EXHIBIT 91.19
INDEPENDENT AUDITOR'S REPORT
The Shareholders and
Board of Directors
North Coast Bank
We have audited the accompanying balance sheet of North Coast Bank as
of December 31, 1999 and the related statements of income, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
financial statements of North Coast Bank as of December 31, 1998 and 1997 were
audited by other auditors whose report dated February 19, 1999 expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the financial position of North Coast Bank as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ PERRY-SMITH LLP
-------------------------------
Certified Public Accountants
Sacramento, California
February 17, 2000,
except for Note 15, as to which
the date is March 1, 2000
9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
North Coast Bank
Santa Rosa, California
We have audited the accompanying balance sheets of North Coast Bank as of
December 31, 1998 and 1997, and the related statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank'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. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of North Coast Bank at December
31, 1998 and 1997, and the results of its operations and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ RICHARDSON & COMPANY
----------------------------------
February 19, 1999
10
<PAGE>
NORTH COAST BANK
BALANCE SHEET
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,626,289 $ 3,484,967
Federal funds sold 1,000,000 4,600,000
Interest-bearing deposits in banks 793,000 693,000
Available-for-sale investment securities (Note 2) 1,708,000 1,428,995
Loans and leases, less allowance for loan and lease
losses of $383,310 in 1999 and $330,755 in 1998
(Notes 3, 7 and 11) 39,735,527 30,802,994
Bank premises and equipment, net (Note 4) 750,750 608,930
Accrued interest receivable and other assets (Note 6) 564,358 557,804
------------ ------------
$ 47,177,924 $ 42,176,690
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 10,149,768 $ 8,153,261
Interest bearing (Note 5) 31,931,394 29,999,782
------------ ------------
Total deposits 42,081,162 38,153,043
Short-term borrowings (Note 8) 1,000,000
Accrued interest payable and other liabilities 98,342 231,621
------------ ------------
Total liabilities 43,179,504 38,384,664
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity (Note 9):
Common stock - $4.00 par value; 6,250,000 shares
authorized, 472,354 shares issued and outstanding 1,889,416 1,889,416
Additional paid-in capital 1,826,945 1,826,945
Retained earnings 295,630 68,636
Accumulated other comprehensive (loss) income
(Notes 2 and 13) (13,571) 7,029
------------ ------------
Total shareholders' equity 3,998,420 3,792,026
------------ ------------
$ 47,177,924 $ 42,176,690
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
NORTH COAST BANK
STATEMENT OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $3,382,954 $2,610,116 $2,162,208
Interest on investment securities:
Taxable 46,471 145,723 256,034
Exempt from Federal income taxes 8,488 5,988
Dividends 13,916 12,195 11,711
Interest on Federal funds sold 151,845 191,987 98,451
Interest on deposits in banks 45,845 23,422 5,097
---------- ---------- ----------
Total interest income 3,649,519 2,989,431 2,533,501
Interest expense:
Deposits (Note 5) 1,173,013 972,712 753,233
Short-term borrowings (Note 8) 21,785
---------- ---------- ----------
Total interest expense 1,194,798 972,712 753,233
---------- ---------- ----------
Net interest income 2,454,721 2,016,719 1,780,268
---------- ---------- ----------
Provision for loan and lease losses (Note 3) 175,000 148,585 70,500
---------- ---------- ----------
Net interest income after provision for
loan and lease losses 2,279,721 1,868,134 1,709,768
---------- ---------- ----------
Non-interest income:
Service charges 99,670 87,905 103,566
Gain on sale of loans 82,707
Gain on sale of investment securities, net
(Note 2) 6,593
Merchant card processing fees 102,358 54,137 42,391
Other income 65,355 55,586 41,500
---------- ---------- ----------
Total non-interest income 267,383 204,221 270,164
---------- ---------- ----------
Other expenses:
Salaries and employee benefits (Notes 3
and 10) 869,878 712,255 775,868
Occupancy and equipment (Notes 4 and 7) 479,100 300,989 299,029
Other (Note 12) 818,132 604,155 559,185
---------- ---------- ----------
Total other expenses 2,167,110 1,617,399 1,634,082
---------- ---------- ----------
Income before income taxes 379,994 454,956 345,850
Income taxes (Note 6) 153,000 109,000
---------- ---------- ----------
Net income $ 226,994 $ 345,956 $ 345,850
========== ========== ==========
Basic earnings per share (Note 9) $ .48 $ .73 $ .73
======= ======= =======
Diluted earnings per share (Note 9) $ .46 $ .70 $ .72
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
NORTH COAST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Other
--------------------- Paid-in (Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit) Income (Loss) Equity Income
------- ---------- ---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 471,644 $1,886,670 $1,825,715 $(623,170) $ 7,696 $3,096,911
Comprehensive income (Note 13):
Net income 345,850 345,850 $ 345,850
Other comprehensive income,
net of tax:
Unrealized gains on available-
for-sale investment securities 5,944 5,944 5,944
---------
Total comprehensive income $ 351,794
=========
------- ---------- ---------- --------- --------- ----------
Balance, December 31, 1997 471,644 1,886,670 1,825,715 (277,320) 13,640 3,448,705
Comprehensive income (Note 13):
Net income 345,956 345,956 $ 345,956
Other comprehensive loss,
net of tax:
Unrealized losses on available-for-
sale investment securities, net of
reclassification adjustment (6,611) (6,611) (6,611)
---------
Total comprehensive income $ 339,345
=========
Stock options exercised (Note 9) 710 2,746 1,230 3,976
------- ---------- ---------- --------- --------- ----------
Balance, December 31, 1998 472,354 1,889,416 1,826,945 68,636 7,029 3,792,026
------- ---------- ---------- --------- --------- ----------
</TABLE>
(Continued)
13
<PAGE>
NORTH COAST BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Other
--------------------- Paid-in (Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit) Income (Loss) Equity Income
------- ---------- ---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 472,354 $1,889,416 $1,826,945 $ 68,636 $ 7,029 $3,792,026
Comprehensive income (Note 13):
Net income 226,994 226,994 $ 226,994
Other comprehensive income,
net of tax:
Unrealized gains on available-
for-sale investment
securities (Note 2) (20,600) (20,600) (20,600)
---------
Total comprehensive income $ 206,394
=========
------- ---------- ---------- --------- --------- ----------
Balance, December 31, 1999 472,354 $1,889,416 $1,826,945 $ 295,630 $ (13,571) $3,998,420
======= ========== ========== ========= ========= ==========
Disclosure of reclassification amount, net of taxes (Note 13):
Unrealized holding losses arising during 1998 $ (10,567)
Reclassification adjustment for gains included in net income (3,956)
---------
Net unrealized losses on available-for-sale investment securities $ (6,611)
=========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
14
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 226,994 $ 345,956 $ 345,850
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 175,000 148,585 70,500
Depreciation, amortization and
accretion, net 71,514 96,115 102,804
Net gain on the sale of available-for-
sale investment securities (6,593)
Increase (decrease) in deferred loan
origination fees and costs, net 23,137 90,631 (4,913)
Increase in accrued interest receivable
and other assets (92,199) (58,385) (82,001)
Decrease (increase) in servicing assets 36,617 4,104 (40,721)
(Decrease) increase in accrued interest
payable and other liabilities (133,279) 121,830 (38,951)
Loss on sale of other real estate 2,000
Deferred taxes 59,000 (47,000) (59,000)
----------- ----------- -----------
Net cash provided by operating
activities 366,784 695,243 295,568
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits in banks (100,000) (672,134) 99,488
Proceeds from the sale of available-for-
sale investment securities 599,023
Proceeds from matured and called
available-for-sale investment securities 450,000 1,963,170 1,518,743
Principal payments received from available-
for-sale mortgage-backed securities 301,500
Purchase of available-for-sale investment
securities (1,060,425) (532,395) (415,088)
Proceeds from sale of other real estate 2,700
Net increase in loans (9,067,256) (9,455,022) (2,205,593)
Purchase of premises and equipment (277,400) (121,800) (59,885)
----------- ----------- -----------
Net cash used in investing activities (9,753,581) (8,219,158) (1,059,635)
----------- ----------- -----------
</TABLE>
(Continued)
15
<PAGE>
NORTH COAST BANK
STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest bearing
and savings deposits $ 4,066,930 $ 3,901,583 $ 1,890,124
Net (decrease) increase in time deposits (138,811) 4,488,243 1,267,913
Increase in short-term borrowings 1,000,000
Proceeds from exercise of stock options 3,976
----------- ----------- -----------
Net cash provided by financing
activities 4,928,119 8,393,802 3,158,037
----------- ----------- -----------
(Decrease) increase in cash and
cash equivalents (4,458,678) 869,887 2,393,970
Cash and cash equivalents at beginning of
year 8,084,967 7,215,080 4,821,110
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,626,289 $ 8,084,967 $ 7,215,080
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 1,192,061 $ 965,663 $ 747,147
Income taxes $ 237,066 $ 93,300 $ 56,000
Non-cash investing activities:
Net change in unrealized gain on
available-for-sale investment securities $ (30,572) $ (6,611) $ 5,944
Loans transferred to other real estate
during the year $ 80,300
Sale of foreclosed other real estate
financed through loans $ 75,600
</TABLE>
The accompanying notes are an integral
part of these financial statements.
16
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
North Coast Bank (the "Bank") is a National Banking Association and, as
such, is regulated by the Office of the Comptroller of the Currency,
the Federal Reserve and the Federal Deposit Insurance Corporation. The
regulations of these agencies govern most aspects of the Bank's
business. The Bank was incorporated on March 26, 1990 as Windsor Oaks
National Bank and was in organization until operations formally
commenced on October 25, 1990. Effective January 8, 1997, the Bank
changed its name to North Coast Bank.
The Bank provides a variety of banking services to individuals and
businesses in its primary service area of northern Sonoma County,
California and the immediate surrounding area. The Bank offers
depository and lending services primarily to meet the needs of its
business and professional clientele. These services include a variety
of demand deposit, savings and time deposit account alternatives, and
special merchant and business services. The Bank's lending activities
are directed primarily towards granting short and medium-term
commercial loans and customized lines of credits for such purposes as
operating capital, business and professional start-ups, inventory,
equipment and accounts receivable, and interim construction financing.
The Bank also targets Small Business Administration guaranteed loans to
qualified small business borrowers.
The accounting and reporting policies of the Bank conform with
generally accepted accounting principles and prevailing practices
within the banking industry.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
INVESTMENT SECURITIES
Investments are classified into one of the following categories:
o Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and
reported, net of taxes, as accumulated other comprehensive
income (loss) within shareholders' equity.
o Held-to-maturity securities, which management has the
positive intent and ability to hold, reported at amortized
cost, adjusted for the accretion of discounts and
amortization of premiums.
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
17
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT SECURITIES (Continued)
Gains or losses on the sale of securities are computed using the
specific identification method. Interest earned on investment
securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
LOANS AND LEASES
Loans and leases are stated at principal balances outstanding, except
for loans and leases transferred from loans and leases held for sale
which are carried at the lower of principal balance or market value at
the date of transfer, adjusted for accretion of discounts. Interest is
accrued daily based upon outstanding loan and lease balances. However,
when, in the opinion of management, loans and leases are considered to
be impaired and the future collectibility of interest and principal is
in serious doubt, loans and leases are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to
reduce principal to the extent necessary to ensure collection.
Subsequent payments on these loans and leases, or payments received on
nonaccrual loans or leases for which the ultimate collectibility of
principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's observable
market price or the fair value of collateral if the loan or lease is
collateral dependent. A loan or lease is considered impaired when,
based on current information and events, it is probable that the Bank
will be unable to collect all amounts due (including both principal and
interest) in accordance with the contractual terms of the loan or lease
agreement.
Loan and lease origination fees, commitment fees, direct loan and lease
origination costs and purchase premiums and discounts on loans and
leases are deferred and recognized as an adjustment of yield, to be
amortized to interest income over the contractual term of the loan or
lease. The unamortized balance of deferred fees and costs is reported
as a component of net loans and leases.
Loans with unpaid balances of $6,236,305 and $3,868,698 were serviced
for others at December 31, 1999 and 1998, respectively.
18
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN SALES AND SERVICING
The guaranteed portion of certain Small Business Administration (SBA)
loans are sold to third parties with the Bank retaining the
unguaranteed portion. The Bank generally receives a premium in excess
of the adjusted carrying value of the loan at the time of sale. The
Bank may be required to refund a portion of this premium if the
borrower defaults or the loan prepays within ninety days of the
settlement date. However, there were no sales of loans subject to these
recourse provisions at December 31, 1999, 1998 or 1997. SBA loans with
unpaid balances of $138,950 and $1,227,623 were being serviced for
others at December 31, 1999 and 1998, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination
of loans which are sold or securitized with servicing rights retained
are recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
and are subsequently amortized in proportion to and over the period of
the related net servicing income or expense. Servicing assets are
periodically evaluated for impairment. Fair values are estimated using
discounted cash flows based on current market interest rates. For
purposes of measuring impairment, servicing assets are stratified based
on note rate and term. The amount of impairment recognized is the
amount by which the servicing assets for a stratum exceed their fair
value.
In addition, assets (accounted for as interest-only (IO) strips) are
recorded at the fair value of the difference between note rates and
rates paid to purchasers (the interest spread) and contractual
servicing fees, if applicable. IO strips are carried at fair value with
gains or losses recorded as a component of shareholders' equity,
similar to available-for-sale investment securities.
The Bank's investment in the loan is allocated between the retained
portion of the loan, the servicing asset, the IO strip, and the sold
portion of the loan based on their relative fair values on the date the
loan is sold. The gain on the sold portion of the loan is recognized as
income at the time of sale. The carrying value of the retained portion
of the loan is discounted based on the estimated value of a comparable
non-guaranteed loan. The servicing asset is amortized over the
estimated life of the related loan. Significant future prepayments of
these loans will result in the recognition of additional amortization
of related servicing assets and an adjustment to the carrying value of
related IO strips.
In connection with the Bank's sale of SBA loans during the year ended
December 31, 1997, the Bank recognized servicing assets totaling
$40,721. Amortization of these servicing assets totaled $4,104 for the
year ended December 31, 1998. The carrying amount at December 31, 1998
was $36,617, which approximates the fair value. During the year ended
December 31, 1997, the Bank recognized interest-only strips of $23,761.
The carrying amount at December 31, 1998 was $19,298, which
approximates the fair value. The loans related to these servicing
assets and IO strips were repaid during 1999. Accordingly, the
servicing assets and IO strips were written off and losses of $53,323
were recognized. In addition, revenue of $60,735 related to the
discounted retained portion of the loans was recognized.
19
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can
be expected to occur in the normal course of business. The
determination of the allowance is based on estimates made by
management, to include consideration of the character of the loan and
lease portfolio, specifically identified problem loans and leases,
potential losses inherent in the portfolio taken as a whole and
economic conditions in the Bank's service area. These estimates are
particularly susceptible to changes in the economic environment and
market conditions. The allowance is established through a provision for
loan and lease losses which is charged to expense.
OTHER REAL ESTATE
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property,
net of estimated selling costs, is charged against the allowance for
loan and lease losses. A valuation allowance for losses on other real
estate is maintained to provide for temporary declines in value. The
allowance is established through a provision for losses on other real
estate which is included in other expenses. Subsequent gains or losses
on sales or writedowns resulting from permanent impairments are
recorded in other income or expense as incurred. On the balance sheet,
other real estate is included in accrued interest receivable and other
assets.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are carried at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives of the related assets. The useful lives of furniture, fixtures
and equipment are estimated to be three to forty years. Leasehold
improvements are amortized over the life of the asset or the term of
the related lease, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation
and amortization are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance
and repairs is charged to expense as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one day periods.
20
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Bank. The treasury stock method has been applied to
determine the dilutive effect of stock options in computing diluted
EPS.
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Bank's stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NEW FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended by SFAS 137 to delay the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that entities
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. Management
does not believe that the adoption of SFAS 133 will have a significant
impact on its financial position and results of operations when
implemented.
21
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale
investment securities at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 981,633 $ (8,633) $ 973,000
U.S. Government
guaranteed
mortgage-backed
securities 227,815 (2,815) 225,000
Obligations of states
and political sub-
divisions 173,095 (12,095) 161,000
Federal Home Loan
Bank stock 176,500 176,500
Federal Reserve
Bank stock 111,500 111,500
Other investments 61,000 61,000
------------- ------------- ------------- -------------
$ 1,731,543 $ -- $ (23,543) $ 1,708,000
============= ============= ============= =============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $23,543 were recorded, net of $9,972 in tax benefits, as
accumulated other comprehensive loss within shareholders' equity for
the year ended December 31, 1999. There were no sales of
available-for-sale investment securities for the year ended December
31, 1999.
22
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 249,674 $ 1,263 $ 250,937
U.S. Government
agencies 200,000 313 200,313
U.S. Government
guaranteed
mortgage-backed
securities 530,325 3,065 $ (1,443) 531,947
Obligations of states
and political sub-
divisions 173,017 3,831 176,848
Federal Home Loan
Bank stock 104,200 104,200
Federal Reserve
Bank stock 105,450 105,450
Other investments 59,300 59,300
------------- ------------- ------------- -------------
$ 1,421,966 $ 8,472 $ (1,443) $ 1,428,995
============= ============= ============= =============
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $7,029 were recorded as accumulated other comprehensive income
within shareholders' equity for the year ended December 31, 1998.
Proceeds and gross realized gains on available-for-sale investment
securities totaled $599,023 and $6,593, respectively, for the year
ended December 31, 1998. There were no sales of available-for-sale
investment securities in 1997.
23
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------ ------------
Within one year $ 136,719 $ 135,000
After one year through five years 1,072,729 1,063,000
After ten years 173,095 161,000
------------ ------------
1,382,543 1,359,000
Investment securities not due at a single
maturity date:
Federal Home Loan Bank stock 176,500 176,500
Federal Reserve Bank stock 111,500 111,500
Other investments 61,000 61,000
------------ ------------
$ 1,731,543 $ 1,708,000
============ ============
Investment securities with amortized costs of $250,000 and $249,675 and
estimated market values of $242,000 and $251,000 were pledged to secure
treasury tax and loan accounts at December 31, 1999 and 1998,
respectively.
3. LOANS AND LEASES
Outstanding loans and leases are summarized below:
December 31,
----------------------------
1999 1998
------------ ------------
Commercial $ 11,883,098 $ 9,301,330
Real estate - commercial 12,711,222 11,298,073
Real estate - residential 2,798,572 4,243,403
Real estate - construction 4,476,824 1,586,915
Agriculture 7,199,565 3,416,398
Lease financing receivables 121,521 363,913
Consumer 898,050 914,736
Other 138,839 94,698
------------ ------------
40,227,691 31,219,466
Deferred loan fees, net (108,854) (85,717)
Allowance for loan and lease losses (383,310) (330,755)
------------ ------------
$ 39,735,527 $ 30,802,994
============ ============
24
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
Balance, beginning of year $ 330,755 $ 352,417 $ 345,785
Provision charged to operations 175,000 148,585 70,500
Losses charged to allowance (130,804) (183,322) (71,105)
Recoveries 8,359 13,075 7,237
--------- --------- ---------
Balance, end of year $ 383,310 $ 330,755 $ 352,417
========= ========= =========
During the years ended December 31, 1999, 1998 and 1997, the Bank had
no significant impaired loans or loans placed on nonaccrual status.
Salaries and employee benefits totaling $189,501, $152,461 and $143,519
were deferred as loan origination costs for the years ended December
31, 1999, 1998 and 1997, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Land $ 149,001 $ 149,001
Building and improvements 212,975 212,975
Furniture, fixtures and equipment 967,466 841,019
Leasehold improvements 180,188 118,120
----------- -----------
1,509,630 1,321,115
Less accumulated depreciation
and amortization (758,880) (712,185)
----------- -----------
$ 750,750 $ 608,930
=========== ===========
Depreciation and amortization included in occupancy and equipment
expense totaled $135,580, $104,064 and $118,861 for the years ended
December 31, 1999, 1998 and 1997, respectively.
25
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
---------------------------
1999 1998
----------- -----------
Savings $ 4,231,966 $ 4,977,851
Money market 9,759,646 7,222,047
NOW accounts 3,719,997 3,441,288
Time, $100,000 or more 5,612,900 6,313,085
Other time 8,606,885 8,045,511
----------- -----------
$31,931,394 $29,999,782
=========== ===========
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
------------
2000 $13,678,479
2001 511,949
2002 13,012
2003 16,345
-----------
$14,219,785
===========
Interest expense recognized on interest-bearing deposits for the years
ended December 31, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
---------- ---------- ----------
Savings $ 120,664 $ 133,546 $ 122,160
Money market 325,503 151,591 84,149
NOW accounts 56,226 58,819 54,294
Time, $100,000 or more 285,373 256,524 167,701
Other time 385,247 372,232 324,929
---------- ---------- ----------
$1,173,013 $ 972,712 $ 753,233
========== ========== ==========
26
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following:
Federal State Total
--------- --------- ---------
1999
----
Current $ 82,000 $ 12,000 $ 94,000
Deferred 32,000 27,000 59,000
--------- --------- ---------
Income tax expense $ 114,000 $ 39,000 $ 153,000
========= ========= =========
1998
----
Current $ 107,000 $ 49,000 $ 156,000
Deferred (32,000) (15,000) (47,000)
--------- --------- ---------
Income tax expense $ 75,000 $ 34,000 $ 109,000
========= ========= =========
1997
----
Current $ 17,000 $ 42,000 $ 59,000
Deferred (17,000) (42,000) (59,000)
--------- --------- ---------
Income tax expense $ -- $ -- $ --
========= ========= =========
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 114,000 $ 98,000
Loans held for sale 27,000
Future benefit of State income tax deduction 5,000 16,000
Other 14,000
Unrealized losses on available-for-sale
investment securities 10,000
--------- ---------
Total deferred tax assets 129,000 155,000
--------- ---------
Deferred tax liabilities:
Bank premises and equipment (32,000) (21,000)
Future liability of State deferred tax asset (7,000)
Other (11,000) (6,000)
--------- ---------
Total deferred tax liabilities (50,000) (27,000)
--------- ---------
Net deferred tax assets $ 79,000 $ 128,000
========= =========
</TABLE>
27
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rates to operating income
before income taxes. The significant items comprising these differences
for the years ended December 31, 1999, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -----------------------
Amount Rate % Amount Rate % Amount Rate %
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 129,000 34.0 $ 155,000 34.0 $ 118,000 34.0
Graduated rate benefit (1,000) (.2)
State franchise tax,
net of Federal tax
effect 28,000 7.4 32,000 7.1 24,000 6.9
Interest on obligations
of states and political
subdivisions (3,000) (.8)
Valuation allowance for
deferred tax assets (81,000) (17.8) (140,000) (40.5)
Other (1,000) (.3) 3,000 .7 (1,000) (.2)
----------- ----------- ----------- ----------- ----------- ----------
Total income
tax expense $ 153,000 40.3 $ 109,000 24.0 $ -- --
=========== =========== =========== =========== =========== ==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Bank leases two of its branch offices and various equipment under
noncancelable operating leases. Future minimum lease payments are as
follows:
Year Ending
December 31,
------------
2000 $ 213,264
2001 219,419
2002 225,759
2003 128,802
2004 122,976
Thereafter 506,851
-----------
$ 1,417,071
===========
The Bank has an option to renew its Windsor branch office lease for two
five-year terms after the initial lease ends February 1, 2003. Additionally, the
Bank has an option to renew its Santa Rosa branch office lease for two five-year
terms after the initial lease ends October 31, 2008.
28
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
OPERATING LEASES (Continued)
Rental expense included in occupancy and equipment expense, net of
related rental income, totaled $175,123, $84,134 and $70,136 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Bank subleases a portion of the Windsor branch office for $2,012
per month. The sublease ends September 1, 2000. Additionally, the Bank
sublet a portion of the Santa Rosa branch office for $600 per month.
This lease ended in November 1999 and was not renewed. The Bank
received rental income of $26,944, $20,744 and $20,272 for the years
ended December 31, 1999, 1998 and 1997, respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business in order to meet the financing
needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments include commitments to
extend credit and letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party for commitments to extend credit and letters of credit
is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments as it does for
loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
------------------------------
1999 1998
------------- -------------
Commitments to extend credit $ 8,757,000 $ 4,462,000
Credit card arrangements $ 397,000 $ 497,000
Letters of credit $ 150,000 $ 150,000
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies,
but may include savings accounts, accounts receivable, inventory,
equipment, and deeds of trust on residential real estate and
income-producing commercial properties.
29
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 1999, commercial loan commitments represent
approximately 62% of total commitments and are generally secured by
accounts receivable and inventory. Real estate loan commitments
represent approximately 37% of total commitments and are generally
secured by property with a loan-to-value ratio not to exceed 80%.
Unsecured credit card and equity line commitments represent the
remaining 1% of total commitments. In addition, the majority of the
Bank's loan commitments have variable interest rates.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants real estate mortgage, real estate construction,
commercial, agricultural and consumer loans to customers in Northern
California, primarily in Sonoma County. Although the Bank has a
diversified loan portfolio, a substantial portion of its portfolio is
secured by commercial and residential real estate. However, personal
and business income represent the primary source of repayment for a
majority of these loans.
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements. There
were no uninsured deposits at December 31, 1999.
FEDERAL RESERVE REQUIREMENTS
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. The Bank had a
reserve requirement with the Federal Reserve Bank of $156,000 and
$86,000 as of December 31, 1999 and 1998, respectively.
CONTINGENCIES
The Bank is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to such actions will not materially
affect the financial position or results of operations of the Bank.
30
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENT
The Bank has a total of $2,000,000 in unsecured Federal funds lines of
credit with two of its correspondent banks to meet short-term liquidity
needs. In addition, the Bank has a line of credit available with the
Federal Home Loan Bank totaling $1,400,000 which is secured by pledged
mortgage loans. An advance totaling $1,000,000 was outstanding from the
Federal Home Loan Bank at December 31, 1999 bearing an interest rate of
5.9% and a maturity date of April 12, 2000. There were no short-term
borrowings outstanding at December 31, 1998.
9. SHAREHOLDERS' EQUITY
DIVIDENDS
Upon declaration by the Board of Directors, all shareholders of record
will be entitled to receive dividends. Under applicable Federal laws,
the Comptroller of the Currency (OCC) restricts the total dividend
payment of any national banking association in any calendar year to the
net income of the year, as defined, combined with the net income for
the two preceding years, less distributions made to shareholders during
the same three-year period. At December 31, 1999, retained earnings of
$295,630 were free of such restrictions.
EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Shares Per Share
For the Year Ended Net Income Outstanding Amount
--------------------------------- ------------ ------------ ------------
December 31, 1999
-----------------
<S> <C> <C> <C>
Basic earnings per share $ 226,994 472,354 $ .48
============
Effect of dilutive stock options 17,318
------------ ------------
Diluted earnings per share $ 226,994 489,672 $ .46
============ ============ ============
December 31, 1998
-----------------
Basic earnings per share $ 345,956 471,794 $ .73
============
Effect of dilutive stock options 22,036
------------ ------------
Diluted earnings per share $ 345,956 493,830 $ .70
============ ============ ============
</TABLE>
31
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of
Shares Per Share
For the Year Ended Net Income Outstanding Amount
--------------------------------- ------------ ------------ ------------
December 31, 1997
-----------------
<S> <C> <C> <C>
Basic earnings per share $ 345,850 471,667 $ .73
============
Effect of dilutive stock options 10,178
------------ ------------
Diluted earnings per share $ 345,850 481,845 $ .72
============ ============ ============
</TABLE>
Weighted average number of shares outstanding are adjusted for stock
splits for all periods presented.
Options to purchase 62,500 shares of common stock at $9.26 per share
were outstanding during the first and third quarters of 1999 and
options to purchase 135,625 shares of common stock at a weighted
average price of $8.87 were outstanding during the fourth quarter of
1999 but were not included in the computation of diluted earnings per
share because the exercise price was greater than the average market
price of the common shares. Options to purchase 16,500 shares of common
stock at $10 per share were outstanding during 1997, but were not
included in the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares.
STOCK OPTIONS
In 1990, the Bank established a stock option plan for which 128,126
shares of common stock are reserved for issuance to employees and
directors under incentive and nonstatutory agreements. The plan
requires that the option price may not be less than the fair market
value of the stock at the date the option is granted, and that the
stock must be paid for in full at the time the option is exercised. All
options expire on a date determined by the Board of Directors, but not
later than ten years from the date of grant. Nonstatutory options
become twenty percent vested immediately upon grant, with the remaining
options vesting ratably over the next four years. Incentive options
vest ratably over a five year period beginning one year from the date
of grant.
32
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
The Bank has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation expense has been
recognized under its stock option plan. Had compensation cost for the
plan been determined based on the fair value at grant date for awards
in 1999, 1998 and 1996 consistent with the provisions of SFAS No. 123,
the Bank's net income and income per share for the years ended December
31, 1999, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below. Compensation expense is included in pro forma
income when the options become vested. The fair value of options
granted in 1999 and 1998 was estimated to be $4.45 and $3.61,
respectively.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income - as reported $ 226,994 $ 345,956 $ 345,850
Net income - pro forma $ 154,403 $ 295,057 $ 321,490
Basic income per share - as reported $ .48 $ .73 $ .73
Basic income per share - pro forma $ .33 $ .63 $ .68
Diluted income per share - as reported $ .46 $ .70 $ .72
Diluted income per share - pro forma $ .32 $ .60 $ .66
</TABLE>
The fair value of each option was estimated on the date of grant using
an option-pricing model with the following assumptions:
1999 1998
--------- ---------
Dividend yield (not applicable)
Expected volatility 73.32% 9.53%
Risk-free interest rate 6.00% 4.91%
Expected option life 10 years 10 years
33
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
A summary of the activity within the plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Incentive Options
-----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 153,665 $ 7.46 92,750 $ 6.22 126,875 $ 6.19
Options granted 52,500 $ 8.75 62,500 $ 9.26
Options exercised (710) $ 5.60
Options canceled (13,750) $ 7.65 (875) $ 5.60 (34,125) $ 6.12
----------- ----------- -----------
Options outstanding,
end of year 192,415 $ 7.80 153,665 $ 7.46 92,750 $ 6.22
=========== =========== ===========
Options exercisable,
end of year 102,949 $ 7.19 78,790 $ 6.91 52,750 $ 6.66
=========== =========== ===========
</TABLE>
A summary of options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
------------------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
$ 5.60 52,415 6.8 years 40,199
$ 6.20 12,500 4.2 years 12,500
$ 8.00 18,750 .7 years 18,750
$ 8.75 52,500 10 years 9,000
$ 9.26 56,250 8.7 years 22,500
--------------- ------------
192,415 102,949
=============== ============
</TABLE>
34
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Office of the Comptroller of the Currency (OCC).
Failure to meet these minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets and of Tier 1 capital
to average assets. Each of these components is defined in the
regulations. Management believes that the Bank meets all its capital
adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the OCC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth below. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----- ------------- ----- ------------- -----
Leverage Ratio
--------------
<S> <C> <C> <C> <C> <C> <C>
North Coast Bank $ 4,012,000 9.3% $ 3,781,000 9.8% $ 3,432,000 11.2%
Minimum requirement for "Well-
Capitalized" institution $ 2,163,000 5.0% $ 1,937,000 5.0% $ 1,525,000 5.0%
Minimum regulatory requirement $ 1,730,000 4.0% $ 1,550,000 4.0% $ 1,220,000 4.0%
Tier 1 Risk-based Capital Ratio
-------------------------------
North Coast Bank $ 4,012,000 10.0% $ 3,781,000 12.0% $ 3,432,000 15.9%
Minimum requirement for "Well-
Capitalized" institution $ 2,395,000 6.0% $ 1,898,000 6.0% $ 1,297,000 6.0%
Minimum regulatory requirement $ 1,597,000 4.0% $ 1,265,000 4.0% $ 865,000 4.0%
Total Risk-Based Capital Ratio
------------------------------
North Coast Bank $ 4,395,000 11.0% $ 4,112,000 13.0% $ 3,703,000 17.1%
Minimum requirement for "Well-
Capitalized" institution $ 3,992,000 10.0% $ 3,163,000 10.0% $ 2,161,000 10.0%
Minimum regulatory requirement $ 3,194,000 8.0% $ 2,531,000 8.0% $ 1,729,000 8.0%
</TABLE>
35
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. EMPLOYEE BENEFIT PLANS
SAVINGS PLAN
The North Coast Bank 401(k) Savings Plan commenced January 1, 1993 and
is available to employees meeting certain service requirements. Under
the plan, employees may defer a selected percentage of their annual
compensation. The Bank's contribution to the plan is discretionary and
is allocated as follows:
o A matching contribution to be determined by the Board of
Directors each plan year under which the Bank will match a
percentage of each participant's contribution.
o The Bank may make additional contributions to the plan at
the discretion of the Board of Directors that shall be
allocated in the same ratio as each participant's
contribution bears to total compensation.
Bank contributions totaled $13,216, $8,560 and $8,031 for the years
ended December 31, 1999, 1998, and 1997, respectively.
11. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including Directors and officers. These
transactions include borrowings from the Bank with substantially the
same terms, including rates and collateral, as loans to unrelated
parties. The following is a summary of the aggregate activity involving
related party borrowers during 1999:
Balance, January 1, 1999 $ 291,596
Disbursements 1,586,068
Amounts repaid (366,122)
------------
Balance, December 31, 1999 $ 1,511,542
============
Undisbursed commitments to related parties,
December 31, 1999 $ 934,195
============
36
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
12. OTHER EXPENSES
Other expenses for the years ended December 31, 1999, 1998 and 1997
consisted of the following:
1999 1998 1997
--------- --------- ---------
Data processing $ 188,234 $ 165,602 $ 168,186
Merchant processing fees 139,819 74,019 56,809
Advertising 72,521 37,566 16,882
Stationery and supplies 71,190 45,119 47,525
Legal and accounting 33,276 38,746 51,082
Brokerage and consulting fees 30,746 38,401 24,875
Insurance 26,805 27,938 29,399
Other operating expenses 255,581 176,764 164,427
--------- --------- ---------
$ 818,132 $ 604,155 $ 559,185
========= ========= =========
13. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all
periods presented. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive
income (loss) that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Bank's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are
presented in the Statement of Changes in Shareholders' Equity.
At December 31, 1999, 1998 and 1997, the Bank held securities
classified as available-for-sale which had unrealized (losses) gains as
follows:
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
---------- ---------- ----------
For the Year Ended December 31, 1999
------------------------------------
<S> <C> <C> <C>
Other comprehensive loss:
Unrealized holding losses $ (30,572) $ 9,972 $ (20,600)
========== ========== ==========
For the Year Ended December 31, 1998
------------------------------------
Other comprehensive loss:
Unrealized holding losses $ (17,824) $ 7,257 $ (10,567)
Reclassification adjustment for net
gains included in net income 6,593 (2,637) 3,956
---------- ---------- ----------
Total other comprehensive
loss $ (11,231) $ 4,620 $ (6,611)
========== ========== ==========
</TABLE>
37
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. COMPREHENSIVE INCOME (Continued)
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
---------- ---------- ----------
For the Year Ended December 31, 1997
------------------------------------
<S> <C> <C> <C>
Other comprehensive income:
Unrealized holding gains $ 10,099 $ (4,155) $ 5,944
========== ========== ==========
</TABLE>
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which
it is practicable to estimate fair value. These estimates are made as
of a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
Bank's entire holdings of a particular financial instrument for sale at
one time, nor do they attempt to estimate the value of anticipated
future business related to the instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of these estimates.
Because no market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Bank to estimate
the fair value of its financial instruments at December 31, 1999 and
1998:
CASH AND DUE FROM BANKS, CASH EQUIVALENTS AND SHORT-TERM BORROWINGS:
For cash and due from banks, cash equivalents and short-term
borrowings, the carrying amount is estimated to be fair value.
INTEREST-BEARING DEPOSITS IN BANKS: The fair value of interest-bearing
deposits in banks are estimated by discounting their future cash-flows
using rates at each reporting date for instruments with similar
remaining maturities offered by comparable financial institutions.
INVESTMENT SECURITIES: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
38
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
LOANS AND LEASES: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. The fair values for other loans and leases
are estimated using discounted cash flow analyses, using interest rates
offered at each reporting date for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of
accrued interest receivable approximates its fair value.
DEPOSITS: The fair values for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date represented by
their carrying amount. Fair values for fixed-rate certificates of
deposit are estimated using discounted cash flow analyses using
interest rates offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: Commitments to
extend credit and letters of credit are primarily for variable rate
loans. For these commitments, there is no difference between the
committed amounts and their fair values. Commitments to fund fixed rate
loans and letters of credit are at rates which approximate fair value
at each reporting date.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,626,289 $ 2,626,289 $ 3,484,967 $ 3,484,967
Federal funds sold 1,000,000 1,000,000 4,600,000 4,600,000
Interest-bearing deposits
in banks 793,000 793,000 693,000 693,000
Investment securities 1,708,000 1,708,000 1,428,995 1,428,995
Loans and leases 39,735,527 39,323,000 30,802,994 30,836,411
Accrued interest receivable 250,478 250,478 206,119 206,119
----------- ----------- ----------- -----------
$46,113,294 $45,700,767 $41,216,075 $41,249,492
=========== =========== =========== ===========
Financial liabilities:
Deposits $42,081,162 $42,113,000 $38,153,043 $38,155,639
Accrued interest payable 39,624 39,624 36,887 36,887
----------- ----------- ----------- -----------
$42,120,786 $42,152,624 $38,189,930 $38,192,526
=========== =========== =========== ===========
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 8,757,000 $ 8,757,000 $ 4,462,000 $ 4,462,000
Credit card arrangements 397,000 397,000 497,000 497,000
Letters of credit 150,000 150,000 150,000 150,000
----------- ----------- ----------- -----------
$ 9,304,000 $ 9,304,000 $ 5,109,000 $ 5,109,000
=========== =========== =========== ===========
</TABLE>
39
<PAGE>
NORTH COAST BANK
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. SUBSEQUENT EVENT
On March 1, 2000, the Directors of North Coast Bank and American River
Holdings approved a definitive merger agreement between the two
companies. As a result, North Coast Bank, American River Bank, and
First Source Capital will operate as wholly-owned subsidiaries under
American River Holdings. Under the agreement, each share of North Coast
Bank will be converted into the right to receive .9644 of a share of
the common stock of American River Holdings. The transaction will be
accounted for under the pooling-of-interests method of accounting. It
is expected that this merger will be accomplished in the third quarter
of 2000, subject to shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1997. This
information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would
have been achieved had the merger been consummated at that time.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net interest income $ 11,754,000 $ 10,743,000 $ 9,582,000
Net income $ 3,128,000 $ 2,850,000 $ 2,347,000
Basic earnings per common share $ 1.37 $ 1.25 $ 1.02
Diluted earnings per common share $ 1.30 $ 1.14 $ .94
</TABLE>
40
