these accounts totaled $36,015,790 at December 31, 1999,
compared to $32,396,096 at December 31, 1998.
Return on average stockholders' equity was 12.0%, 11.43%, and 12.78%
for the years ending December 31, 1999, 1998, and 1997, respectively. The
risk-based capital ratio was 11.22%, 12.37%, and 13.74% as of December 31, 1999,
1998, and 1997, respectively.
The following table provides a summary of the income statement, balance
sheet and selected ratios for 1999 and 1998. A more detailed analysis of each
component of net income is included under the appropriate captions, which
follow.
<TABLE>
<CAPTION>
(Dollars in Thousands Except for
Per Share Information)
1999 1998
<S> <C> <C>
RESULTS OF OPERATIONS
Interest income $ 5,976 $ 5,039
Interest expense 1,586 1,694
Net interest income 4,390 3,345
Provision for loan losses 225 50
Noninterest income 1,035 977
Noninterest expense 4,152 3,452
Net income 729 627
BALANCE SHEET (END OF PERIOD)
Total assets $ 76,007 $ 69,594
Total loans 53,188 41,027
Allowance for loan losses 581 433
Nonperforming loans 61 327
Other real estate and repossessed assets owned 20 11
Total deposits 69,140 63,325
Stockholders' equity 6,328 5,818
BALANCE SHEET (PERIOD AVERAGE)
Total assets $ 72,559 $ 68,722
Total loans 46,978 37,095
Earning assets 63,076 56,558
Total deposits 65,963 62,473
Stockholders' equity 6,059 5,764
</TABLE>
- 20 -
<PAGE>
SUMMARY (Continued)
<TABLE>
<CAPTION>
(Dollars in Thousands Except for
Per Share Information)
1999 1998
<S> <C> <C>
CAPITAL RATIOS
Leverage ratio 8.44% 8.52%
Tier 1 risk-based capital 10.30% 11.52%
Total risk-based capital 11.22% 12.37%
ASSET QUALITY RATIOS
Nonperforming loans/total loans 0.13% 0.88%
Nonperforming assets/total assets 0.83% 0.65%
Allowance for loan losses/total loans 1.24% 1.17%
PERFORMANCE RATIOS
Return on average assets 1.00% 0.91%
Return on average equity 12.03% 10.88%
Net interest margin 6.96% 5.91%
Net interest spread 6.26% 5.01%
Average total loans to average total deposits 71.22% 59.38%
Efficiency ratio 76.53% 79.87%
PER SHARE INFORMATION
Basic earnings $ 1.09 $ 0.95
Diluted earnings $ 1.02 $ 0.88
Common stock dividends declared $ -- $ --
Common stock book value $ 9.42 $ 8.84
Common shares outstanding at period end 677,028 667,377
Weighted average common shares outstanding 671,676 658,256
</TABLE>
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the difference between interest earned on loans
and investments and interest paid on deposits. Net interest income totaled
$4,390,237 for the year ended December 31, 1999, up 31.3% from $3,344,675 at
December 31, 1998, which was up 25.3% from $2,670,190 at December 31, 1997. The
primary factor contributing to the growth of net interest income during 1999 was
an increase in fees and interest on construction loans and increases in the
Company's prime rate. The increase in 1999 and 1998 was also due to an overall
increase in earning assets. Earning assets increased $5,321,724, or 8.8%, to
$65,937,335 in 1999, compared to an increase of $9,623,531, or 18.9%, to
$60,615,611 in 1998.
The net interest margin was 6.96%, 5.91%, and 5.50% for the years ended
December 31, 1999, 1998 and 1997, respectively.
- 21 -
<PAGE>
INTEREST SPREAD ANALYSIS
The following table shows the components of the Bank's net interest
income setting forth, for each of the three years ended December 31, 1999, 1998
and 1997 (i) average interest earning assets, interest bearing liabilities and
investments, (ii) interest income earned on interest earning assets and interest
expense paid on interest bearing liabilities, (iii) average yields earned on
interest earning assets and average rates paid on interest bearing liabilities,
(iv) the net interest spread (i.e., yield earned on interest earning assets less
the average rate paid on interest bearing liabilities) and (v) the net interest
margin (i.e., net interest income divided by average interest earning assets).
Yields are not computed on a tax-equivalent basis. Non-accrual loans and
overdrafts are included in average loan balances. Average loans are presented
net of unearned income.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ---------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Earned/ Interest Average Earned/ Interest Average Earned/ Interest
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 3,157 $ 151 4.75% $ 6,549 $ 340 5.11% $ 2,995 $ 156 5.15%
Interest-bearing deposits in
financial institutions 3,900 238 6.10 3,872 252 6.52 5,029 306 6.08
Investment securities 9,041 487 5.39 9,042 530 5.86 12,371 778 6.29
-------- ------- ---- --------- -------- ----- --------- -------- -------
Total investments 16,098 876 5.44 19,463 1,122 5.76 20,395 1,240 6.08
Loans 46,978 5,100 10.86 37,095 3,917 10.56 28,226 2,928 10.37
-------- ------- ----- --------- -------- ----- --------- -------- -------
Total interest earning assets $ 63,076 $ 5,976 9.47% $56,558 $5,039 8.91% $ 48,621 $4,168 8.57%
======== ======= ===== ========= ======== ===== ========= ======== =======
Interest Bearing Liabilities:
Interest bearing demand
deposits $ 10,510 $ 119 1.13% $ 8,510 $ 112 1.31% $ 7,524 $ 95 1.27%
Money market deposits 7,631 213 2.79 6,493 208 3.20 4,943 132 2.67
Savings deposits 11,180 295 2.62 9,246 337 3.64 7,205 268 3.73
Time deposits of $100,000
or more 9,397 452 4.86 8,192 604 5.29 8,223 405 4.93
Time deposits under
$100,000 10,592 507 4.79 11,014 433 5.49 9,337 598 5.52
-------- ------- ---- --------- -------- ------ --------- -------- -----
Total interest-bearing
liabilities $ 49,310 $ 1,586 3.22% $ 43,455 $ 1,694 3.90% $ 37,232 $ 1,498 4.02%
======== ======= ===== ========= ======== ====== ========= ======== =====
Net interest income $ 4,390 $ 3,345 $ 2,670
======= ======== ========
Net interest spread 6.26% 5.01% 4.55%
===== ====== =====
Net interest margin 6.96% 5.91% 5.49%
===== ====== =====
</TABLE>
- 22 -
<PAGE>
INTEREST SPREAD ANALYSIS (Continued)
<TABLE>
<CAPTION>
1999 COMPARED WITH 1998 1998 COMPARED WITH 1997
-------------------------------- --------------------------------
Increase (decrease) due to Increase (decrease) due to
change in: change in:
Average Average Average Average
Volume Rate Total Volume Rate Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME
Federal funds sold $ (239) $ 50 $ (189) $ 212 $ (28) $ 184
Interest-bearing deposits in
financial institutions (32) 18 (14) (34) (20) (54)
Investment securities (113) 70 (43) (173) (75) (248)
Loans 1,213 (30) 1,183 866 123 989
--------- ------- -------- -------- ------- --------
Total 829 108 937 871 (0) 871
-------- ------- -------- -------- ------- --------
INCREASE (DECREASE) IN INTEREST EXPENSE
Interest bearing demand deposits 32 (25) 7 (26) 43 17
Money market deposits (23) 28 5 140 (64) 76
Savings deposits 13 (55) (42) 127 (58) 69
Time deposits of $100,000 or more 142 (294) (152) 6 193 199
Time deposits under $100,000 (47) 121 74 76 (241) (165)
-------- ------- -------- -------- ------- --------
Total 117 (225) (108) 323 (127) 196
-------- ------- -------- -------- ------- --------
TOTAL CHANGE IN NET INTEREST INCOME $ 71 $ 333 $1,045 $ 548 $ 127 $ 675
======== ======= ======== ======== ======= ========
</TABLE>
OTHER INCOME
Other income for the Company includes customer service fees, net gain
from sale of loans, net gain or loss from sale of investment securities, and
other miscellaneous income. Total other income grew 5.9% in 1999. In 1998, total
other income increased 76.2% as a result of increases in fees, revenue gains
from the sale of SBA loans, and gains from the sales of investment securities.
Customer service fees increased to $717,947 in 1999 from $518,379 in
1998 and from $295,310 in 1997. The gain on sale of loans was $220,275 in 1999,
compared with $285,668 in 1998 and $116,847 in 1997. During 1998, the Company
opened an Orange County based SBA Loan Department. The Company incurred a minor
loss from the sale of investment securities of $2,317 in 1999, compared to gains
of $119,361 in 1998. Miscellaneous income for 1999 totaled $99,033, compared to
$53,944 in 1998. It is management's intention to continue to sell its SBA loans
to outside investors.
- 23 -
<PAGE>
OTHER EXPENSES
Total other expenses for 1998 were $4,151,859, an increase of $700,020
from December 31, 1998. During 1999, salaries, wages and employee benefits
increased $574,985 or 36.1%, compared to an increase of $341,965, or 27.4%, from
1997 to 1998, primarily due to increases in staffing of the SBA and Construction
Loan Divisions, as well as normal branch growth.
In 1999, net occupancy expense increased $39,607 to $354,295, or 12.6%,
compared to an increase of $58,746, or 23.0%, from 1997 to 1998. Cost increases
relate to the Company's expansion in establishing new sources of loan and fee
income through real estate, construction and SBA lending.
Other operating expenses, including professional fees, data processing
fees, supplies and advertising were $1,631,503 in 1999, an increase of only
$85,428 or 5.5% from $1,546,075 in 1998, as compared to an increase of $708,737,
or 84.6%, from 1997 to 1998.
INCOME TAXES
The provision for income taxes was $319,124 in 1999 versus $193,000 in
1998 and $263,300 in 1997. For the year ended December 31, 1999, the effective
tax rate was 30.4%, compared to 23.2% for the year ended December 31, 1998, and
30.1% for the year ended December 31, 1997.
INVESTMENT SECURITIES
The Company's investment portfolio provides income to the Company and
also serves as a source of liquidity. Total yield, maturity and risk are among
the factors considered in building the investment portfolio. Under FDIC
guidelines for risk-based capital, certain loans and investments may affect the
level of capital required to support risk-weighted assets. For example, U.S.
Treasury Securities have a 0% risk weighting, whereas U.S. Agency Pools have a
20% risk weighting, while 1-4 family real estate loans carry a 50% risk
weighting. In addition, pursuant to FASB 115, securities must be classified as
"held to maturity," "available for sale," or "trading securities." Those
securities held in the "available for sale" category must be carried on the
Company's books at "fair market value." At December 31, 1999, the Company's
"available for sale" investment portfolio consisted of $3,640,900 in
mortgage-backed securities, $3,752,710 in municipal bonds, and $399,814 in U.S.
Treasury obligations compared to $4,676,773, $3,593,132 and $411,000,
respectively in 1998.
At December 31, 1999, the Company did not carry any "held to maturity"
investments, compared to $807,352 at December 31, 1998, which was carried at net
book value. In order to maintain its liquidity and ability to meet the demand
for loans, the Company did not reinvest the pay downs and maturities from "held
to maturity" investments held in 1998. The Company has no trading securities.
Interest-bearing deposits in short-term time certificates at other financial
institutions totaled $3,612,012 at year-end 1999 versus $4,104,463 in 1998.
Overnight Federal Funds sold totaled $2,150,000 in 1999, as compared to
$6,820,000 in 1998.
- 24 -
<PAGE>
The following table shows the carrying amount of investment securities
as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Thousands)
Available for sale:
Mortgage-backed securities $ 3,722 $ -- $ 81 $ 3,641
Obligations of states and
local governments 4,011 -- 258 3,753
U.S. Treasury Obligations 405 -- 6 399
Federal Home Loan Bank
stock 210 -- -- 210
--------- --------- -------- ---------
$ 8,348 $ -- $ 345 $ 8,003
========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 4,671 $ 13 $ 7 $ 4,677
Obligations of states and
local governments 3,583 11 1 3,593
U.S. Treasury Obligations 404 7 -- 411
--------- --------- --------- ---------
$ 8,658 $ 31 $ 8 $ 8,681
========= ========= ========= =========
Held to maturity:
Corporate securities,
Mortgage-backed $ 807 $ 8 $ -- $ 815
========= ========= ========= =========
</TABLE>
The following table shows the weighted average maturities and yields of
investment securities as of December 31, 1999. Weighted average yields on
obligations of state and local governments have not been computed on a tax
equivalent basis.
<TABLE>
<CAPTION>
After 1 year 5 years through
One year or less through 5 years 10 years After 10 years Total
(In thousands) Average Average Average Average Average
$ Yield $ Yield $ Yield $ Yield $ Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
Mortgage backed securities 159 4.53% 2,939 6.31% 624 6.46% -- 0.00% 3,722 6.25%
Obligations of state and local
governments 330 7.01% 361 6.63% 2,457 6.48% 863 6.63% 4,011 6.57%
U.S. Treasury Obligations -- 0.00% 405 5.44% -- 0.00% -- 0.00% 405 5.44%
Federal Home Loan Bank stock 210 0.00% -- 0.00% -- 0.00% -- 0.00% 210 0.00%
------------ --------------- -------------- -------------- --------------
$ 699 4.34% $ 3,705 6.24% $3,081 6.48% $ 863 6.63% $ 8,348 6.21%
============ =============== ============== ============== ==============
</TABLE>
- 25 -
<PAGE>
LOANS
Total loans were $53,187,795 at December 31, 1999, total loans
increased by $12,160,360, or 29.6%, during 1999, compared to growth of
$8,561,951, or 26.4%, during 1998. Mortgage loans on real estate totaled
$27,782,887 at December 31, 1999, an increase of $11,485,922 or 70.5% from 1998.
Commercial loans totaled $18,686,010 at December 31, 1999, an increase of
$2,011,665 or 12.1% from 1998. Consumer installment loans totaled $6,718,898 at
December 31, 1999, a decrease of $1,337,227, or 16.6%, from 1998.
Approximately 29.1%, or $15.5 million, of the Company's loan portfolio
is at fixed rates, compared to 33.9%, or $13.9 million, for 1998. Of the total
portfolio, $6.7 million of fixed rate loans mature within one year for 1999,
compared to $3.4 million of fixed rate loans maturing in one year for 1998.
Loans having variable rates increased to $37.7 million in 1999 compared to $27.2
million in 1998.
The following table sets forth the amount of loans outstanding as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
% of % of
(In Thousands) 1999 Total 1998 Total
<S> <C> <C> <C> <C>
Real estate loans
Construction and development $ 15,248 28.7% $ 4,977 12.1%
Mortgage loans 12,533 23.6% 11,320 27.6%
Commercial loans 18,686 35.1% 16,674 40.6%
Automobile loans 2,468 4.6% 2,563 6.2%
Indirect loans 1,845 3.5% 3,348 8.2%
Equity loans 876 1.6% 149 0.4%
Consumer and other loans 1,530 2.9% 1,995 4.9%
--------------------- ---------------------
53,186 100.0% 41,026 100.0%
Unearned income (224) (391)
Allowance for loan losses (581) (433)
---------- ----------
$ 52,381 $ 40,202
========== ==========
</TABLE>
- 26 -
<PAGE>
LOANS (Continued)
The following table shows the amounts of real estate and commercial
loans outstanding at December 31, 1999 which, based on the remaining scheduled
repayments of principal, are due in one year or less, more than 1 year but less
than 5 years, and more than 5 years. The amounts are classified according to the
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
(In Thousands) 1999
<S> <C>
Real estate construction and development
and mortgage loans
Aggregate maturities of balances due:
In one year or less
Interest rates are floating or adjustable $ 9,511
Interest rates are fixed or predetermined 6,039
After one year but within 5 years
Interest rates are floating or adjustable 2,025
Interest rates are fixed or predetermined 1,012
Due after 5 years
Interest rates are floating or adjustable 8,263
Interest rates are fixed or predetermined 931
----------
Total real estate construction and development
and mortgage loans 27,781
----------
Commercial loans
Aggregate maturities of balances due:
In one year or less
Interest rates are floating or adjustable 8,088
Interest rates are fixed or predetermined 384
After one year but within 5 years
Interest rates are floating or adjustable 5,979
Interest rates are fixed or predetermined 658
Due after 5 years
Interest rates are floating or adjustable 3,386
Interest rates are fixed or predetermined 191
----------
Total commercial loans 18,686
----------
Total commercial and construction loans $ 46,467
==========
</TABLE>
- 27 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is an expense charged against operating
income and added to the allowance for loan losses. The allowance for loan losses
represents amounts, which have been set-aside for the specific purpose of
absorbing losses, which may occur in the Bank's loan portfolio.
The allowance for loan losses reflects management's ongoing evaluation
of the risks inherent in the loan portfolio, generally and with respect to
specific loans, the state of the economy, and the level of net loan losses
experienced in the past. Management and the Board of Directors review the
results of the State Banking Department and FDIC examinations, independent
accountants' observations, and the Bank 's internal review as additional
indicators to determine if the amount in the allowance for loan losses is
adequate to protect against estimated future losses. It is the Bank 's current
practice, which could change in accordance with the factors mentioned above, to
maintain an allowance, which is at least equal to the sum of the following
percentage of loan balances by loan category.
<TABLE>
<CAPTION>
Loan Category
Classified loans: Reserve%
<S> <C>
Loans classified loss 100.00%
Loans classified non-accrual - doubtful 50.00
Loans classified non-accrual - substandard 20.00
Loans classified substandard - unsecured 20.00
Loans classified substandard - secured 10.00
Loans classified special mention 2.00
Loans classified watch 1.00
<CAPTION>
Delinquent loans:
<S> <C>
Real estate and construction loans over 30 days past due 1.25
Real estate and construction loans over 60 days past due 2.50
Commercial loans over 30 days past due 1.25
Commercial loans over 60 days past due 10.00
Consumer auto loans over 30 days past due 2.50
Consumer auto loans over 60 days past due 10.00
Consumer real estate loans over 30 days past due 1.25
Consumer real estate loans over 60 days past due 2.50
Other consumer loans over 30 days past due 2.50
Other consumer loans over 60 days past due 10.00
- 28 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES (Continued)
<CAPTION>
Unclassified loans: Reserve%
<S> <C>
Real estate loans - construction 1.00
SBA real estate loans - unguaranteed portion 0.75
SBA real estate loans - guaranteed portion 0.00
Real estate loans - other 0.75
Commercial loans 0.50
Commercial SBA loans - unguaranteed portion 0.50
Commercial SBA loans - guaranteed portion 0.00
Automobile loans - direct/indirect 0.50
Automobile loan insurance reserve 0.25
Equity loans 0.50
Consumer and other loans 0.50
</TABLE>
Prudent collection efforts, and tighter lending controls, are
responsible for the Bank's strong performance on these measures of credit
quality. However, no assurance can be given that the Bank's loan portfolio will
continue to measure well against its peers on these ratios and quality measures,
or that losses will not otherwise occur in the future.
The allowance for loan losses was $581,430 or 1.1% of gross loans at
December 31, 1999, $433,475 or 1.1% of gross loans at December 31, 1998 and
$489,711 or 1.5% of gross loans at December 31, 1997. The amount maintained
reflects management's evaluation of the present economic outlook concerning the
liquidity and realizable value of the real property held as collateral. It also
reflects an ongoing evaluation of the risks inherent in the Company's loan
portfolio, the short-term and long-term economic forecasts and the continued
monitoring of specific loans where there are potential losses. Non-performing
assets include loans for which interest is no longer accruing, loans 90 or more
days past due, impaired loans and other real estate owned. Non-performing assets
at December 31, 1999 totaled $60,671 verses $327,111 at December 31, 1998, as a
result of the Company's continued adherence to strict loan standards and
policies.
The following table summarizes the changes in the allowance for loan
losses arising from loan losses, recoveries on loans previously charged off and
provisions for loan losses charged to operating expense during the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Balance of allowance for loan losses
at beginning of year $ 433 $ 490
--------- ---------
Loans charged off:
Real estate $ - - $ - -
Commercial (13) (108)
Installment and other loans (83) (55)
--------- ---------
(96) (163)
--------- ---------
</TABLE>
- 29 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES (Continued)
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Recoveries of loans previously charged off:
Real estate $ - - $ - -
Commercial 14 51
Installment and other loans 5 5
--------- ---------
19 56
--------- ---------
Net loans charged off (77) (107)
Provision charged to operating expense 225 50
--------- ---------
Balance of allowance for loan losses
at end of year $ 581 $ 433
========= =========
Amount of total loans outstanding at
end of year $ 53,186 $ 41,026
Average amount of loans outstanding 46,978 37,095
Ratio of net charge-offs to average
loans outstanding .2% .3%
Ratio of allowance for loan losses at
end of the year to average loans
outstanding 1.2% 1.2%
Ratio of allowance for loan losses at
end of the year to total loans outstanding
at end of year 1.1% 1.1%
</TABLE>
The following table sets from the Company's allocation of the allowance
for loan losses to specific loan categories at December 31, 1999 and 1998. The
allocations are based upon the same factors as considered by management in
determining the amount additional provisions to the allowance for loan losses
and the aggregate level of the allowance.
<TABLE>
<CAPTION>
Allocation of allowance for loan losses 1999 1998
Percentage Percentage
of loans in of loans in
each category each category
Amount to total loans Amount to total loans
<S> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate loans
Construction and development $ 167 28.7% $ 52 12.1%
Mortgage loans 137 23.6% 120 27.6%
Commercial loans 204 35.1% 176 40.6%
Automobile loans 27 4.6% 27 6.2%
Indirect loans 20 3.5% 36 8.2%
Equity loans 9 1.6% 2 0.4%
Consumer and other loans 17 2.9% 20 4.9%
-------- ------- --------- --------
$ 581 100.0% $ 433 100.0%
======== ======= ========= ========
</TABLE>
- 30 -
<PAGE>
ALLOWANCE FOR LOAN LOSSES (Continued)
The allowance for loan losses should not be interpreted as an
indication that future charge-offs will occur in these amounts or proportions,
or that the allocation indicates future charge-off trends.
Although management believes the level of the allowance for loan losses
as of December 31, 1999, is adequate to absorb losses inherent in the loan
portfolio, currently unanticipated conditions and events, such as additional
declines in the local economy and increases in interest rates, may result in
losses that cannot reasonably be predicted at this date.
DEPOSITS
Total deposits increased $5,814,969, or 9.2%, to a record level of
$69,139,598 at December 31, 1999. During 1998, deposits increased $9,668,496 or
18.0% to $63,324,629. An increase of non-interest bearing deposits and a
decrease in total interest expense contributed to lower cost of funds during
1999. In 1999, non-interest bearing deposits grew 11.6% to $18,135,050, up
$1,882,357 over $16,252,693 recorded at December 31, 1998, and increased
$1,576,928, up 10.7% over $14,675,765 at December 31, 1997. The Company's cost
of funds for 1999 was 2.40%, as compared to 2.90% and 3.07% for 1998 and 1997,
respectively.
The Bank's deposit products include non-interest bearing demand
deposits, interest-bearing demand deposits, money market and savings accounts,
and time certificates of deposit. The majority of the Bank's deposits are
obtained from its primary marketing area.
The distribution of average deposits and the average rates paid thereon
is summarized for the periods indicated below:
<TABLE>
<CAPTION>
1999 1998
DEPOSITS Average Average Average Average
(In thousands) Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 16,678 $ 14,664
Interest bearing demand deposits 10,510 1.13% 8,510 1.31%
Money market deposits 7,631 2.79% 6,493 3.20%
Savings deposits 11,180 2.62 9,246 3.64%
Time deposits of $100,000 or more 9,397 4.86% 8,192 5.29%
Time deposits under $100,000 10,592 4.79% 11,014 5.49%
----------------------- ----------------------
$ 65,988 $ 58,119
=========== ==========
</TABLE>
The following is a maturity schedule of time certificates of deposit as
of December 31, 1999:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Three months or less $ 8,142
Over three months through six months 4,422
Over six months through twelve months 7,601
Over twelve months 951
----------
$ 21,116
==========
</TABLE>
- 31 -
<PAGE>
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity represents a bank's ability to provide sufficient cash flows
or cash resources in a manner that enables it to meet obligations in a timely
fashion and adequately provides for anticipated future cash needs. For the Bank,
liquidity considerations involve the capacity to meet expected and potential
requirements of depositors seeking access to balances and to provide for the
credit demands of borrowing customers. In the ordinary course of the Bank's
business, funds are generated from the repayment of loans, maturities within the
investment securities portfolio and the acquisition of deposit balances and
short-term borrowings. In addition, the Bank has a line of credit from the
Federal Home Loan Bank of San Francisco of approximately $3,200,000. The Bank
also has unsecured, written lines of credit, which allow it to borrow federal
funds of $4,500,000 from three correspondent banks in order to meet temporary
liquidity requirements.
As a matter of policy, the Bank seeks to maintain a level of liquid
assets, including marketable investment securities, equal to at least 20% of
total assets ("primary liquidity"), while maintaining sources of secondary
liquidity (borrowing lines from other institutions) equal to at least an
additional 10% of assets. In addition, it seeks to generally limit loans to not
more than 85% of deposits. Within these ratios, the Bank generally has excess
funds available to sell as federal funds on a daily basis, and is able to fund
its own liquidity needs without the need of short-term borrowing. The Bank's
primary liquidity at December 31, 1999, 1998 and 1997 was 17.83%, 29.33%, and
33.18% respectively, while its average loan to deposit ratio for such years was
71.22%, 59.38% and 57.12% respectively.
Brokered deposits are deposit instruments, such as certificates of
deposit, deposit notes, bank investment contracts and certain municipal
investment contracts that are issued through brokers and dealers who then offer
and/or sell these deposit instruments to one or more investors. Additionally,
deposits on which a financial institution pays an interest rate significantly
higher than prevailing rates are considered to be brokered deposits. Federal law
and regulation restricts banks from soliciting or accepting brokered deposits,
unless the bank is well capitalized under Federal guidelines. The Bank had
brokered deposits of approximately $2,866,000, $1,269,000 and $1,467,000 at
December 31, 1999, 1998 and 1997, respectively. The Bank's asset/liability
policy limits brokered deposits to no more than 10% of total deposits.
Management of interest rate sensitivity (asset/liability management)
involves matching and repricing rates of interest-earning assets with
interest-bearing liabilities in a manner designed to optimize net interest
income within the constraints imposed by regulatory authorities, liquidity
determinations and capital considerations. The Bank's asset/liability policy was
revised in September 1999.
- 32 -
<PAGE>
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT (Continued)
The purpose for asset/liability management is to provide stable net
interest income growth by protecting the Bank's earnings from undue interest
rate risk. The Bank expects to generate earnings from increasing loan volume,
appropriate loan pricing and expense control and not from trying to accurately
forecast interest rates. Another important function of asset/liability
management is managing the risk/return relationships between interest rate risk,
liquidity, market risk and capital adequacy. The Bank gives priority to
liquidity concerns followed by capital adequacy, then interest rate risk and
market risk in the investment portfolio. The policy of the Bank will be to
control the exposure of the Bank's earnings to changing interest rates by
generally maintaining a position within a narrow range around an "earnings
neutral position." An earnings neutral position is defined as the mix of assets
and liabilities that generate a net interest margin that is not affected by
interest rate changes. However, Management does not believe that the Bank can
maintain a totally earnings neutral position. Further, the actual timing of
repricing of assets and liabilities does not always correspond to the timing
assumed by the Bank for analytical purposes. Therefore, changes in market rates
of interest will generally impact on the Bank's net interest income and net
interest margin for long or short periods of time.
The Bank monitors its interest rate risk on a quarterly basis through
the use of a model, which calculates the effect on earnings of changes in the
prevailing market interest rate. The model converts a prevailing market interest
rate change into rate changes for each major class of asset and liability, then
simulates the bank's net interest margin based on the bank's actual repricing
over a one year period, assuming that maturities are reinvested in instruments
identical to those maturing during the period. At December 31, 1999, assuming
the effect of a 2% increase or decrease in prevailing market interest rates, the
increase in economic value of equity was approximately $4,351,000 and
$6,851,000, respectively. This represents a net portfolio value ratio of 13.35%
and 15.91%, respectively, as compared to the Bank's net portfolio value ratio of
8.35% at December 31, 1999. The net portfolio value ratio represents total
stockholders equity divided by total assets. These forecasted results fall
within the Bank's asset/liability policy guidelines of 7% to 20%.
The Company has no sources of revenues or liquidity other than
dividends, tax equalization payments or management fees from the Bank. The
ability of the Bank to pay such items to the Company is subject to limitations
under state and Federal law.
RISK MANAGEMENT
Various types of risk are inherent in the business of banking. Federal
regulators have adopted examination guidelines that scrutinize not only a bank's
level of risk, but also its ability to manage and control that risk. Regulators
evaluate risks that affect capital, liquidity, and compliance to determine their
potential effect on the safety and soundness of a bank. Certain risks may be
covered by insurance coverage, but management must establish a risk management
approach that addresses all areas of risk.
- 33 -
<PAGE>
RISK MANAGEMENT (Continued)
The Company has in place acceptable limits for each of the risks
identified by the Federal Deposit Insurance Corporation. The Company has defined
the types of risk, and has mechanisms in place to manage, monitor and report
those risks. Specifically, the Company focuses on six risk categories within
each area of the Company. Those include credit risk, interest rate risk,
liquidity risk, market risk, transaction risk and compliance risk.
CAPITAL RESOURCES
The Company maintains capital to comply with legal requirements, to
provide a margin of safety for its depositors and stockholders, and to provide
for future growth and the ability to pay dividends. At December 31, 1999,
stockholders' equity was $6,327,816 versus $5,818,344 at December 31, 1998 and
$5,152,847 at December 31, 1997. The Bank issued a 25% stock dividend accounted
for as a stock split in 1998 and a 7% stock dividend during 1997. The Bank paid
cash dividends totaling $11,000 to the Company during 1999.
To the extent the Company has capital in excess of its estimated
capital requirements, it may occasionally repurchase its common shares. During
February 2000, the Company repurchased approximately $637,000 or 43,500 shares
of its common shares.
The FDIC and Federal Reserve Board have adopted capital adequacy
guidelines for use in their examination and regulation of banks and bank holding
companies. If the capital of a bank or bank holding company falls below the
minimum levels established by these guidelines, it may be denied approval to
acquire or establish additional banks or non-bank businesses, or the FDIC or
Federal Reserve Board may take other administrative actions. The guidelines
employ two measures of capital: (1) risk-based capital and (2) leverage capital.
In general, the risk-based capital guidelines provide detailed
definitions of which obligations will be treated as capital, and assign
different weights to various assets and off-balance sheet items, depending upon
the perceived degree of credit risk associated with each asset. Each asset is
assigned to one of four risk-weighted categories. For example, 0% for cash and
unconditionally guaranteed government securities; 20% for deposits with other
banks and fed funds; 50% for state bonds and certain residential real estate
loans; and 100% for commercial loans and other assets. Capital is categorized as
either Tier 1 capital, consisting of common stock and retained earnings (or
deficit), or Tier 2 capital, which includes limited-life preferred stock and
allowance for loan losses (subject to certain limitations). The guidelines also
define and set minimum capital requirements (risk-based capital ratios), which
increased over a transition period ended December 31, 1992. Under the final 1992
rules, all banks were required to maintain Tier 1 capital of at least 4% and
total capital of 8.0% of risk-adjusted assets. The Company had a Tier 1 capital
ratio of 8.44%, 8.52% and 8.72% at December 31, 1999, 1998 and 1997,
respectively, and a total risk-based capital ratio of 11.22%, 12.37% and 13.74%
at December 31, 1999, 1998 and 1997, respectively.
- 34 -
<PAGE>
CAPITAL RESOURCES (Continued)
The leverage capital ratio guidelines require a minimum leverage
capital ratio of 3% of Tier 1 capital to total assets less goodwill. The Company
had a leverage capital ratio of 8.58%, 8.43% and 8.55% at December 31, 1999,
1998 and 1997, respectively.
YEAR 2000
The Company has not experienced any disruptions associated with the
century date change. Management feels that the extensive testing of hardware and
mission critical systems and the monitoring of borrowers' Year 2000 readiness
has limited the Company's exposure to disruptions. The Company's Year 2000
expenses paid to outside consultants and software vendors were $18,807 in 1999
and $53,154 in 1998. These amounts do not include employee salaries directly
associated with testing and documenting systems for compliance.
- 35 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Centennial First Financial Services
Redlands, California
We have audited the accompanying consolidated statements of condition of
Centennial First Financial Services and subsidiary, Redlands Centennial Bank, as
of December 31, 1999 and 1998, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 financial position of Centennial First
Financial Services and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Hutchinson and Bloodgood LLP
January 21, 2000
- 36 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,230,412 $ 4,485,450
Federal funds sold 2,150,000 6,820,000
--------------- ---------------
Total cash and cash equivalents 7,380,412 11,305,450
Interest-bearing deposits in financial institutions 3,612,012 4,104,463
Investment securities, available for sale 7,793,424 8,680,905
Investment securities, held to maturity - - 807,352
Federal Home Loan Bank stock, at cost 210,000 - -
Loans, net 52,381,899 40,202,891
Accrued interest receivable 377,635 327,523
Premises and equipment, net 1,689,832 1,729,135
Other assets 2,561,831 2,436,726
--------------- ---------------
Total assets $ 76,007,045 $ 69,594,445
=============== ===============
LIABILITIES
Deposits:
Noninterest-bearing $ 18,135,050 $ 16,252,693
Interest-bearing and NOW accounts 17,880,740 16,143,403
Savings 12,007,949 11,640,655
Time deposits $100,000 or greater 10,234,634 7,553,038
Other time deposits 10,881,225 11,734,840
--------------- ---------------
Total deposits 69,139,598 63,324,629
Accrued interest payable 242,092 283,988
Other liabilities 297,539 167,484
--------------- ---------------
Total liabilities 69,679,229 63,776,101
--------------- ---------------
Commitments and Contingencies (Note 9) - - - -
STOCKHOLDERS' EQUITY
Common stock, $4 stated value; authorized 10,000,000 shares,
issued and outstanding 677,028 and 667,377 shares
at December 31, 1999 and 1998, respectively 2,708,112 2,669,508
Additional paid-in capital 2,660,086 2,634,412
Retained earnings 1,164,926 500,663
Accumulated other comprehensive income (loss) (205,308) 13,761
--------------- --------------
Total stockholders' equity 6,327,816 5,818,344
--------------- --------------
Total liabilities and stockholders' equity $ 76,007,045 $ 69,594,445
=============== ==============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 37 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Interest income:
Interest and fees on loans $ 5,099,751 $ 3,917,147
Deposits in financial institutions 237,930 252,333
Federal funds sold 150,525 339,565
Investments 487,871 530,124
-------------- -------------
Total interest income 5,976,077 5,039,169
-------------- -------------
Interest expense:
Demand and savings deposits 658,543 700,394
Time deposits $100,000 or greater 452,145 433,144
Other time deposits 475,152 560,956
-------------- -------------
Total interest expense 1,585,840 1,694,494
-------------- -------------
Net interest income 4,390,237 3,344,675
Provision for loan losses 225,000 50,000
-------------- -------------
Net interest income after provision for loan losses 4,165,237 3,294,675
-------------- -------------
Other income:
Customer service fees 717,947 518,379
Gain from sale of loans 220,275 285,668
Gain (loss) from sale of investment securities (2,317) 119,361
Other income 99,033 53,944
-------------- -------------
Total other income 1,034,938 977,352
-------------- -------------
Other expenses:
Salaries and wages 1,697,805 1,308,016
Employee benefits 468,256 283,060
Net occupancy expense 354,295 314,688
Other operating expense 1,631,503 1,546,075
-------------- -------------
Total other expenses 4,151,859 3,451,839
-------------- -------------
Income before provision for income taxes 1,048,316 820,188
Provision for income taxes 319,124 193,000
-------------- -------------
Net income $ 729,192 $ 627,188
============== =============
Basic earnings per share $ 1.09 $ .95
============== =============
Diluted earnings per share $ 1.02 $ .88
============== =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 38 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
COMMON PAID-IN EARNINGS COMPREHENSIVE
STOCK CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 2,595,415 $ 2,584,054 $ (124,404) $ 97,782 $ 5,152,847
-------------
Comprehensive income:
Net income - - - - 627,188 - - 627,188
Change in net unrealized gain
on investment securities
available for sale, after
tax effects - - - - - - (84,021) (84,021)
-------------
Total comprehensive income 543,167
-------------
Stock dividend (415) 415 (2,121) - - (2,121)
Exercise of stock options 74,508 49,943 - - - - 124,451
------------- ------------- ------------- ------------ -------------
BALANCE, DECEMBER 31, 1998 2,669,508 2,634,412 500,663 13,761 5,818,344
-------------
Comprehensive income:
Net income - - - - 729,192 - - 729,192
Change in net unrealized gain (loss)
on investment securities
available for sale, after
tax effects - - - - - - (219,069) (219,069)
-------------
Total comprehensive income 510,123
-------------
Exercise of stock options 54,832 37,248 - - - - 92,080
Repurchase and retirement of
common stock and stock
options (16,228) (11,574) (64,929) - - (92,731)
------------- ------------- ------------- ------------ -------------
BALANCE, DECEMBER 31, 1999 $ 2,708,112 $ 2,660,086 $ 1,164,926 $ (205,308) $ 6,327,816
============= ============= ============= ============ =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 39 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 729,192 $ 627,188
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 231,123 193,488
Provision for loan losses 225,000 50,000
Loss on sale and disposal of equipment - - 18,869
Loss on sale of other real estate owned - - 15,409
Loss (gain) from sale of investments 2,317 (119,361)
Gain from sale of loans (220,275) (285,668)
Amortization of deferred loan fees (193,231) (160,624)
Deferred income tax benefit (30,421) (113,360)
Amortization of premiums on investment
securities available for sale 35,076 63,820
Amortization of premiums on investment
securities held to maturity 7,352 12,528
Increase in cash surrender value of life insurance (63,366) (43,745)
Decrease (increase) in assets:
Accrued interest receivable (50,112) 155,181
Other assets 88,776 (308,184)
Increase (decrease) in liabilities:
Accrued interest payable (41,896) 12,864
Other liabilities 130,055 130,750
-------------- --------------
Net cash provided by operating activities 849,590 249,155
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing
deposits in financial institutions 492,451 558,727
Activity in available-for-sale securities:
Sales 258,690 4,581,890
Maturities, prepayments and calls 1,194,605 2,256,214
Purchases (968,322) (4,167,010)
Activity in held-to-maturity securities:
Maturities 800,000 - -
Purchases of Federal Home Loan Bank stock (210,000) - -
Net increase in loans (11,988,502) (8,434,080)
Proceeds from sales of other real estate owned 20,870 214,289
Additions to bank premises and equipment (202,132) (290,957)
Purchase of life insurance (35,000) (1,268,157)
Proceeds from sale of equipment 10,312 - -
-------------- --------------
Net cash used in investing activities (10,627,028) (6,549,084)
-------------- --------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 40 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 3,986,988 $ 8,193,710
Net increase in time deposits 1,827,981 1,474,786
Cash dividends paid in lieu of fractional shares - - (2,121)
Payments to acquire common stock and stock options (54,649) - -
Proceeds from exercise of stock options 92,080 124,451
-------------- --------------
Net cash provided by financing activities 5,852,400 9,790,826
-------------- --------------
Net increase (decrease) in cash and cash equivalents (3,925,038) 3,490,897
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,305,450 7,814,553
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,380,412 $ 11,305,450
============== ==============
SUPPLEMENTARY INFORMATION
Interest paid $ 1,627,736 $ 1,681,630
============== ==============
Income taxes paid $ 422,710 $ 199,000
============== ==============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- 41 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Centennial First Financial Services (the "Company") was organized
in August 1999 to become the holding company for Redlands
Centennial Bank (the "Bank"), pursuant to a Plan of Reorganization
and Merger Agreement. As part of the reorganization, all of the
outstanding shares of the Bank were exchanged for shares of the
Company on December 23, 1999. The transaction was accounted for at
historical cost in a manner similar to a pooling of interests.
Redlands Centennial Bank is a California state chartered bank,
which provides banking services to individuals and business
customers in Redlands and surrounding communities, as well as
Small Business Administration loans to customers in Los Angeles
and Orange counties.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of
Centennial First Financial Services and its wholly-owned
subsidiary, Redlands Centennial Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statement of
condition and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to
the determination of the allowance for losses on loans, the
valuation of foreclosed real estate and the valuation of
deferred tax assets.
RECLASSIFICATION
Certain amounts have been reclassified in the 1998 financial
statements to conform with the 1999 financial statement
presentation.
INTEREST-BEARING DEPOSITS IN FINANCIAL INSTITUTIONS
Interest-bearing deposits in financial institutions mature
within ten years and are carried at fair market value which
approximates cost.
- 42 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off, generally
are reported at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans.
Interest on loans is accrued daily as earned, except when
serious doubt concerning collectibility arises, at which time
such loans are placed on a nonaccrual basis, and all accrued
and uncollected interest income is reversed against current
period operations. Interest income on nonaccrual loans is
recognized only to the extent of interest payments received.
Unearned income on installment loans is recognized as income
over the term of the loans using a method that approximates
the interest method.
Loan origination fees, to the extent they represent
reimbursement for initial direct costs, are recognized as
income at the time of loan closing. The excess of fees over
costs, if any, are deferred and credited to income over the
term of the loan using a method which approximates the
interest method. Amortization of loan origination fees are
included in revenues as an element of interest on loans. If a
loan is paid in full, any deferred fees not yet amortized are
recognized as income.
Loans which are deemed impaired by management are loans
whereby it is probable that the Bank will be unable to collect
the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.
Losses on impaired loans are measured on a loan-by-loan basis
by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral
if the loan is collateral dependent. Larger groups of smaller
balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify
individual consumer loans for impairment disclosures.
- 43 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The determination of the allowance for loan losses is based on
an analysis of the loan portfolio and evaluation of
collateral. The allowance reflects an amount which, in
management's judgment, is adequate to provide for estimated
loan losses. The allowance is based on estimates, and ultimate
losses may vary from the current estimates. Management's
judgment in determining the adequacy of the allowance for loan
losses is based on evaluations of the collectibility of loans,
taking into consideration such factors as changes in the
nature and volume of the loan portfolio, adequacy of
collateral, current economic conditions which may affect the
borrower's ability to pay, overall portfolio quality, and
review of specific problem loans. Loans are charged against
the allowance for loan losses when management believes that
the collectibility of the principal is unlikely.
LOAN SERVICING
Servicing assets are recognized as separate assets when rights
are acquired through purchase or through sale of financial
assets. Capitalized servicing rights are reported in other
assets and are amortized into other income in proportion to,
and over the period of, the estimated future net servicing
income of the underlying financial assets. Servicing assets
are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined
by stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using
prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a
valuation allowance for an individual stratum, to the extent
that fair value is less than the capitalized amount for the
stratum.
PREMISES, EQUIPMENT AND DEPRECIATION
Land is carried at cost. Premises and equipment are stated at
cost, less accumulated depreciation. Depreciation is provided
for in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives on a
straight-line basis, which range from five to thirty-nine
years.
- 44 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE
Foreclosed real estate is held for sale and carried at the
lower of cost or fair values less estimated costs to sell and
an allowance for losses. Troubled loans are transferred to
foreclosed real estate upon completion of formal foreclosure
proceedings.
Costs relating to development and improvement of foreclosed
real estate are capitalized, whereas costs relating to holding
property are expensed. The portion of interest costs relating
to development of real estate is capitalized.
Valuations are periodically performed by management, and an
allowance for losses is established through a charge to
operations if the carrying value of a property exceeds its
fair value, less estimated costs to sell.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when: (1) the
assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an
agreement to repurchase them before their maturity.
INCOME TAXES
Deferred income taxes are recognized for estimated future tax
effects attributable to temporary differences between income
tax and financial reporting purposes and carry forwards.
Valuation allowances are established when necessary to reduce
the deferred tax asset to the amount expected to be realized.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes.
- 45 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to
maturity" and recorded at cost. Securities not classified as
held to maturity or trading, including equity securities with
readily determinable fair values, are classified as "available
for sale" and recorded at fair value, with unrealized gains or
losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the
specific identification method.
The Bank's investment in its data processing center, Bancdata
Solutions, Inc., is recorded at cost and is included in other
assets.
STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages all
entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost
is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to
continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the
grant date over the amount an employee or a director must pay
to acquire the stock. Stock options issued under the Bank's
stock option plan have no intrinsic value at the grant date,
and under Opinion No. 25 no compensation cost is recognized
for them. Under the Bank's stock option plan, compensation
cost is recognized to the extent that the quoted market price
of the stock on the date of grant exceeds the amount that the
employee is required to pay. The Bank has elected to continue
with the accounting methodology in Opinion No. 25 and, as a
result, must make pro forma disclosures of net income and
earnings per share and other disclosures, as if the fair value
based method of accounting had been applied. The pro forma
disclosures include the effects of all awards granted on or
after January 1, 1995 (see Note 7).
- 46 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be
issued by the Company relate solely to outstanding stock
options and are determined using the treasury stock method.
The weighted average number of shares used in the computation
of basic earnings per share was 671,676 for 1999 and 658,256
for 1998. The weighted average number of shares used in the
computation of diluted earnings per share was 717,688 for 1999
and 712,861 for 1998.
STATEMENT OF CASH FLOWS
For the purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and
federal funds sold.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities,
are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Unrealized holding losses on
available-for-sale securities $ (367,432) $ (20,673)
Reclassification adjustment for (gains)
losses realized in income 2,317 (119,361)
------------ -----------
Net unrealized losses (365,115) (140,034)
Tax effect 146,046 56,013
------------ -----------
Net-of-tax amount $ (219,069) $ (84,021)
============ ===========
</TABLE>
- 47 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including
certain derivative instruments embedded in other contracts,
and requires that an entity recognize all derivatives as
assets or liabilities in the balance sheet and measure them at
fair value. If certain conditions are met, an entity may elect
to designate a derivative as follows: (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure
of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the
recognition of the gain or loss on derivatives designated as
hedging instruments with the recognition of the changes in the
fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designated as a
hedging instrument, changes in fair value will be recognized
in net income in the period of change. Management is currently
evaluating the impact of adopting this Statement on the
consolidated financial statements, but does not anticipate
that it will have a material impact.
- 48 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2. INVESTMENT SECURITIES
The following is a comparison of amortized cost and fair value of
investment securities at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 3,722,221 $ - - $ 81,321 $ 3,640,900
Obligations of States and
Local Governments 4,011,150 - - 258,440 3,752,710
U.S. Treasury Obligations 405,234 - - 5,420 399,814
--------------- ----------- ------------- --------------
$ 8,138,605 $ - - $ 345,181 $ 7,793,424
=============== =========== ============= ==============
<CAPTION>
1998
------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities $ 4,671,476 $ 12,564 $ 7,267 $ 4,676,773
Obligations of States and
Local Governments 3,582,905 11,414 1,187 3,593,132
U.S. Treasury Obligations 403,587 7,413 - - 411,000
--------------- ----------- ------------- --------------
$ 8,657,968 $ 31,391 $ 8,454 $ 8,680,905
=============== =========== ============= ==============
Held to maturity:
Corporate securities,
Mortgage-backed $ 807,352 $ 8,058 $ - - $ 815,410
=============== =========== ============= ==============
</TABLE>
- 49 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of investment securities
available at December 31, 1999, by contractual maturity, are shown
below. Expected maturities for mortgage-backed securities may
differ from contractual maturities because borrowers may have the
right to call or retire obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale
-------------------------------------
Amortized Fair
Cost Value
<S> <C> <C>
Due within one year $ 330,499 $ 329,291
Due after one year 766,056 735,229
Due after five years 2,456,906 2,296,010
Due after ten years 862,923 791,994
--------------- ---------------
4,416,384 4,152,524
Mortgage-backed
securities 3,722,221 3,640,900
--------------- ---------------
$ 8,138,605 $ 7,793,424
=============== ===============
</TABLE>
As of December 31, 1999 and 1998, U.S. Treasury Obligations with
amortized cost of $405,324 and $403,587 and fair values of
$399,814 and $411,000, respectively, were pledged as collateral
against the Bank's treasury, tax and loan account.
NOTE 3. LOANS
The composition of the Bank's loan portfolio at December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Mortgage loans on real estate $ 27,782,887 $ 16,296,965
Commercial loans 18,686,010 16,674,345
Consumer installment loans 6,718,898 8,056,125
---------------- --------------
Total loans 53,187,795 41,027,435
Less unearned income (224,466) (391,069)
Less allowance for loan losses (581,430) (433,475)
---------------- ----------------
Net loans $ 52,381,899 $ 40,202,891
================ ================
</TABLE>
- 50 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3. LOANS (CONTINUED)
Changes in the allowance for possible loan losses are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance as of January 1 $ 433,475 $ 489,711
Provision charged to expense 225,000 50,000
Loans charged off (96,442) (162,567)
Recoveries of loans previously charged-off 19,397 56,331
----------- -----------
Balance as of December 31 $ 581,430 $ 433,475
=========== ===========
</TABLE>
Loans serviced for others are not included in the accompanying
statements of condition. The unpaid principal balances of loans
serviced for others were $13,234,821 and $8,169,484 at December
31, 1999 and 1998, respectively.
The balance of capitalized loan servicing rights included in other
assets was $109,239 and $69,467 at December 31, 1999 and 1998,
respectively.
At December 31, 1999 and 1998, the recorded investment in impaired
loans totaled $60,671 and $327,111, respectively. No additional
funds are committed to be advanced in connection with impaired
loans. Nonaccrual loans totaled $60,671 and $327,111 at December
31, 1999 and 1998, respectively. The interest income that would
have been recorded in 1999 and 1998 had the nonaccrual loans
performed in accordance with the original terms, would have been
approximately $6,000 and $35,000, respectively.
- 51 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4. PREMISES, EQUIPMENT AND ACCUMULATED DEPRECIATION
Premises, equipment and accumulated depreciation at December 31,
1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 132,092 $ 132,092
Building 1,090,604 1,083,449
Equipment, furniture and fixtures 1,185,912 1,005,748
------------- -------------
2,408,608 2,221,289
Less accumulated depreciation 718,776 492,154
------------- -------------
$ 1,689,832 $ 1,729,135
============= =============
</TABLE>
Total depreciation expense amounted to $231,123 in 1999 and
$193,488 in 1998.
During 1998, the Bank opened a loan office in Santa Ana,
California. Pursuant to the terms of the noncancelable operating
lease agreement in effect at December 31, 1999, pertaining to this
office, future minimum rent commitments under the lease are as
follows:
<TABLE>
<S> <C>
2000 $ 20,900
2001 7,040
-------------
$ 27,940
=============
</TABLE>
Total rent expense for the years ended December 31, 1999 and 1998
amounted to $20,385 and $13,230, respectively.
- 52 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5. DEPOSITS
A summary of time deposits by maturity is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Within 1 year $ 20,165,667 4.99% $ 18,037,102 4.92%
After 1 year through 3 years 886,534 6.06 893,093 6.60
After 3 years through 5 years -- -- 298,000 7.00
After 5 years 63,658 6.45 59,683 6.45
---------------- ----------------
$ 21,115,859 5.04% $ 19,287,878 5.03%
================ ================
</TABLE>
NOTE 6. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
certain directors, principal officers, their immediate families,
and affiliated companies in which they are principal stockholders.
All loans were made under terms which are consistent with the
Bank's normal lending policies.
Aggregate related party loan transactions were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance as of January 1 $ 1,767,443 $ 1,327,128
Net borrowings (repayments) (93,203) 440,315
-------------- ---------------
Balance as of December 31 $ 1,674,240 $ 1,767,443
============== ===============
</TABLE>
- 53 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7. STOCK DIVIDEND AND STOCK OPTIONS
During 1998, the Board of Directors approved a 25% stock dividend,
accounted for as a stock split, which resulted in the issuance of
132,301 shares.
The Company has a combined incentive and nonqualified stock option
plan which authorizes the issuance of stock options to full-time
salaried employees and directors. The incentive portion of the
Plan is only available to employees of the Company, while the
nonqualified portion is also available to directors of the
Company.
The Company's Board of Directors is responsible for
administrating the Plan. Option prices are determined by the
Company's directors and must be equal to or greater than the fair
market value of the Company's capital stock at the time the
option is granted. Options are vested at a rate of 20% a year for
five years and expire ten years from the date the options are
granted. The maximum number of shares reserved for issuance upon
exercise of options under the Plan is 182,440 shares of the
Company's capital stock. Options issued have an exercise price
ranging from $5.27 to $15.60 per share.
The following is a summary of the Company's stock option activity
for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options granted and outstanding
at beginning of year 128,686 $ 9.35 105,263 $ 9.35
Stock dividend -- -- 26,756 --
Options granted 50,250 15.31 17,600 16.79
Options canceled (7,675) 15.31 (4,944) 13.51
Options exercised (21,399) 6.78 (15,989) 7.78
---------- ----------
Options granted and outstanding
at end of year 149,862 $ 10.55 128,686 $ 8.46
========== ==========
Options exercisable at year-end 87,967 $8.58 87,414 $7.23
Weighted average fair value of
options granted during year $5.29 $4.32
</TABLE>
- 54 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7. STOCK DIVIDEND AND STOCK OPTIONS (CONTINUED)
Information pertaining to options outstanding at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C>
$5.27 to $7.85 49,296 5.1 years $ 6.22 48,739 $ 6.22
$9.16 to $15.60 100,566 8.2 years $ 12.66 39,228 $ 11.52
---------- ---------
Options outstanding
at end of year 149,862 7.1 years $ 10.55 87,967 $ 8.58
========== =========
</TABLE>
The Company applies APB 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has
been recognized for the stock option plan. Had compensation cost
for the Company's stock option plan been determined based on the
fair value at the grant date for awards under the Plan consistent
with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
<S> <C> <C>
Net income:
As reported $ 729,192 $ 627,188
Pro forma 570,977 564,667
Basic earnings per share:
As reported $ 1.09 $ $.95
Pro forma .85 .86
Diluted earnings per share:
As reported $ 1.02 $.88
Pro forma .80 .79
</TABLE>
- 55 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7. STOCK DIVIDEND AND STOCK OPTIONS (CONTINUED)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model, with the
following weighted assumptions used for option grants in 1999 and
1998; no dividend yield or expected volatility for both years;
risk-free interest rates of 6.4% for 1999 and 4.6% for 1998 and
expected lives of ten years for both years.
NOTE 8. INCOME TAXES
The components of the provision for income taxes at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current tax provision:
Federal $ 244,392 $ 216,598
State 105,153 89,762
---------- -----------
349,545 306,360
---------- -----------
Deferred tax provision:
Federal (27,268) (76,598)
State (3,153) (36,762)
---------- -----------
(30,421) (113,360)
---------- -----------
$ 319,124 $ 193,000
========== ===========
</TABLE>
The reasons for the differences between the statutory federal
income tax rate and the effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Statutory tax rate 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 7.2 7.2
Change in valuation allowance (.9) (3.0)
Municipal bond income (5.1) (4.1)
Cash surrender value of life insurance (2.7) (2.0)
Other, net (2.1) (8.6)
---- ----
Effective tax rates 30.4% 23.5%
==== ====
</TABLE>
- 56 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset at December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Federal $ 361,435 $ 190,985
State 68,892 33,968
---------- -----------
430,327 224,953
Valuation allowance (13,475) (33,474)
---------- -----------
416,852 191,479
---------- -----------
Deferred tax liability:
Federal (31,187) (34,666)
State (4,873) (5,789)
---------- -----------
(36,060) (40,455)
---------- -----------
Net deferred tax asset $ 380,792 $ 151,024
========== ===========
</TABLE>
The tax effects of the temporary differences in income and expense
items that give rise to deferred taxes at December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 172,083 $ 128,349
Cash basis of reporting for tax purposes 10,892 26,781
Employee benefit plans 39,160 13,525
Deferred loan fees 62,814 56,298
Net unrealized loss on investment
securities available for sale 140,822 --
Organizational costs 4,556 --
---------- -----------
430,327 224,953
Valuation allowance (13,475) (33,474)
---------- -----------
416,852 191,479
---------- -----------
Deferred tax liability:
Net unrealized gain on investment
securities available for sale -- (9,439)
Depreciation and amortization (27,966) (24,824)
State income taxes (8,094) (6,192)
---------- -----------
(36,060) (40,455)
---------- -----------
Net deferred tax asset $ 380,792 $ 151,024
========== ===========
</TABLE>
- 57 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, there are various
commitments outstanding, such as commitments to extend credit,
which are not reflected in the financial statements. At
December 31, 1999 and 1998, such commitments included
approximately $234,000 and $691,000, respectively, of standby
letters of credit and approximately $27,110,000 and
$12,789,000, respectively, of undisbursed lines of credit and
undisbursed loans in process. The Company's exposure to credit
loss is represented by the contractual amount of these
commitments. The Company uses the same credit policies in
making commitments as it does for on-balance-sheet
instruments.
OTHER CONTINGENCIES
Various legal claims also arise from time to time in the
normal course of business which, in the opinion of management,
will have no material effect on the Company's financial
statements.
EMPLOYMENT AGREEMENTS AND SPECIAL TERMINATION AGREEMENTS
The Bank has entered into employment agreements with several
of its key officers. The agreements provide for a specified
minimum annual compensation and the continuation of benefits
currently received. However, employment under the agreements
may be terminated for cause, as defined, without incurring any
continuing obligations. The agreements also provide for the
establishment of a salary continuation plan to provide
benefits to the Bank's president at the age of retirement
(Note 12).
All of the employment agreements contain special termination
clauses which provide for certain lump sum severance payments
within a specified period following a "change in control," as
defined in the agreements.
NOTE 10. EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) savings and retirement plan that includes
substantially all employees. The employees attain vesting in the
Bank's contribution over six years. Employees may contribute up to
15% of their compensation, subject to certain limits based on
federal tax laws. Under the terms of the Plan, the Bank may make
matching contributions at the discretion of the Board of
Directors. Contributions to the Plan by the Bank amounted to
$37,434 and $35,713 for the years ended December 31, 1999 and
1998, respectively.
- 58 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11. CONCENTRATION OF CREDIT RISK
The Bank services customers in Redlands and surrounding
communities and has no concentration of deposits with any one
particular customer or industry. At December 31, 1999 and 1998,
the Bank had approximately $2,425,000 and $7,530,000,
respectively, of Federal funds sold, interest-bearing deposits and
noninterest-bearing deposits with its correspondent banks and one
other financial institution. At December 31, 1999, approximately
52% of the Bank's loan portfolio consists of mortgage loans on
real estate.
NOTE 12. SALARY CONTINUATION PLANS
During 1998, the Bank established salary continuation plans which
provide for payments to the Bank's president and its directors at
the age of retirement. Included in other liabilities at December
31, 1999 and 1998, respectively, is approximately $95,000 and
$33,000 of deferred compensation related to the salary
continuation plans. The plans are funded through life insurance
policies that generate a cash surrender value to fund the future
benefits. Included in other assets at December 31, 1999 and 1998,
respectively, is approximately $1,410,000 and $1,313,000 of life
insurance cash surrender value.
NOTE 13. STOCKHOLDERS' EQUITY
MINIMUM REGULATORY REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
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 weighting,
and other factors.
- 59 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13. STOCKHOLDERS' EQUITY (CONTINUED)
MINIMUM REGULATORY REQUIREMENTS (CONTINUED)
Quantitative measures established by the regulations to ensure
capital adequacy require 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. Management believes,
as of December 31, 1999, that the Bank met all capital
adequacy requirements to which it is subject. As of December
31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation 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 in the following
table. There are no conditions or events since the
notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------- ----------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital to
risk-weighted assets $7,100,000 11.22% >=$5,062,000 >=8.00% >=$6,328,000 >=10.00%
Tier 1 capital to
risk-weighted assets $6,519,000 10.30% >=$2,532,000 >=4.00% >=$3,797,000 >=6.00%
Tier 1 capital to
average assets $6,519,000 8.44% >=$3,090,000 >=4.00% >=$3,862,000 >=5.00%
As of December 31, 1998:
Total capital to
risk-weighted assets $6,300,000 12.37% >=$4,074,000 >=8.00% >=$5,092,000 >=10.00%
Tier 1 capital to
risk-weighted assets $5,867,000 11.52% >=$2,037,000 >=4.00% >=$3,056,000 >=6.00%
Tier 1 capital to
average assets $5,867,000 8.52% >=$2,754,000 >=4.00% >=$3,443,000 >=5.00%
</TABLE>
- 60 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Parent company only information for 1999 is presented for
Centennial First Financial Services since its inception in August
1999:
STATEMENT OF CONDITION
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Cash $ 3,124
Investment in common stock of Redlands Centennial Bank 6,324,692
--------------
Total assets $ 6,327,816
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ - -
Stockholders' equity:
Common stock, $4.00 stated value; 10,000,000 shares authorized;
677,028 shares issued and outstanding 2,708,112
Additional paid-in-capital 2,660,086
Retained earnings 1,164,926
Accumulated other comprehensive loss (205,308)
--------------
Total stockholders' equity 6,327,816
--------------
Total liabilities and stockholders' equity $ 6,327,816
==============
STATEMENT OF EARNINGS
PERIOD ENDED DECEMBER 31, 1999
Equity in undistributed net income of Redlands Centennial Bank $ 726,068
Dividend income from Redlands Centennial Bank 11,000
Expenses (7,876)
--------------
Net income $ 729,192
==============
</TABLE>
- 61 -
<PAGE>
CENTENNIAL FIRST FINANCIAL SERVICES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (CONTINUED)
STATEMENT OF CASH FLOWS
PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 729,192
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of Redlands Centennial Bank (726,068)
--------------
Net cash provided by operating activities 3,124
--------------
FINANCING ACTIVITIES
Proceeds from notes payable, related party 10,000
Payments on notes payable, related party (10,000)
--------------
Net cash provided by financing activities - -
--------------
Net increase in cash and cash equivalents 3,124
Cash and cash equivalents, beginning of year - -
--------------
Cash and cash equivalents, end of year $ 3,124
==============
NONCASH INVESTING ACTIVITY
Exchange of common stock for investment in Redlands Centennial Bank $ 5,646,369
==============
</TABLE>
NOTE 15. FEDERAL HOME LOAN BANK LINE OF CREDIT
During April 1999, the Bank became a member of the Federal Home
Loan Bank of San Francisco (FHLB). The Bank has an available line
of credit with the FHLB at an interest rate which is determined
daily. Borrowings under the line are limited to eligible
collateral. All borrowings from the FHLB are secured by a blanket
lien on qualified collateral. There were no outstanding advances
at December 31, 1999.
- 62 -
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on
any matter of accounting principles, practices or financial statement disclosure
during 1999 or 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names of, and certain information concerning
each director, executive officer and significant employee of the Company
(including the Bank) and the persons nominated by the board of directors for
election as directors of the Company.
<TABLE>
<CAPTION>
Name and Position with Bank Age Principal Occupation During the Last Five Years
- --------------------------- --- -----------------------------------------------
<S> <C> <C>
Bruce J. Bartells 55 Chief Executive Officer and former Chief
Director since 1999 Financial Officer of Wilden Pump &
Engineering Company, Inc. (formerly
President and CEO of Soren McAdams,
Bartells, CPA's, Inc.).
Carole H. Beswick 57 Part owner of Paper Partners, Inc. (formerly a
Director since 2000 councilwoman of the City of Redlands).
James C. Coffin 77 President and CEO of C-Y Development Co
Director since 2000 (building and land development).
Irving M. Feldkamp, III, DDS 54 President/Owner of Hospitality Dental
Director since 2000 Associates and President/Owner of Glen
Racing Inc.
Larry Jacinto 50 President of Larry Jacinto Construction,
Director since 2000 President of Pangahamo Materials, Inc.,
President of Larry Jacinto Family, President
of Mentone Enterprises, and Vice President of
Rancho Las Narajas.
Ronald J. Jeffrey 56 Vice President of Tri-City Acoustics, Inc., a
Director since 2000 specialty subcontracting business and former
President of Inland Acoustics, Inc.
</TABLE>
- 63 -
<PAGE>
NOMINEES (Continued)
<TABLE>
<CAPTION>
Name and Position with Bank Age Principal Occupation During the Last Five Years
- --------------------------- --- -----------------------------------------------
<S> <C> <C>
William A. McCalmon 54 President and owner of RPM Insurance
Director since 2000 Services, Inc., registered principal of PIM
Financial Services, Inc. Director of Redlands
Centennial Bank.
Patrick J. Meyer 48 Owner of Urban Environs, a land planning
Chairman of the Board of the consultant business. Chairman of the Board of
Company since 1999 Redlands Centennial Bank.
Douglas C. Spencer 41 President and CEO of Redlands Centennial
President & CEO, Director of the Bank (formerly Senior Vice President/Branch
Company since 1999 former Senior Vice President/Chief Operating
Officer of Landmark Bank).
Douglas F. Welebir 56 President of Welebir, McCune & Jure,
Director since 2000 a professional law corporation.
Roy D. Lewis 53 Executive Vice President and Chief Credit
Executive Vice President & Chief Officer of the Bank
Credit Officer of the Company
since 1999
Beth Sanders 47 Executive Vice President & Chief Financial
Executive Vice President & Chief Officer of the Bank.
Financial Officer of the Company
since 1999
</TABLE>
Directors and nominees for the Board of Directors of the Company serve
in similar capacities with the Bank.
No director or executive officer of the Company serves as a director of
any company which has a class of securities registered under, or which is
subject to the periodic reporting requirements of, the Securities Exchange Act
of 1934, or of any company registered as an investment company under the
Investment Company Act of 1940.
ITEM 10. EXECUTIVE COMPENSATION
The response to this Item required by Item 402 of Regulation S-B
incorporates by reference the information under the caption "EXECUTIVE
COMPENSATION" on pages 8 and 9, "EMPLOYMENT AGREEMENTS" on pages 10 through 13
and "COMPENSATION OF DIRECTORS" on page 13 of the Company's definitive proxy
statement filed on March 17, 2000.
- 64 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item required by Item 403 of Regulation S-B
incorporates by reference the information under the caption "SHAREHOLDINGS OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 2 through 4 of the Company's
definitive proxy statement filed on March 17, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item required by Item 404 of Regulation S-B
incorporates by reference the information under the caption "CERTAIN
TRANSACTIONS" on page 13 of the Company's definitive proxy statement filed on
March 17, 2000.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Item Description
- ---- -----------
<S> <C>
2 Plan of Reorganization and Agreement of Merger
Dated December 1, 1999
Filed as exhibit to Form S-4 dated October 20, 1999
3(i) Articles of Incorporation
Filed as exhibit to Form S-4 dated October 20, 1999
3(ii) Bylaws
Filed as exhibit to Form S-4 dated October 20, 1999
10(ii)(A) 1. Employment Contract of Douglas C. Spencer, dated September 10, 1997
Filed as exhibit to Form S-4 dated October 20, 1999
2. Salary Continuation Agreement of Douglas C. Spencer, dated March 17, 1998
Filed as exhibit to Form S-4 dated October 20, 1999
3. Employment Agreement of Roy D. Lewis, dated March 20, 1998
Filed as exhibit to Form S-4 dated October 20, 1999
4. Employment Agreement of Anne E. Sanders, dated March 20, 1998
Filed as exhibit to Form S-4 dated October 20, 1999
5. Redlands Centennial Bank 1990 Stock Option Plan and Addendums
Filed as exhibit to Form S-4 dated October 20, 1999
11 Statement Reference Computation of Per Share Earnings
21 Subsidiaries
22 Published report regarding matters submitted to vote
See Part I, Item 4 hereof
27 See Part II, Item 7 hereof
</TABLE>
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the last quarter of 1999.
- 65 -
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 11th day of April
2000.
By: /s/ Douglas C. Spencer
---------------------------
Douglas C. Spencer
President and CEO
Principal Executive Officer
Director
By: /s/ Beth Sanders
---------------------------
Beth Sanders
Chief Financial Officer
Principal Financial Officer
Principal Accounting 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 indicated on the 11th day of April, 2000.
/s/ Patrick J. Meyer
- -----------------------------------
Patrick J. Meyer
Chairman of the Board
/s/ Bruce J. Bartells
- -----------------------------------
Bruce J. Bartells
Director
/S/ Douglas C. Spencer
- -----------------------------------
Douglas C. Spencer
Director
- 66 -
<PAGE>
EXHIBIT
ITEM 11
Statement Reference Computation of Per Share Earnings
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Company relate solely to outstanding stock options and are determined using
the treasury stock method.
The weighted average number of shares used in the computation of
basic earnings per share was 671,676 for 1999 and 658,256 for 1998. The
weighted average number of shares used in the computation of diluted earnings
per share was 717,688 for 1999 and 712,861 for 1998.
- 67 -
<PAGE>
EXHIBIT
ITEM 21
Subsidiaries
Redlands Centennial Bank
Incorporated in the State of California
- 68 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF CONDITION AND CONSOLIDATED STATEMENT OF EARNINGS FROM
THE COMPANY FORM 10-KSB FOR THE YEAR TO DATE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,230,412
<INT-BEARING-DEPOSITS> 3,612,012
<FED-FUNDS-SOLD> 2,150,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,793,424
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 52,963,329
<ALLOWANCE> 581,430
<TOTAL-ASSETS> 76,007,045
<DEPOSITS> 69,139,598
<SHORT-TERM> 0
<LIABILITIES-OTHER> 539,631
<LONG-TERM> 0
0
0
<COMMON> 2,708,112
<OTHER-SE> 3,619,704
<TOTAL-LIABILITIES-AND-EQUITY> 76,007,045
<INTEREST-LOAN> 5,099,751
<INTEREST-INVEST> 876,326
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,976,077
<INTEREST-DEPOSIT> 1,585,840
<INTEREST-EXPENSE> 1,585,840
<INTEREST-INCOME-NET> 4,390,237
<LOAN-LOSSES> 225,000
<SECURITIES-GAINS> 2,317
<EXPENSE-OTHER> 3,114,604
<INCOME-PRETAX> 1,048,316
<INCOME-PRE-EXTRAORDINARY> 1,048,316
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 729,192
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 9.47
<LOANS-NON> 60,671
<LOANS-PAST> 577,289
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,432,893
<ALLOWANCE-OPEN> 433,475
<CHARGE-OFFS> 96,442
<RECOVERIES> 19,397
<ALLOWANCE-CLOSE> 581,430
<ALLOWANCE-DOMESTIC> 581,430
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
