<PAGE>
CLOVIS COMMUNITY BANK
1999 ANNUAL REPORT TO SHAREHOLDERS
A Legacy of Pride - A Future of Promise
As we reflect on the first twenty years of Clovis Community Bank, many successes
and milestones come to mind. And many familiar faces come to mind too. Some
faces we've served since the day we opened in 1980. Others have only recently
become customers of the Bank. But they are all greeted by name and always with a
smile. That level of personal service is the greatest legacy of our first twenty
years.
We are also excited about our future. As more people are drawn to Clovis
Community Bank by our uniquely personal approach to banking, we are growing to
meet their financial needs. As always, we continue to enhance not only our local
accessibility but also our complete line of support and loyalty we have enjoyed
and look forward to ensuring that Clovis Community Bank's next twenty years are
as richly satisfying and successful as our first twenty.
To Our Shareholders:
The past year saw a return to profitability and was the Bank's best year in
earnings since 1995. While this financial performance can and should be improved
upon in the future, it is proof positive that the Bank's past financial and
structural problems have been addressed.
Clovest Proves Costly, But Its Now Discontinued
We have made significant progress in the discontinuance of Clovest Corporation,
the Bank's real estate investment subsidiary. All projects were completed and
sold during 1999 except one residential lot development. These reductions
accounted for approximately $6 million in reduction of assets and liabilities
during the past year.
[PHOTOGRAPH - DANIEL J. DOYLE, PRESIDENT AND CEO]
New Systems will Protect the Bank Against Risk
Charge-offs and additions to the allowance for loan and lease losses were
significant for the year. An analysis of the loans shows that they were all
underwritten in previous years, before new credit processes and structures were
put in place. We are confident that proper systems and measurement tools are now
in place to monitor the Bank's risk in an accurate and timely fashion.
[PHOTOGRAPH - DANIEL CUNNINGHAM, CHAIRMAN OF THE BOARD]
Experienced New Management Team In Place
During 1999, changes were made to supplement and support the Bank's leadership
with the additions to the five key senior management team members, bringing over
125 combined years of banking experience to the organization. By adding a
Manager of Retail and Consumer Banking, a Manager of Commercial and Business
Banking and Manager of Credit Administration/Senior Credit Officer, we have
enabled the Bank to more effectively meet the needs of every segment of our
clientele.
[PHOTOGRAPH - WANDA L. ROGERS, ROGERS HELICOPTERS, INC.]
Bank Prevents Bite of "Y2K Bug"
There were, of course, significant efforts and financial resources invested in
preparing for the year 2000, or Y2K. The planning, testing, new equipment,
communication and hard work paid off. No negative impact occurred in the Bank's
systems or service. We offer our deepest appreciation to our customers and
shareholders for the confidence they displayed in our Bank during this time of
national uncertainty.
[PHOTOGRAPH - DAVID E. COOK, RETIRED]
Modest Improvements In Local Economy Are Encouraging
The economy in our local market did show some improvement, as unemployment
finally fell to single digits during part of the year. The Central Valley as a
whole is still behind the growth experienced in other parts of California.
However, long-term growth is considered to be positive for the Central Valley
Region.
[PHOTOGRAPH - SID COX, COX COMMUNICATIONS]
1
<PAGE>
Bank Capitalizes on 20-Year Record of Unchanged Strength & Stability
The financial service industry continued to experience changes with mergers,
acquisitions and new regulations being effected nationally. In order to
capitalize on these changes, which generally are seen negatively by banking
customers, our advertising message focused on the fact that Clovis Community
Bank was preparing to enter its 20th year in business and remained the only bank
in the market that had not been acquired, changed its name or gone out of
business in the last twenty years. We combined the message with an invitation to
use our SwitchKit, which was mailed to targeted businesses and consumers to
encourage them to switch to Clovis Community Bank.
New Products Reflect Input From Bank Customers
While we are organized by customer segments and not products, and while we
attribute our success to our exceptional team of employees and shareholders, we
are committed to continuing to ask our customers what we can do to meet their
needs. By listening to them, we added our new Debit/Check Card, QuickLoan,
QuickLine and QuickLease; received SBA Preferred Lender status; and added our
Bank@Work program for individuals who are employed by our business customers. In
addition, we installed a Marketing Customer Information System (MCIF) to assist
us in monitoring the growth of the Bank by product segment and allowing us to
better understand our customer's needs.
Bank Staff Sharpens Its Sales Focus
To effectively meet the needs of our customers, in an increasingly competitive
environment, the Bank spent considerable time in recruiting new sales-oriented
employees, providing training, developing incentive programs, and implementing a
new needs-based sales culture throughout the Bank.
[PHOTOGRAPH - STEVEN D. MCDONALD, MCDONALD PROPERTIES]
Stock Price Consistent With National Trend
One area of disappointment to us all is the Bank's stock price decline in 1999.
The market did not reward us for our progress or our return to profitability.
Overall, the financial services industry was not "in favor" during this year, as
evidenced by the significant decline in the value of nearly all bank stocks
during 1999. Some of this was due to increased rates by the Federal Reserve,
concerns about Y2K and fear that bank profits would decline. Some was due to
concerns that if the economy began a recession, bank loans might deteriorate.
And in some cases, the market was more interested in high-tech stocks. In our
case, we have limited amounts of stock sales, our stock price can be greatly
affected by small sales of shares which generally can take place through
Internet trading or discount brokerage firms.
[PHOTOGRAPH - LOUIS MCMURRAY, CHARLES MCMURRAY COMPANY]
Quality Employees Are Key to Continued Success
As we look to the year 2000 and beyond, we are excited about the opportunities
for our Bank. Our Mission Statement and strategic plan clearly express our goal
of providing long-term shareholder value and meeting the needs of our community.
Our key focus in 2000 is to improve earnings and continue to improve asset
quality. In order to broaden our competitive advantage, we will continue to
provide local decision-making and employees empowered to deliver personal and
professional customer solutions. The Clovis Community Bank advantage is that our
employees, our products, and our entire organization is focused on meeting
customer needs. We strongly believe customer satisfaction and shareholder value
all rest on the quality of our team.
[PHOTOGRAPH - WILLIAM SMITTCAMP, WAWONA FROZEN FOODS]
New Services & Offices Planned for 2000
As we have listened to our customers, we feel now is the appropriate time to
offer Internet Banking. This project is underway and expected to be available
for all customers at the end of the second quarter. Likewise, responding to an
opportunity created by another merger in our local market, we will be opening a
new branch in the prestigious Fig Garden Village shopping center early in the
second quarter. This allows us to serve our existing customers in this popular
area, while expanding into one of our strategic business niches: the
professional market. Additionally, we will be opening a Commercial Banking
Center in the fast-growing River Park business district. This Center will be
staffed with key professional bankers. In order to accommodate this move, we
will integrate one of our three In-Store banking offices into the River Park
facility thus creating a full-service office. We will relocate and close one of
our in-store branches to accommodate these changes.
[PHOTOGRAPH - HOSHITO TAKEHASHI, INVESTMENTS]
Looking Ahead To Continued Success In The New Millennium
A new and very experienced management team, combined with our outstanding new
and existing employees, have created a solid foundation upon which the Bank can
continue our record of service, stability and satisfaction. As we reflect
2
<PAGE>
on the past 20 years, we appreciate your patience and support during those
times. And as we look ahead to growing and building our organization for the
next 20 years, we are committed to earning your business and rewarding your
confidence every day.
[PHOTOGRAPH - JOSEPH WEIRICK, INVESTMENTS]
/s/ DANIEL N. CUNNINGHAM /s/ DANIEL J. DOYLE
---------------------------------- ----------------------------------------
Daniel N. Cunningham Daniel J. Doyle
Chairman of the Board President and Chief Executive Officer
Mission Statement
As a Full-Service Community Bank We Are Committed To:
- Providing the full range of financial products and services required by our
customers.
- Contributing to the quality of life throughout the Central Valley
communities we serve.
- Providing superior customer service to be delivered in a highly
professional, but very personal, manner that promotes trust and confidence.
- Maintaining a positive work environment for our team members.
- Continuing to maximize shareholder value.
Being the Best we can be!
Business
Clovis Community Bank is a California State chartered bank with deposit
accounts insured by the Federal Deposit Insurance Corporation.
The Bank commenced operations on January 10, 1980 and currently operates
full-service offices in Clovis, Fresno, Shaver Lake and Prather. Three of the
offices are in-store facilities in Save Mart Supermarkets offering extended
hours, including Saturday and Sunday hours, for the benefit of our customers.
The Bank has increased the products and services offered to consumers and has
provided emphasis on needs-based selling within the branch environment. Internet
banking is expected to be provided to customers at the end of the second quarter
of 2000.
The Bank operates a Real Estate Office where all real estate related
transactions are processed, including residential and commercial interim
construction loans, and all types of single family residential loans. The Bank
also has an SBA Lending Department to complement its commercial banking
services. In addition, the Bank expects to open a seventh branch at Fig Garden
Village in Fresno during the second quarter of 2000. An additional commercial
banking center is also expected to open in the second quarter in the River Park
area of Fresno while closing one of the In-Store offices.
Clovis Community Bank has built a reputation for quality, efficient banking
service based on personalized relationship banking for businesses, individuals
and professionals. The business sector has been a primary area of growth within
the Bank as its reputation as a lender and provider of business banking services
has expanded. This sector is further serviced by courier service for
commercial/business customers in the surrounding industrial area.
Account services include checking, savings, money market accounts and time
certificates of deposit. Loan services include commercial/business loans,
consumer loans, MasterCard and Visa credit cards and all types of real estate
loans.
The Bank maintains state of the art data processing and information
systems, 24-hour customer access to account information, deposit and withdrawal
history, loan history, interest earned or paid and the ability to transfer funds
via touch-tone phone through "BANKLINE". Automated teller machines are available
at all six offices.
3
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,087,796 $ 10,801,115
Federal funds sold 8,921,000 10,440,000
Available-for-sale investment securities (Note 2) 54,170,377 56,452,484
Held-to-maturity investment securities (market value of
$7,721,617 in 1998) (Note 2) 7,228,017
Loans, less allowance for credit losses of $2,236,342 in 1999
and $2,949,171 in 1998 (Notes 3, 13 and 17) 79,017,405 71,693,223
Equipment leased to others, net (Note 4) 2,437,118 2,357,235
Bank premises and equipment, net (Notes 5 and 13) 1,507,638 1,736,035
Other real estate, net of a valuation allowance of $36,305 in
1999 and $593,668 in 1998 (Note 6) 48,148 712,813
Investments in real estate, net of a valuation allowance of
$938,757 in 1999 and $901,641 in 1998 (Note 7) 502,321 7,251,222
Accrued interest receivable and other assets
(Notes 8, 11 and 16) 6,311,152 6,415,904
------------- -------------
$ 167,002,955 $ 175,088,048
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 34,965,565 $ 35,750,459
Interest bearing (Note 9) 114,181,818 116,255,868
------------- -------------
Total deposits 149,147,383 152,006,327
Notes payable (Notes 4 and 10) 250,366 5,972,423
Accrued interest payable and other liabilities (Note 16) 1,789,694 1,934,763
------------- -------------
Total liabilities 151,187,443 159,913,513
------------- -------------
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity (Note 14):
Common stock, no par value; 2,812,500 shares
authorized, 1,303,459 and 1,169,067 shares issued
and outstanding in 1999 and 1998, respectively 6,465,236 3,913,798
Retained earnings 9,737,276 11,367,237
Accumulated other comprehensive loss (Notes 2 and 18) (387,000) (106,500)
------------- -------------
15,815,512 15,174,535
------------- -------------
$ 167,002,955 $ 175,088,048
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
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 $ 7,719,899 $ 8,671,527 $ 10,492,240
Interest on Federal funds sold 327,409 530,348 453,064
Interest on deposits in banks 15,054 10,650 17,485
Interest and dividends on investment
securities:
Taxable 2,824,774 2,242,488 1,055,744
Exempt from Federal income
taxes 466,222 457,113 460,300
------------ ------------ ------------
Total interest income 11,353,358 11,912,126 12,478,833
------------ ------------ ------------
Interest expense:
Interest on deposits (Note 9) 3,296,176 3,976,883 3,943,115
Other (Note 10) 48,217 79,556 45,420
------------ ------------ ------------
Total interest expense 3,344,393 4,056,439 3,988,535
------------ ------------ ------------
Net interest income before
provision for credit losses 8,008,965 7,855,687 8,490,298
Provision for credit losses (Note 3) 1,270,000 1,721,566 2,346,000
------------ ------------ ------------
Net interest income after
provision for credit losses 6,738,965 6,134,121 6,144,298
------------ ------------ ------------
Non-interest income:
Service charges 1,012,076 932,936 852,620
Rentals from equipment leased
to others 1,273,629 1,057,349 1,055,004
Loan placement fees 215,306 259,578 216,261
Net realized losses on sales of
investment securities (Note 2) (47,629) (8,656)
Other income 543,269 426,991 498,902
------------ ------------ ------------
Total non-interest income 2,996,651 2,676,854 2,614,131
------------ ------------ ------------
</TABLE>
(CONTINUED)
5
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Non-interest expenses:
Salaries and employee benefits
(Notes 3 and 16) $ 3,853,412 $ 3,727,856 $ 3,102,309
Occupancy and equipment (Notes 5
and 13) 640,091 621,002 745,605
Depreciation and provision for losses
on equipment leased to others (Note 4) 1,080,410 914,620 858,009
Other expense (Note 15) 3,237,204 3,486,749 3,041,314
------------ ------------ ------------
Total non-interest expenses 8,811,117 8,750,227 7,747,237
------------ ------------ ------------
Income from continuing oper-
ations before income taxes 924,499 60,748 1,011,192
Income tax expense (benefit) (Note 11) 207,700 (149,000) 239,800
------------ ------------ ------------
Net income from continuing
operations 716,799 209,748 771,392
------------ ------------ ------------
Discontinued operations (Note 7):
Gain (loss) from operations of Clovest
less applicable income tax expense
(benefit) of $800, $(422,000) and
$(146,300) for the years ended
December 31, 1999, 1998 and 1997,
respectively 1,194 (601,967) (209,211)
------------ ------------ ------------
Net income (loss) $ 717,993 $ (392,219) $ 562,181
============ ============ ============
Basic earnings per share from
continuing operations (Note 14) $ .56 $ .17 $ .63
============ ============ ============
Diluted earnings per share from
continuing operations (Note 14) $ .55 $ .16 $ .59
============ ============ ============
Basic earnings (loss) per share (Note 14) $ .56 $ (.31) $ .46
============ ============ ============
Diluted earnings (loss) per share (Note 14) $ .55 $ (.30) $ .43
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
----------------------- RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME(LOSS) EQUITY INCOME(LOSS)
---------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,101,990 $ 3,114,159 $ 11,642,533 $ 39,926 $ 14,796,618
Comprehensive income (Note 18):
Net income 562,181 562,181 $ 562,181
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 149,674 149,674 149,674
----------
Total comprehensive income $ 711,855
==========
Cash dividend $.40 per share (445,258) (445,258)
Stock options exercised and related tax
benefit (Note 14) 11,160 132,389 132,389
---------- ----------- ------------ ---------- ------------
Balance, December 31, 1997 1,113,150 3,246,548 11,759,456 189,600 15,195,604
Comprehensive loss (Note 18):
Net loss (392,219) (392,219) $ (392,219)
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (296,100) (296,100) (296,100)
----------
Total comprehensive loss $ (688,319)
==========
Stock options exercised and related tax
benefit (Note 14) 55,917 667,250 667,250
---------- ----------- ------------ ---------- ------------
Balance, December 31, 1998 1,169,067 3,913,798 11,367,237 (106,500) 15,174,535
---------- ----------- ------------ ---------- ------------
</TABLE>
(CONTINUED)
7
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
----------------------- RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME(LOSS) EQUITY INCOME(LOSS)
---------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,169,067 $ 3,913,798 $ 11,367,237 $ (106,500) $ 15,174,535
Comprehensive income (Note 18):
Net income 717,993 717,993 $ 717,993
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Note 2) (280,500) (280,500) (280,500)
----------
Total comprehensive income $ 437,493
==========
Common stock dividend - 10% 117,217 2,344,340 (2,344,340)
Common stock dividend - fractional shares (3,614) (3,614)
Stock options exercised and related tax
benefit (Note 14) 17,175 207,098 207,098
---------- ----------- ------------ ---------- ------------
Balance, December 31, 1999 1,303,459 $ 6,465,236 $ 9,737,276 $ (387,000) $ 15,815,512
========== =========== ============ ========== ============
Disclosure of reclassification amount, net
of taxes:
Unrealized holding losses arising during 1999 $ (309,077)
Reclassification adjustment for net losses
included in net income 28,577
----------
Net unrealized losses on available-for-sale
investment securities $ (280,500)
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
8
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 717,993 $ (392,219) $ 562,181
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Net (income) loss from discontinued operations (1,194) 601,967 209,211
Provision for credit losses 1,270,000 1,721,566 2,346,000
Provision for losses on other real estate 39,126 217,000 157,959
Gain on sale of equipment leased to others (43,165) (22,869) (49,244)
Net decrease in deferred loan fees (149,983) (88,393) (156,029)
Depreciation, accretion and amortization, net 2,231,647 1,808,431 1,726,147
Net realized losses on sales of available-for-sale
investment securities 47,629 8,656
(Gain) loss on sale of equipment (12,309) 4,413 16,050
Gain on sale of other real estate (86,473) (102,483)
Reduction in carrying value of bank premises
and equipment 161,612 175,500
Net (increase) decrease in accrued interest
receivable and other assets (376,680) 1,069,504 400,544
Net (decrease) increase in accrued interest
payable and other liabilities (125,241) 82,270 (559,995)
Deferred income tax expense (benefit) 645,000 (1,095,000) (683,000)
------------ ------------ ------------
Net cash provided by operating activities of
continuing operations 4,317,962 3,979,687 3,978,480
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale investment securities (28,359,004) (39,509,404) (12,628,833)
Proceeds from sale of available-for-sale investment
securities 11,773,416 8,578,882
Proceeds from principal repayments of available-for-
sale investment securities 12,706,547 7,706,916 1,707,519
Proceeds from called and matured available-for-sale
investment securities 12,041,812
Proceeds from matured held-to-maturity investment
securities 155,000 185,000
Net (increase) decrease in loans (8,794,798) 14,918,119 (1,965,265)
Purchases of premises and equipment (260,380) (196,252) (644,290)
Proceeds from sale of equipment 6,000 8,000
Proceeds from sale of other real estate 1,062,611 899,752 252,345
Purchase of equipment leased to others (1,818,117) (866,522) (839,106)
Proceeds from sale of equipment leased to others 852,932 176,132 861,259
------------ ------------ ------------
Net cash used in investing activities of
continuing operations (788,981) (16,716,259) (4,484,489)
------------ ------------ ------------
</TABLE>
(CONTINUED)
9
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 3,802,731 $ 11,717,800 $ 5,527,862
Net (decrease) increase in time deposits (6,661,675) (2,567,275) 7,273,009
Payments on notes payable for equipment leased to
others (761,949) (468,991) (534,993)
Dividends paid on common stock (445,258)
Cash paid for fractional shares (3,614)
Proceeds from exercise of stock options 143,093 206,232 76,326
Net decrease in Federal funds purchased (1,500,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities
of continuing operations (3,481,414) 8,887,766 10,396,946
------------ ------------ ------------
Cash provided by discontinued operations 1,720,114 3,322,219 416,983
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,767,681 (526,587) 10,307,920
Cash and cash equivalents at beginning of year 21,241,115 21,767,70 11,459,782
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,008,796 $ 21,241,115 $ 21,767,702
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the year for:
Interest expense $ 3,411,303 $ 4,106,864 $ 3,910,180
Income taxes $ (448,261) $ 436,895 $ 431,928
Non-cash investing activities:
Real estate acquired through foreclosure, net of
valuation allowances $ 490,205 $ 706,049 $ 24,026
Receivable recorded from Small Business
Administration in connection with foreclosed
property $ 139,606
Net change in unrealized (loss) gain on available-
for-sale investment securities $ (470,900) $ (470,100) $ 237,625
Transfer of held-to-maturity investment securities
to available-for-sale investment securities $ 7,228,017
Non-cash financing activities:
Purchase of equipment leased to others through
issuance of notes payable $ 132,363 $ 767,360 $ 650,792
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.
10
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Clovis Community Bank (the "Bank") operates six branches in Clovis, north
Fresno, and northeast Fresno County, California. The Bank?s primary source
of revenue is providing loans to customers who are predominately small and
middle-market businesses and middle-income individuals. Another significant
source of revenue includes arrangements to lease computer equipment to
various entities located throughout the United States. In addition, the
Bank engaged in real estate development activities through its subsidiary,
Clovest Corporation (Clovest). Such real estate development activities
consisted primarily of the acquisition, development and sale of residential
homes, homesite lots and senior citizen housing in the Fresno and Clovis
areas through various partnerships and limited liability companies (LLCs)
in which Clovest is a general partner or manager. As discussed in Note 7,
on July 15, 1998, the Clovest Board of Directors adopted a plan to
discontinue the operations of Clovest. The accounting and reporting
policies of Clovis Community Bank and subsidiaries conform with generally
accepted accounting principles and prevailing practices within the banking
industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
BASIS OF PRESENTATION
The consolidated financial statements include the Bank and its wholly-owned
subsidiaries, Clovest and Clovis Securities Corporation (currently
inactive). The operating results of Clovest are reflected as discontinued
operations for all periods presented. All significant intercompany accounts
and transactions are eliminated.
INVESTMENT SECURITIES
Investments are classified into the following categories:
- Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
- Held-to-maturity securities, which management has the positive
intent and ability to hold to maturity, 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was subsequently
amended by SFAS 137 to delay the effective date. Upon adoption, SFAS 133
allows the transfer of held-to-maturity investment securities into the
available-for-sale category without calling into question an entity's
intent to hold other debt securities to maturity in the future. The Bank
adopted SFAS 133 as of April 1, 1999. No derivative instruments were held
and, accordingly, there is no transition adjustment reported in these
financial statements. However, all held-to-maturity investment securities
were transferred to the available-for-sale category and the unrealized
holding gain at the date of transfer was included in accumulated other
comprehensive income.
11
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT SECURITIES (Continued)
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities is
reported in interest income, net of applicable adjustments for accretion of
discounts and amortization of premiums. In addition, unrealized losses that
are other than temporary are recognized in earnings for all investments.
LOANS
Loans are stated at principal balances outstanding. Interest is accrued
daily based upon outstanding loan balances. However, when, in the opinion
of management, loans are considered impaired and the future collectibility
of interest and principal is in serious doubt, a loan is placed on
nonaccrual status and the accrual of interest income is suspended. Any
interest accrued but unpaid is charged against income. Payments received
are applied to reduce principal to the extent necessary to ensure
collection. Subsequent payments on these loans, or payments received on
nonaccrual loans for which the ultimate collectibility of principal is not
in doubt, are applied first to earned but unpaid interest and then to
principal.
An impaired loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due (including both
principal and interest) in accordance with the contractual terms of the
loan agreement.
Substantially all loan origination fees, commitment fees, direct loan
origination costs and purchase premiums and discounts on loans are deferred
and recognized as an adjustment of yield, to be amortized to interest
income over the contractual term of the loan. The unamortized balance of
deferred fees and costs is reported as a component of net loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained to provide for losses related
to impaired loans 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 portfolio, specifically identified problem loans, 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 credit losses which is charged to
expense. Management considers the allowance for credit losses adequate to
cover losses inherent in the loan portfolio.
EQUIPMENT LEASED TO OTHERS
The Bank enters into leasing arrangements through certain leasing brokers
to lease computer equipment to various entities. Computer equipment leased
to others under operating leases is depreciated on a straight-line basis
over the lease term to an estimated residual value. Related rental income
is recorded when earned.
The Bank maintains an allowance for residual losses based upon management's
assessment of various factors affecting residual values. Management
considers the allowance for residual losses adequate to cover any potential
losses in the lease portfolio.
12
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 is charged
against the allowance for credit 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 and 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.
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 Bank premises are estimated to be
between twenty and forty years. The useful lives of improvements to Bank
premises, furniture, fixtures and equipment are estimated to be three to
fifteen 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 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.
The Bank evaluates premises and equipment for financial impairment as
events or changes in circumstances indicate that the carrying amount of
such assets may not be fully recoverable. Based upon these evaluations, the
Bank recorded an adjustment to the carrying value of certain long-lived
assets in 1999 and 1998 (Note 5).
REAL ESTATE INVESTMENTS
Real estate held for investment is held in the Bank's subsidiary, Clovest,
and is recorded at the lower of cost or net realizable value through the
use of a valuation allowance. The allowance is established through a
provision for losses on real estate investments which is included in losses
from discontinued operations. Interest and other carrying charges related
to property held for development are capitalized during the construction
period. Capitalization of interest ceases when the qualifying asset is
substantially complete and ready for sale or when activities related to
development are completed.
Revenue recognition on the disposition of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property
sold and the terms of the sale. Under certain circumstances, revenue
recognition may be deferred until these criteria are met.
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, the Bank considers cash and
due from banks and Federal funds sold to be cash equivalents. Generally,
Federal funds are sold for one-day periods.
13
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the 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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS), which excludes dilution, is computed
by dividing income (loss) 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. All
data with respect to computing earnings per share is retroactively adjusted
to reflect stock dividends and the treasury stock method is applied to
determine the dilutive effect of stock options in computing diluted EPS.
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.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 1999 and 1998 consisted of the following:
AVAILABLE-FOR-SALE:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 1,018,614 $ (14,500) $1,004,114
U.S. Government
agencies 4,989,841 (117,300) 4,872,541
Obligations of states
and political sub-
divisions 9,771,247 $ 159,200 (144,500) 9,785,947
U.S. Government
agencies collateral-
ized by mortgage
obligations 37,211,067 85,500 (596,200) 36,700,367
Federal Home Loan
Mortgage Corpora-
tion non-cumulative
preferred stock 1,012,189 (12,200) 999,989
Federal Home Loan
Bank stock 495,800 495,800
Other securities 311,619 311,619
------------- ------------- ------------- -------------
$ 54,810,377 $ 244,700 $ (884,700) $ 54,170,377
============= ============= ============= =============
</TABLE>
14
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
AVAILABLE-FOR-SALE: (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 500,681 $ 3,000 $ 503,681
U.S. Government
agencies 17,740,958 34,100 $ (29,300) 17,745,758
Obligations of states
and political sub-
divisions 1,492,547 91,100 1,583,647
U.S. Government
agencies collateral-
ized by mortgage
obligations 36,387,398 213,600 (481,600) 36,119,398
Federal Home Loan
Mortgage Corpora-
tion non-cumulative
preferred stock 500,000 500,000
------------- ------------- ------------- -------------
$ 56,621,584 $ 341,800 $ (510,900) $ 56,452,484
============= ============= ============= =============
</TABLE>
Net unrealized losses on available-for-sale investment securities totaling
$640,000 and $169,100 are recorded net of $253,000 and $62,600 in tax
benefits as accumulated other comprehensive loss within shareholders'
equity at December 31, 1999 and 1998, respectively.
Proceeds and gross realized gains and losses from the sale of
available-for-sale investment securities totaled $11,773,416, $31,285 and
$78,914, respectively, for the year ended December 31, 1999. There were no
sales of available-for-sale investment securities for the year ended
December 31, 1998. Proceeds and gross realized gains and losses from the
sale of available-for-sale investment securities totaled $8,578,882,
$36,915 and $45,571, respectively, for the year ended December 31, 1997.
HELD-TO-MATURITY:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Obligations of states
and political sub-
divisions $ 7,228,017 $ 493,600 $ - $ 7,721,617
================= ================== ================== ==================
</TABLE>
On April 1, 1999, all securities were transferred from the held-to-maturity
category to the available-for-sale category in accordance with the
provisions of SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, issued by the Financial Accounting Standards Board. The
amortized cost and market value of the transferred securities on the date
of the transfer were $7,064,000 and $7,535,000, respectively. Accordingly,
unrealized gains of $471,000 were recorded, net of $174,000 in tax
liabilities, as accumulated other comprehensive income within shareholders'
equity. There were no transfers of held-to-maturity investment securities
during 1998 or 1997.
15
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers of
the securities may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
---------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Within one year
After one year through five years $ 4,636,216 $ 4,549,472
After five years through ten years 3,568,023 3,489,494
After ten years 7,575,463 7,623,636
------------- -------------
15,779,702 15,662,602
U.S. Government guaranteed mortgage-
related securities 37,211,067 36,700,367
Federal Home Loan Mortgage Corporation
non-cumulative preferred stock 1,012,189 999,989
Federal Home Loan Bank stock 495,800 495,800
Other securities 311,619 311,619
------------- -------------
$ 54,810,377 $ 54,170,377
============= =============
</TABLE>
Investment securities with amortized costs totaling $16,445,084 and
$12,702,470 and market values totaling $16,279,426 and $13,036,770 were
pledged to secure public deposits and other contractual obligations at
December 31, 1999 and 1998, respectively.
3. LOANS
Outstanding loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Commercial $ 40,634,532 $ 35,994,782
Real estate 25,543,743 25,070,678
Real estate - construction 8,253,535 5,712,137
Agricultural 609,613 1,466,751
Installment 5,917,822 6,031,185
Other 545,191 767,533
------------- -------------
81,504,436 75,043,066
Deferred loan fees, net (250,689) (400,672)
Allowance for credit losses (2,236,342) (2,949,171)
------------- -------------
$ 79,017,405 $ 71,693,223
============= =============
</TABLE>
16
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LOANS (CONTINUED)
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,949,171 $ 2,600,015 $ 1,599,138
Provision charged to operations 1,270,000 1,721,566 2,346,000
Losses charged to the allowance (2,532,540) (1,622,705) (1,416,230)
Recoveries 549,711 250,295 71,107
------------ ------------ ------------
Balance, end of year $ 2,236,342 $ 2,949,171 $ 2,600,015
============ ============ ============
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $3,274,953 and $4,323,408 at December 31, 1999 and 1998,
respectively. The related allowance for credit losses on these impaired
loans at December 31, 1999 and 1998 was $614,000 and $609,500,
respectively. The average recorded investment in impaired loans during
1999, 1998 and 1997 was $4,212,000, $2,034,852 and $1,498,717,
respectively. Interest income on impaired loans is recognized on a cash
basis and totaled $229,000 and $83,000 for the years ended December 31,
1999 and 1998, respectively. Interest collected on impaired loans for the
year ended December 31, 1997 was not material.
At December 31, 1999 and 1998, nonaccrual loans totaled $3,617,536 and
$4,032,632, respectively. Interest foregone on nonaccrual loans totaled
$126,021, $196,226 and $92,258 for the years ended December 31, 1999, 1998
and 1997, respectively.
Salaries and employee benefits totaling $58,069, $74,126 and $125,890 have
been deferred as loan origination costs for the years ended December 31,
1999, 1998 and 1997, respectively.
4. EQUIPMENT LEASED TO OTHERS
The Bank is a lessor of computer equipment under operating leases. Included
in notes payable are obligations to other financial institutions of
$250,366 and $879,952 at December 31, 1999 and 1998, respectively, which
were used to partially finance purchases of equipment leased to others (see
Note 10).
Equipment leased to others consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Computer equipment $ 3,897,397 $ 3,790,258
Accumulated depreciation (1,421,430) (1,394,174)
Allowance for residual losses (38,849) (38,849)
------------- -------------
$ 2,437,118 $ 2,357,235
============= =============
</TABLE>
Depreciation totaled $1,080,410, $914,620 and $858,009 for the years ended
December 31, 1999, 1998 and 1997, respectively. There has been no change in
the allowance for residual losses for the years ended December 31, 1999,
1998 and 1997.
17
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. EQUIPMENT LEASED TO OTHERS (CONTINUED)
Minimum future rentals on noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $ 1,083,149
2001 683,507
2002 154,005
------------
$ 1,920,661
============
</TABLE>
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Land $ 250,000 $ 250,000
Buildings and improvements 933,941 933,176
Furniture, fixtures and equipment 1,915,536 2,120,624
Leasehold improvements 516,043 671,322
------------- -------------
3,615,520 3,975,122
Less accumulated depreciation
and amortization (2,107,882) (2,239,087)
------------- -------------
$ 1,507,638 $ 1,736,035
============= =============
</TABLE>
Depreciation and amortization included in occupancy and equipment expense
totaled $333,474, $343,909 and $423,787 for the years ended December 31,
1999, 1998 and 1997, respectively.
In December 1999 and 1998, management determined that the carrying amount
of certain leasehold improvements was not fully recoverable. Accordingly,
the Bank reduced the carrying value to $7,637 and $8,000, respectively,
through a charge to other expenses totaling $161,612 and $175,500,
respectively, to reflect the impairment.
6. OTHER REAL ESTATE
Other real estate, net of the related valuation allowance, totaled $48,148
and $712,813 at December 31, 1999 and 1998, respectively.
Changes in the valuation allowance for other real estate were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Balance, beginning of year $ 593,668 $ 479,151 $ 359,147
Provision charged to operations 39,126 217,000 157,959
Losses charged to the allowance (596,489) (102,483) (37,955)
----------- ------------ -----------
Balance, end of year $ 36,305 $ 593,668 $ 479,151
=========== ============ ===========
</TABLE>
18
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. DISCONTINUED OPERATIONS
On January 23, 1996, the FDIC issued an order approving the Bank's
application to continue to engage in real estate development, through
Clovest, subject to certain conditions relating to the maintenance of
capital (see Note 14) and the reduction in the level of real estate
investment to less than 30% of Tier 1 capital by January 2001. Management
believes that Clovest is in substantial compliance with the outlined
conditions at December 31, 1999.
Clovest did not enter into any new real estate investments in 1999 and
1998, and, on July 15, 1998 (the measurement date), the Board of Directors
approved the discontinuation of Clovest's operations. At the measurement
date, management estimated the net realizable value of each asset and
established a plan of disposition. The plan of disposition calls for the
expedient but judicious sale of assets. Management anticipates no further
losses will be incurred in connection with the disposition of the remaining
assets in Clovest.
Summarized below is condensed consolidated financial information for
Clovest included as discontinued operations in the Bank's consolidated
financial statements before elimination of intercompany accounts:
Condensed Balance Sheet:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash $ 113,831 $ 135,762
Real estate held for sale, net of valuation
allowance of $938,757 in 1999 and
$901,641 in 1998 502,321 7,251,222
Other assets 87,806 95,377
----------- -----------
Total assets $ 703,958 $ 7,482,361
=========== ===========
Liabilities and shareholder's deficit:
Liabilities:
Advances from the Bank, net of allocated tax
benefit of $602,083 in 1999 and $527,083
in 1998 $ 922,877 $ 2,323,463
Notes payable to the Bank 58,310
Notes payable to third parties (Note 10) 5,092,471
Other liabilities 112,992 189,089
----------- -----------
Total liabilities 1,035,869 7,763,333
Minority interest, net of allowance for
uncollectible amounts of $396,396 in
1999 and $382,000 in 1998 (24,934) (87,425)
Shareholder's deficit (306,977) (193,547)
----------- -----------
Total liabilities and shareholder's deficit $ 703,958 $ 7,482,361
=========== ===========
</TABLE>
19
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. DISCONTINUED OPERATIONS (CONTINUED)
Condensed Statement of Operations:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Income (loss) from operations of real estate
investments $ 201,030 $ (397,628) $ (187,030)
Interest income 17,398 209,063 270,402
Provisions to reduce carrying value of
minority interests and real estate under
development, net of recoveries (51,512) (598,572) (389,589)
Interest paid to Bank (190,424) (386,507)
Other expenses, net (202,883) (435,546) (132,509)
------------- ------------ ------------
(226,391) (1,609,190) (438,726)
Minority interest in loss from investments
in real estate 37,961 198,715 83,217
------------- ------------ ------------
Loss before income tax benefit $ (188,430) $ (1,410,475) $ (355,509)
============ ============ ============
</TABLE>
At December 31, 1999, Clovest's interests are comprised primarily of a
single family development of twenty-seven contiguous five acre parcels.
Clovest sold its interest in a senior citizens' apartment building in 1999.
Operating losses from the measurement date to December 31, 1999 and 1998
totaled approximately $788,000 and $600,000, respectively. Asset
dispositions subsequent to the measurement date totaled $7,412,000 and
$663,000 at December 31, 1999 and 1998, respectively. At December 31, 1999,
Clovest has no commitments to fund further development of its remaining
projects.
8. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Accrued interest receivable $ 841,158 $ 1,020,860
Receivable from minority interests in real estate
investments (Note 7) 24,934 87,425
Net deferred tax assets (Note 11) 2,584,000 3,039,000
Cash surrender value of life insurance (Note 16) 1,582,138 1,510,522
Intangibles 9,084 24,249
Prepaid expenses 108,623 118,104
Taxes receivable 537,772 485,529
Other 623,443 130,215
------------- -------------
$ 6,311,152 $ 6,415,904
============= =============
</TABLE>
20
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Savings $ 12,586,038 $ 13,223,993
Money market 24,411,789 27,150,116
NOW accounts 32,153,482 24,189,575
Time, $100,000 or more 13,182,399 17,657,112
Time, under $100,000 31,848,110 34,035,072
------------- -------------
$ 114,181,818 $ 116,255,868
============= =============
</TABLE>
Aggregate annual maturities of time deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000 $ 37,346,057
2001 7,287,537
2002 396,915
-------------
$ 45,030,509
=============
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Savings $ 266,603 $ 286,127 $ 303,796
Money market 647,800 582,930 590,495
NOW accounts 211,071 292,600 305,509
Time, $100,000 or more 551,293 816,149 833,141
Time, under $100,000 1,619,409 1,999,077 1,910,174
----------- ------------ -----------
$ 3,296,176 $ 3,976,883 $ 3,943,115
=========== ============ ===========
</TABLE>
21
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. NOTES PAYABLE AND SHORT-TERM BORROWING ARRANGEMENTS
NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Notes payable in connection with subsidiary investments
in real estate:
Construction loan payable to a financial institution
secured by land and improvements, variable
interest rate, interest due monthly, remaining
interest and principal paid April 1999. $ 5,080,000
Other 12,471
-------------
5,092,471
Notes payable in connection with equipment leases:
Note payable to a financial institution secured by
computer equipment, interest at 6.28% fixed,
paid December 1999. 504,097
Note payable to a financial institution secured by
computer equipment, interest at 5.65% fixed, due
in installments through April 2001. $ 94,849
Note payable to a financial institution secured by
computer equipment, interest at 6.88% fixed, due
in installments through August 2000. 155,517 375,855
------------- -------------
$ 250,366 $ 5,972,423
============= =============
</TABLE>
SHORT-TERM BORROWING ARRANGEMENTS
The Bank has unsecured lines of credit with its correspondent banks which,
in the aggregate, amounted to $4,900,000 at December 31, 1999 and 1998, at
interest rates which vary with market conditions. The Bank also had a line
of credit with the Federal Reserve Bank of San Francisco at December 31,
1999 and 1998 which bears interest at the prevailing discount rate
collateralized by $10,043,000 and $1,500,000, respectively, in investment
securities. The amount of the credit line varies according to the Bank's
deposit base and other factors. At December 31, 1999 and 1998, the Bank had
no outstanding borrowings under these lines of credit.
22
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. INCOME TAXES
The expense (benefit) for income taxes for continuing operations for the
years ended December 31, 1999, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
1999
Current $ (422,100) $ (15,200) $ (437,300)
Deferred $ 579,000 66,000 645,000
------------ ------------ ------------
Income tax expense $ 156,900 $ 50,800 $ 207,700
============ ============ ============
1998
Current $ 267,000 $ 22,000 $ 289,000
Deferred (368,000) (70,000) (438,000)
------------ ------------ ------------
Income tax benefit $ (101,000) $ (48,000) $ (149,000)
============ ============ ============
1997
Current $ 435,800 $ 185,000 $ 620,800
Deferred (278,000) (103,000) (381,000)
------------ ------------ ------------
Income tax expense $ 157,800 $ 82,000 $ 239,800
============ ============ ============
</TABLE>
Deferred tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 687,000 $ 1,112,000
Net operating loss 823,000 913,000
Other reserves 632,000 859,000
Other accruals 117,000 152,000
Deferred compensation 388,000 371,000
Unrealized loss on available-for-sale
investment securities 253,000 63,000
------------- -------------
Total deferred tax assets 2,900,000 3,470,000
------------- -------------
Deferred tax liabilities:
Bank premises and equipment (93,000) (183,000)
Future liability of State deferred tax asset (214,000) (236,000)
Consolidated partnership and LLC book
and tax differences (9,000) (12,000)
------------- -------------
Total deferred tax liabilities (316,000) (431,000)
------------- -------------
Net deferred tax assets $ 2,584,000 $ 3,039,000
============= =============
</TABLE>
23
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. INCOME TAXES (CONTINUED)
The Bank had the following Federal and State net operating loss
carryforward at December 31, 1999:
<TABLE>
<CAPTION>
NET OPERATING
LOSS EXPIRATION
CARRYFORWARD DATE
-------------- -----------
<S> <C> <C>
Federal $ 919,000 2018
1,124,000 2019
--------------
$ 2,043,000
==============
State $ 768,000 2003
387,000 2004
--------------
$ 1,155,000
==============
</TABLE>
The expense (benefit) for income taxes for continuing operations differs
from amounts computed by applying the statutory Federal income tax rates to
operating income from continuing operations 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
------------- ------------ ------------
<S> <C> <C> <C>
Federal income tax expense, at
statutory rate 34.0 % 34.0 % 34.0 %
State franchise tax expense (benefit),
net of Federal tax effect 2.5 % (63.4)% 3.2 %
Tax exempt income (15.9)% (220.1)% (16.8)%
Other 1.9 % 4.2 % .2 %
------------- ------------ ------------
Total income tax expense
(benefit) for continuing
operations 22.5 % (245.3)% 20.6 %
============= ============ ============
</TABLE>
12. TERMINATION OF REGULATORY ORDERS
On February 10 and March 10, 1999, the Bank was notified by the Federal
Deposit Insurance Corporation (FDIC) and California Department of Financial
Institutions (DFI), respectively, that regulatory orders (Orders) to
address certain concerns arising out of a 1997 joint examination had been
terminated. Under the Orders, the Bank was required to (i) retain qualified
management, (ii) maintain Tier 1 capital equal to or exceeding 7.5% of
total assets, (iii) reduce classified assets to defined amounts and
maintain a fully funded allowance for credit losses, (iv) reduce the
concentration in real estate assets and obtain prior approval before making
any additional real estate investments, (v) revise, adopt and implement
lending and internal control policies, (vi) formulate a strategic plan
which addressed improving the earnings of the Bank, (vii) develop and adopt
a Year 2000 Plan and (viii) obtain written consent of the FDIC and DFI
prior to paying cash dividends.
On February 17, 1999, the Board of Directors of the Bank adopted a
resolution to, among other things, maintain a ratio of Tier 1 capital to
total assets of at least 7% and to obtain the written consent of the FDIC
and the DFI prior to paying any cash dividends. Additionally, the Board
resolved to provide supplementary quarterly status reporting to the FDIC
and DFI until notification was received from the FDIC and DFI that such
reporting was no longer required. On December 31, 1999, the FDIC and DFI
did notify the Bank that the conditions required by the resolution had been
achieved and supplemental reporting was no longer required. Accordingly,
the Board intends to rescind the February 17, 1999 resolution.
24
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Bank leases certain of its branch facilities and administrative
offices under noncancelable operating leases. Rental expense included
in occupancy and equipment and other expense totaled $161,653, $174,783
and $170,128 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum lease payments on noncancelable operating leases which
expire in years through 2005 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------------
<S> <C> <C>
2000 $ 189,569
2001 128,290
2002 123,566
2003 120,192
2004 105,076
Thereafter 105,076
------------------
$ 771,769
==================
</TABLE>
The Bank has an option to renew its Shaver Lake office lease for two
five-year terms after the initial lease ends May 31, 2002.
Additionally, the Bank has an option to renew its real estate office
lease for two five-year terms after the initial lease ends August 29,
2005.
FEDERAL RESERVE REQUIREMENTS
Banks are required to maintain reserves with the Federal Reserve Bank
equal to a percentage of their reservable deposits. The average amount
of such reserve balances required at December 31, 1999 and 1998 was
$25,000 and $1,149,000, respectively.
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured
financial institutions under correspondent banking agreements.
Uninsured deposits totaled $1,605,244 at December 31, 1999.
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 consist of 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 in 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 and letters of
credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Commitments to extend credit $ 41,929,933 $ 34,532,711
Letters of credit $ 592,000 $ 1,018,000
</TABLE>
25
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)
Commitments to extend credit consist primarily of unfunded
single-family residential and commercial real estate construction loans
and commercial revolving lines of credit. Construction loans are
established under standard underwriting guidelines and policies and are
secured by deeds of trust, with disbursements made over the course of
construction. Commercial revolving lines of credit have a high degree
of industry diversification. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit are
generally secured and are 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 67% of total commitments and are generally secured. Real
estate loan commitments represent 16% of total commitments and are
generally secured by property with a loan-to-value ratio not to exceed
80%. Consumer loan commitments represent the remaining 17% of total
commitments and are generally unsecured. In addition, the majority of
the Bank's loan commitments have variable interest rates.
CONCENTRATIONS OF CREDIT RISK
The Bank's business activity is with customers located primarily within
Fresno County. Although the Bank has a diversified loan portfolio, a
significant portion of its customers' ability to repay loans is
dependent upon the real estate market and various economic factors
within the Bank's service area. Generally, loans are secured by various
forms of collateral. The Bank's loan policy requires sufficient
collateral be obtained as necessary to meet the Bank's relative risk
criteria for each borrower. The Bank's collateral consists primarily of
real estate, accounts receivable, inventory, and other financial
instruments.
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.
14. SHAREHOLDERS' EQUITY
REGULATORY CAPITAL
The Bank is subject to certain regulatory capital requirements
administered by the Federal Deposit Insurance Corporation (FDIC).
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. 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. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
26
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
REGULATORY CAPITAL (Continued)
Notifications from the FDIC as of June 30, 1999, 1998 and 1997
categorized the Bank as well- capitalized under the regulatory
framework for prompt corrective action. The Bank's capital ratios are
detailed below.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----- ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
TIER 1 LEVERAGE RATIO
Clovis Community Bank $ 14,413,000 8.8% $ 13,329,000 8.0% $ 14,975,000 9.4%
Minimum requirement for "Well-
Capitalized" institution $ 8,192,000 5.0% $ 8,320,000 5.0% $ 7,947,000 5.0%
Minimum regulatory requirement $ 6,554,000 4.0% $ 6,656,000 4.0% $ 6,358,000 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 14,413,000 14.2% $ 13,329,000 12.8% $ 14,975,000 12.3%
Minimum requirement for "Well-
Capitalized" institution $ 6,078,000 6.0% $ 6,257,000 6.0% $ 7,278,000 6.0%
Minimum regulatory requirement$ $ 4,052,000 4.0% $ 4,171,000 4.0% $ 4,852,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 15,690,000 15.5% $ 14,653,000 14.1% $ 16,502,000 13.6%
Minimum requirement for "Well-
Capitalized" institution $ 10,130,000 10.0% $ 10,428,000 10.0% $ 12,129,000 10.0%
Minimum regulatory requirement$ $ 8,104,000 8.0% $ 8,342,000 8.0% $ 9,703,000 8.0%
</TABLE>
As discussed in Note 7, one of the conditions to continue real estate
activities specified that the Bank's capital level after the deduction
of all real estate investments (as defined in the FDIC's approval of
the Bank's application to continue to engage in real estate development
activities) must equal or exceed the levels required for a
well-capitalized institution. As of December 31, 1999 and 1998, the
Bank exceeded the levels required for a well-capitalized institution
after deduction of all its real estate investments. As of December 31,
1997, the Bank exceeded the Tier 1 capital to risk-weighted assets and
Tier 1 capital to average assets required levels for a well-capitalized
institution after deduction of all its real estate investments, but did
not meet the required level for total capital to risk-weighted assets
after deduction of all real estate investments (as defined). The Bank's
ratios under this additional requirement are shown on the following
page.
27
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ------- ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
TIER 1 LEVERAGE RATIO
Clovis Community Bank $ 13,797,000 8.5% $ 10,851,000 6.6% $ 8,082,000 5.3%
Minimum requirement for "Well-
Capitalized" institution $ 8,161,000 5.0% $ 8,196,000 5.0% $ 7,617,000 5.0%
TIER 1 RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 13,797,000 13.7% $ 10,851,000 10.7% $ 8,082,000 7.0%
Minimum requirement for "Well-
Capitalized" institution $ 6,041,000 6.0% $ 6,108,000 6.0% $ 6,882,000 6.0%
TOTAL RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 15,074,000 15.0% $ 12,175,000 12.0% $ 9,609,000 8.4%
Minimum requirement for "Well-
Capitalized" institution $ 10,071,000 10.0% $ 10,180,000 10.0% $11,469,000 10.0%
</TABLE>
DIVIDENDS
All per share data has been restated to reflect the 10% stock dividend
declared May 19, 1999 to shareholders of record on June 15, 1999 and
paid on July 15, 1999. No dividends were paid during 1998 and cash
dividends to common shareholders in the amount of $445,258 were paid
during 1997.
The California Financial Code restricts the total dividend payment of
any bank in any calendar year to the lesser of (1) the bank's retained
earnings or (2) the bank's net income for its last three fiscal years,
less distributions made to stockholders during the same three-year
period. At December 31, 1999, retained earnings of $439,083 were free
of such restrictions.
28
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings (loss) per share computations is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Income from continuing operations $ 716,799 $ 209,748 $ 771,392
Income (loss) from discontinued
operations 1,194 (601,967) (209,211)
------------- --------------- -------------
Net income (loss) available to common
shareholders $ 717,993 $ (392,219) $ 562,181
============= ============= =============
Weighted average shares outstanding 1,292,345 1,248,425 1,223,847
============== ============== =============
Basic earnings (loss) per share from:
Continuing operations $ .56 $ .17 $ .63
Discontinued operations (.48) (.17)
------------- --------------- -------------
Net income (loss) $ .56 $ (.31) $ .46
============= =============== =============
Diluted Earnings (Loss) Per Share:
Income from continuing operations $ 716,799 $ 209,748 $ 771,392
Income (loss) from discontinued
operations 1,194 (601,967) (209,211)
-------------- ------------- ---------------
Net income (loss) available to common
shareholders $ 717,993 $ (392,219) $ 562,181
============= ============= ================
Weighted average shares outstanding 1,292,345 1,248,425 123,847
Effect of dilutive stock options 15,365 65,929 79,787
------------- --------------- -------------
Weighted average shares of common
stock and common stock equivalents 1,307,710 1,314,354 1,303,634
============= ============== ===============
Diluted earnings (loss) per share from:
Continuing operations $ .55 $ .16 $ .59
Discontinued operations (.46) (.16)
------------- --------------- -------------
Net income (loss) $ .55 $ (.30) $ .43
=========== =========== ===========
</TABLE>
29
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
During 1980 and 1992, the Bank established Stock Option Plans for which
376,916 shares are reserved for issuance to employees and directors
under incentive and nonstatutory agreements. The plans require that the
option price may not be less than the fair market value of the stock at
the date the option is granted, and that the option price must be paid
in full at the time it is exercised. The options under the plans expire
on dates determined by the Board of Directors, but not later than ten
years from the date of grant. The vesting period is determined by the
Board of Directors and is generally over five years. Outstanding
options under the 1980 plan are exercisable until their expiration;
however, no new options will be granted under that plan.
The Bank has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. Accordingly, no compensation expense has been recognized
under its stock option plan. There were 30,000 options granted during
1999 and 65,175 options granted during 1998. Had compensation cost for
the plan been determined based on the fair value at grant date for
awards in 1999 and 1998 consistent with the provisions of SFAS No. 123,
the Bank's net earnings (loss) and earnings (loss) per share for the
years ended December 31, 1999 and 1998 would have been reduced to the
pro forma amounts indicated on the following page. Pro forma
adjustments to the Bank's net earnings (loss) and earnings (loss) per
share are disclosed during the years in which the options become
vested.
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Net earnings from continuing operations - as reported $ 716,799 $ 209,748
Net earnings from continuing operations - pro forma $ 647,372 $ 186,837
Basic earnings per share from continuing operations -
as reported $ .56 $ .17
Basic earnings per share from continuing operations -
pro forma $ .50 $ .16
Diluted earnings per share from continuing operations -
as reported $ .55 $ .16
Diluted earnings per share from continuing operations -
pro-forma $ .49 $ .16
Net income (loss) - as reported $ 717,993 $ (392,219)
Net income (loss) - pro forma $ 648,564 $ (415,130)
Basic earnings (loss) per share - as reported $ .56 $ (.31)
Basic earnings (loss) per share - pro forma $ .50 $ (.37)
Diluted earnings (loss) per share - as reported $ .55 $ (.30)
Diluted earnings (loss) per share - pro forma $ .49 $ (.35)
</TABLE>
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Dividend yield N/A N/A
Expected volatility 55.23 to 65.85% 23.82 to 34.21%
Risk-free interest rate 5.50 to 6.00% 5.70%
Expected option life 10 years 5 to 10 years
</TABLE>
30
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (Continued)
A summary of the combined Plan activity adjusted to give effect to
stock dividends follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 128,422 $ 16.31 124,755 $ 7.06 137,031 $ 6.98
Options granted 30,000 $ 18.38 65,175 $ 21.79
Options exercised (17,666) $ 7.94 (61,508) $ 3.35 (12,276) $ 6.17
Options canceled (15,456) $ 18.39
--------- --------- ----------
Options outstanding,
end of year 125,300 $ 17.70 128,422 $ 16.31 124,755 $ 7.06
========= ========= ==========
Options exercisable,
end of year 59,965 $ 14.51 71,277 $ 11.96 122,775 $ 6.87
========= ========= ==========
Weighted average fair
value of options
granted during the
year $ 7.85 $ 8.10
</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>
$ 7.27 17,731 2 years 17,731
$ 10.00 6,598 3 years 6,598
$ 15.50 5,000 10 years
$ 16.36 13,196 4 years 13,196
$ 18.18 5,500 9 years 5,500
$ 18.64 3,080 5 years 3,080
$ 19.00 11,000 9 years
$ 19.55 5,500 9 years
$ 21.59 22,000 8 years 4,400
$ 21.82 17,820 3 years 5,445
$ 21.82 13,200 8 years 2,640
$ 22.27 4,675 8 years 1,375
------------ -------------
125,300 59,965
============ =============
</TABLE>
31
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Amortization of goodwill ............. $ 213,470
Legal fees ........................... $ 201,560 $ 376,153 241,842
Data processing ...................... 695,119 745,443 703,197
Advertising .......................... 373,249 382,060 181,160
Provision for other real estate losses
and related expenses ............. 56,178 267,694 242,411
Regulatory assessments ............... 200,405 202,563 47,878
Audit and accounting fees ............ 163,300 212,428 140,143
Consulting fees ...................... 52,524 166,611 28,870
Other expenses ....................... 1,494,869 1,133,797 1,242,343
---------- ---------- ----------
$3,237,204 $3,486,749 $3,041,314
========== ========== ==========
</TABLE>
16. EMPLOYEE BENEFITS
401(k) PROFIT SHARING PLAN
The Bank has established a 401(k) plan covering substantially all
employees who have completed a six-month period in which they are
credited with at least 1,000 hours of service. Participants are
eligible to receive employer contributions after completion of two
years of service. Bank contributions are determined at the discretion
of the Board of Directors. Participants are automatically vested 100%
in all employer contributions. The Bank contributed $60,000 to the plan
in 1999. There were no Bank contributions to the plan in 1998 and 1997.
DEFERRED COMPENSATION PLAN
The Bank has a nonqualified Deferred Compensation Plan which provides
directors and a former key executive with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect
to defer some or all of their current compensation. Deferred amounts
earn interest at an annual rate determined by the Board of Directors
(8.5% at December 31, 1999). At December 31, 1999 and 1998, the total
net deferrals included in other liabilities were $863,467 and $827,461,
respectively.
In connection with the implementation of the above plan, single premium
universal life insurance policies on the life of each participant were
purchased by the Bank, which is beneficiary and owner of the policies.
The cash surrender value of the policies totaled $1,582,138 and
$1,510,522 at December 31, 1999 and 1998, respectively, and is included
in accrued interest receivable and other assets on the balance sheet.
The current annual tax-free interest rates on these policies is 4.6%.
32
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with
related parties, including executive officers and directors. These
loans are made 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Balance, beginning of year ................ $ 29,000 $ 29,000
Disbursements ......................... 723,000 80,000
Amounts repaid ........................ (442,000) (80,000)
----------- -----------
Balance, end of year ...................... $ 310,000 $ 29,000
=========== ===========
Undisbursed commitments to related parties,
end of year ........................... $ 1,890,000 $ 2,420,000
=========== ===========
</TABLE>
18. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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 (loss). Unrealized gains and losses on the Bank's
available-for-sale investment securities are included in other
comprehensive income (loss). Total comprehensive income (loss) 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 gains or losses
as follows:
<TABLE>
<CAPTION>
TAX
BEFORE BENEFIT AFTER
TAX (EXPENSE) TAX
--------------- --------------- ----------------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Other comprehensive loss:
Unrealized holding losses $ (518,529) $ 209,452 $ (309,077)
Reclassification adjustment for net
losses included in net income (47,629) 19,052 (28,577)
--------------- --------------- ----------------
Total other comprehensive income $ (470,900) $ 190,400 $ (280,500)
================ =============== ================
FOR THE YEAR ENDED DECEMBER 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (470,100) $ 174,000 $ (296,100)
================ =============== ================
FOR THE YEAR ENDED DECEMBER 31, 1997
Other comprehensive income:
Unrealized holding gains $ 237,625 $ (87,951) $ 149,674
=============== =============== ================
</TABLE>
33
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures include estimated fair values for financial instruments for
which it is practicable to estimate fair value. These estimates are
made at a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
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 CASH EQUIVALENTS: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
INVESTMENT SECURITIES: For investment securities, fair values are based
on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
LOANS: For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans are estimated using discounted cash
flow analyses, using interest rates being offered at each reporting
date for loans with similar terms to borrowers of comparable
creditworthiness. The carrying amount of accrued interest receivable
approximates its fair value.
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES: The fair value of life
insurance policies are based on cash surrender values at each reporting
date as provided by the insurers.
NOTES PAYABLE: The fair values of fixed-rate notes payable are
estimated by discounting their future cash flows using rates at each
reporting date for similar instruments. The carrying amount of variable
rate notes payable approximates their 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 a discounted cash flow analysis using
interest rates being offered at each reporting date by the Bank for
certificates with similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
34
<PAGE>
CLOVIS COMMUNITY BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: Commitments to
extend credit are primarily for adjustable rate loans. For these
commitments, there are no differences 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 $ 14,087,796 $ 14,087,796 $ 10,801,115 $ 10,801,115
Federal funds sold 8,921,000 8,921,000 10,440,000 10,440,000
Investment securities 54,170,377 54,170,377 63,680,501 64,174,101
Loans 79,017,405 77,574,000 71,693,223 72,007,000
Cash surrender value life
insurance policies 1,582,138 1,582,138 1,510,522 1,510,522
Accrued interest receivable 841,158 841,158 1,020,860 1,020,860
-------------- --------------- --------------- ---------------
$ 158,619,874 $ 157,176,469 $ 159,146,221 $ 159,953,598
============= ================ ================ ================
Financial liabilities:
Deposits $ 149,147,383 $ 149,022,000 $ 152,006,327 $ 152,119,000
Notes payable 250,366 241,000 5,972,423 5,960,000
Accrued interest payable 267,147 267,147 334,057 334,057
-------------- --------------- --------------- ---------------
$ 149,664,896 $ 149,530,147 $ 158,312,807 $ 158,413,057
============= ================ ================ ================
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 41,929,933 $ 41,929,933 $ 34,532,711 $ 34,532,711
Standby letters of credit 592,000 592,000 1,018,000 1,018,000
-------------- ---------------- ---------------- ---------------
$ 42,521,933 $ 42,521,933 $ 35,550,711 $ 35,550,711
============= ================ ================ ================
</TABLE>
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders
and Board of Directors
Clovis Community Bank
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Clovis
Community Bank and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Clovis Community Bank and subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Perry-Smith LLP
Sacramento, California
February 3, 2000
36
<PAGE>
Selected Financial Data
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
CONTINUING OPERATIONS FOR THE YEAR: 1999 1998 1997 1996 1995
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,353 $ 11,912 $ 12,479 $ 11,502 $ 10,111
Total interest expense 3,344 4,056 3,989 3,608 3,294
------------ ------------ ------------ ----------- ------------
Net interest income before provision for credit 8,009 7,856 8,490 7,894 6,817
losses
Provision for credit losses (1,270) (1,722) (2,346) (541) (60)
Non-interest income 2,997 2,677 2,614 2,586 2,643
------------ ------------ ------------ ----------- ------------
9,736 8,811 8,758 9,939 9,400
------------ ------------ ------------ ----------- ------------
Non-interest expense 8,811 8,750 7,747 8,165 7,568
------------ ------------ ------------ ----------- ------------
Income from continuing operations before income taxes 925 61 1,011 1,774 1,832
------------ ------------ ------------ ----------- ------------
Income tax (benefit) expense 208 (149) 240 562 616
Net income from continuing operations $ 717 $ 210 $ 771 $ 1,212 $ 1,216
============ ============ ============ =========== ============
Basic earnings per share from continuing operations $ 0.56 $ 0.17 $ 0.63 $ 1.00 $ 1.02
============ ============ ============ =========== ============
Diluted earnings per share from continuing operations $ 0.54 $ 0.16 $ 0.59 $ 0.94 $ 0.95
============ ============ ============ =========== ============
Cash dividends declared per common share $ - $ - $ 0.40 $ 0.36 $ 0.30
============ ============ ============ =========== ============
DECEMBER 31
(IN THOUSANDS)
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
BALANCES AT END OF YEAR: 1999 1998 1997 1996 1995
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
Investment securities, Federal funds sold and other
deposits $ 63,191 $ 74,243 $ 44,260 $ 30,893 $ 37,073
Net loans 79,017 71,693 88,951 89,199 73,778
Total deposits 149,147 152,006 142,856 130,055 117,199
Total assets 167,003 175,088 165,854 153,989 134,589
Shareholders' equity 15,816 15,175 15,196 14,797 15,624
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
AVERAGE BALANCES: 1999 1998 1997 1996 1995
------------------------------------------------------ ------------ ------------ ------------ ----------- ------------
Investment securities, Federal funds sold and other
deposits $ 68,284 $ 55,152 $ 34,125 $ 36,248 $ 32,341
Net loans 74,695 81,053 95,666 83,668 72,178
Total deposits 147,855 143,297 136,215 122,428 107,138
Total assets 165,926 161,730 154,629 140,938 123,664
Shareholders' equity 15,694 15,185 14,996 15,211 14,732
Earning assets 141,258 136,516 130,098 120,266 105,661
</TABLE>
37
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
December 31, 1999 and 1998
Management's discussion and analysis should be read in conjunction with the
Bank's audited Consolidated Financial Statements, including the Notes thereto,
at pages 4 through 35 herein.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, SUCH AS
STATEMENTS REGARDING THE BANK'S CURRENT BUSINESS STRATEGY AND THE BANK'S PLANS
FOR FUTURE DEVELOPMENT AND OPERATIONS, ARE BASED UPON CURRENT EXPECTATIONS.
THESE STATEMENTS ARE FORWARD-LOOKING IN NATURE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DESCRIBED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND INCLUDE, AMONG OTHER THINGS, (1) SIGNIFICANT
INCREASES IN COMPETITIVE PRESSURE IN THE BANKING INDUSTRY; (2) CHANGES IN THE
INTEREST RATE ENVIRONMENT RESULTING IN REDUCED MARGINS; (3) GENERAL ECONOMIC
CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED,
RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) CHANGES
IN THE REGULATORY ENVIRONMENT; (5) FLUCTUATIONS IN THE REAL ESTATE MARKET; (6)
CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND (7) CHANGES IN SECURITIES
MARKETS. THEREFORE, THE INFORMATION SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS
SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE
BANK.
OVERVIEW:
The Bank had net income after income from discontinued operations of
$718,000 for the 1999 fiscal year compared to a net loss after loss from
discontinued operations of $392,000 for the 1998 fiscal year. The Bank had net
income before income from discontinued operations of $717,000 for 1999 compared
to net income before loss from discontinued operations of $210,000 for 1998. The
primary contributors to net income during 1999 were a $320,000 increase in
non-interest income, a $452,000 decrease in the provision for credit losses, and
a $603,000 decrease in loss from discontinued operations, which were partially
offset by a $357,000 increase in tax expense.
Income from continuing operations before income taxes was $924,000 for
1999 compared to $61,000 for 1998. Income from the discontinued operations of
Clovest before tax expense (benefit) was $2,000 for 1999 compared to a loss of
$1,024,000 for 1998. Income from operations of Clovest after tax expense
(benefit) was $1,000 for 1999 compared to a loss of $602,000 for 1998.
Average earning assets for 1999 were $141,258,000 compared to
$136,516,000 for 1998. A major contributor to the increase in average earning
assets was the $4,558,000 increase in average deposits and the liquidation of
certain partnerships and Limited Liability Companies ("LLCs") of Clovest which
were non-earning assets. Average non-earning assets of the Bank represented by
its interest in Clovest were $1,380,000 for 1999 compared to $4,170,000 for
1998, a decrease of $2,790,000, or 66.9%.
The Bank's net interest margin decreased 8 basis points to 5.67% for
1999 from 5.75% for 1998. The decrease can be attributed to lower yields on
investment securities and loans which were partially offset by lower rates on
interest bearing deposits. Total average loans (excluding non-accrual loans),
which yielded 10.58% during 1999, decreased by $8,390,000 compared to 1998 when
the effective yield was 10.66%. The decrease in loans necessitated placing
earning assets in lower yielding investments. The average investments (including
interest bearing deposits with other banks and Federal funds sold) yielded 5.32%
during 1999 compared to 5.87% in1998. The Bank's emphasis in 1999 continued to
be on increased loan volume and improved loan quality. With that process well
underway, the Bank has positioned itself to direct its resources at rebuilding
its core lending business.
As discussed under "Discontinued Operations", Note 7 "Notes to
Consolidated Financial Statements", page 20, in July 1998 the Bank announced its
decision to discontinue operations of its real estate investment subsidiary,
Clovest. The Bank's investment in real estate at December 31, 1999 was $502,000
compared to $7,251,000 at December 31, 1998, a $6,749,000 decrease. The
investment in real estate has been classified as non-earning assets for the
purposes of computing net interest margin.
Several major management changes occurred during the periods under
review. During the first half of 1998, the President and Chief Executive Officer
announced his retirement. A new President and Chief Executive Officer was
appointed as of June 1,1998 and, in August 1998, a new position of Credit Review
Manager was established. In the first quarter of 1999, a position of Manager,
Retail and Consumer Banking was created with job responsibilities which will
move the focus of the Bank to a customer retention and needs-based sales
environment. Additionally, in the fourth quarter of 1999, the responsibilities
and duties of the former senior credit officer position were restructured to
reflect the Bank's strategic plan. In the past, the senior credit officer
38
<PAGE>
position was two-fold: business development and credit quality/credit
processing. As a result of the restructuring, the position of Manager,
Commercial and Business Banking, was created to focus on the Bank's business
growth and the position of Chief Credit Officer was created to continue to focus
on credit quality.
The cornerstone of a community bank is its branch system. While other
financial institutions have been closing, merging, and reducing offices, the
Bank has adopted a strategic plan to expand into areas where the demographics
for small business and future population growth appear favorable.
The many mergers and acquisitions which occurred in 1999 and 1998 have
resulted in numerous opportunities to bring new business and experienced
personnel to the Bank. One of the first responsibilities of the new Manager,
Commercial and Business Banking will be to establish a loan production office in
the Northeast section of Fresno in the first quarter of 2000, and to focus on
those opportunities. Additionally, the Manager of Retail and Consumer Banking
will be opening a new branch in Northwest Fresno in an established upscale
shopping center. Both facilities will provide the Bank with an opportunity to
expand its loan and deposit base; however, based on past experience, management
expects that these new offices may initially have a negative impact on earnings
until the volume of business grows to cover overhead expenses.
The Bank's market focus for loans continues to concentrate on medium to
small commercial business. These loans offer diversification as to industries
and types of business, with no limiting material exposure in any industry
concentrations. The Bank offers both fixed and floating interest rates and
obtains collateral in the form of real estate, deposit accounts, and accounts
receivable, but looks to business cash flow as its primary source of repayment.
Although the Bank believes that it has achieved significant diversity within its
portfolio, the Bank is susceptible to general real estate economic trends. As of
December 31, 1999, the Bank had a concentration of real estate loans
representing approximately 41.5% of total loans. Although management believes
such concentrations have no more than the normal risk of collectibility of real
estate related loans, a substantial decline in real estate values could have an
adverse impact on collectibility, increase the level of real estate-related
non-performing loans, or have other adverse effects which alone or in the
aggregate could have a material adverse effect on the financial condition of the
Bank. No one borrower had aggregate credit commitments exceeding 5.6% of the
loan portfolio at December 31, 1999.
During 1999, the Bank developed and introduced several new products
such as Quick Business Line, Quick Lease Line, Quick Business Loan, and Home
Equity Line. In 1998, a Small Business Administration Lending Department (SBA)
was established. In 1999, loan processing and loan documentation was streamlined
with the introduction of credit scoring, and additional loan support personnel
were added. In addition, extensive sales and referral training for all customer
contact personnel was implemented.
Average assets during 1999 were $165,926,000 compared to $161,730,000
for 1998, an increase of $4,196,000, or 2.6%. Return on average assets (ROA) and
return on average equity (ROE) for the periods under review are reflected in the
following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- --------------------- ---------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
ROA after gain (loss) from discontinued operations 0.43% (0.24%)
-------------------------------------------------------------------------- --------------------- ---------------------
ROE after gain (loss) from discontinued operations 4.63% (2.58%)
-------------------------------------------------------------------------- --------------------- ---------------------
ROA before gain (loss) from discontinued operations 0.43% 0.13%
-------------------------------------------------------------------------- --------------------- ---------------------
ROE before gain (loss) from discontinued operations 4.63% 1.38%
-------------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
RESULTS OF OPERATIONS
Net income for 1999 was $718,000 compared to a net loss of $392,000 in
1998, a $1,110,000 increase. The increase in net income in 1999 resulted from an
increase in non-interest income, a decrease in interest expense, income instead
of loss from discontinued operations, and a decrease in loan loss provision,
which were partially offset by a decrease in interest income and an increase in
non-interest expense.
.
Net interest income is the Bank's primary source of revenue. Net
interest income is the difference between the interest income received on
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income is primarily affected by two factors, the
volume and mix of interest-earning assets and interest-bearing liabilities and
the interest rates earned on those assets and paid on the liabilities.
Interest income from loans decreased 11.0%, or $952,000, in the year
ended 1999 as average total loan volumes
39
<PAGE>
declined 7.5% to $77,234,000 for 1999 compared to $83,483,000 for 1998. Loan
demand in the Central Valley has become highly competitive in both rates and
fees with major banks as well as other community banks vying for loan demand.
The $6,249,000 reduction in average loan volume can also be attributed to the
Bank's efforts in 1999 to refine the lending process and improve the quality of
the loan portfolio. Significant progress has been made in the Bank's SBA lending
with average SBA loan volumes increasing to $2,987,000 for 1999 compared to
$1,338,000 for 1998, a 112.2% increase. The Bank has been active in the SBA
market since its inception and in 1998 established a distinct SBA Lending
Department. The Bank anticipates receiving its SBA Preferred Lender status
during the first half of 2000. This status would allow the Bank to compete more
effectively with other SBA lenders and provide more expedient responses to
credit requests.
A significant portion of the Bank's loan portfolio utilizes prime rate
as a reference point in pricing its loans. The West Coast prime rate averaged
8.00% in 1999 and 8.30% in 1998 compared to the effective yields on the Bank's
loans (excluding non-accrual loans) in 1999 of 10.58% and 10.66% for 1998.
Average non-accrual loans for 1999 were $4,260,000 compared to
$2,119,000 in average non-accrual loans for 1998. At December 31, 1999, the Bank
had $3,618,000 in non-accrual loans compared to $4,033,000 at December 1998. Two
real estate commercial borrowing relationships represented 90.4% of the total
non-accrual loans at December 31, 1999. The ratio of non-accrual loans to total
loans was 4.5% at December 31, 1999 compared to 5.4% at December 31, 1998.
The designation of a loan as non-accrual for financial reporting
purposes does not relieve the borrower of its obligation to pay interest.
Accordingly, the Bank may ultimately recover all or a portion of the interest
due on these non-accrual loans. A non-accrual loan returns to accrual status
when the loan becomes contractually current and future collectibility of amounts
due is reasonably assured.
The investment policy of the Bank is established by the Board of
Directors and implemented by the Asset/Liability Committee. It is designed
primarily to provide and maintain liquidity, to enable the Bank to meet its
pledging requirements for public money and borrowing arrangements, to generate a
favorable return on investments without incurring undue interest rate and credit
risk, and to complement the Bank's lending activities.
Investments typically have yields lower than loans. Interest income
from investment securities, Federal funds sold, and interest-bearing deposits in
other banks increased 12.1% in 1999 compared to 1998. Average investment
securities and interest-bearing deposits in other banks increased 36.3%, or
$16,390,000, to $61,492,000 for 1999 compared to $45,102,000 for 1998. Average
federal funds sold decreased $3,258,000 in the periods under review. The
increase in investment volume is a direct result of the $6,249,000 decrease in
average loan volume, a $4,558,000 increase in average deposit volume and the
$2,790,000 average reduction in Clovest real estate projects. The effective
yield on the investment portfolio and other interest bearing deposits for 1999
was 5.38% compared to 6.00% in 1998. The effective yield on Federal funds sold
averaged 4.81% in 1999 compared to 5.27% during 1998. As discussed above, the
focus of the lending staff is now concentrated on business development to return
the loan volumes to their prior levels which may reduce the investment portfolio
in the future.
In an effort to increase yields without accepting unreasonable risk, a
significant portion of the new investment purchases has been in high quality
mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).
These securities typically provide a higher yield than U.S. Treasuries,
government agencies, and municipal investments. The Bank held $37,138,000, or
68.1%, of the total investment portfolio in MBS and CMOs with an average
weighted yield of 7.5% at December 31, 1999 compared to $36,387,000, or 64.3% of
the total investment portfolio at December 31, 1998, with an average weighted
yield of 8.0%. In comparison, the Bank held $4,990,000 in agency securities with
an average weighted yield of 5.6% at December 31, 1999 and $17,742,000 in agency
securities with an average weighted yield of 6.0% at December 31, 1998.
Management's review of investments before purchase includes an analysis
of how the security will perform under several interest rate scenarios to
evaluate whether investments are consistent with the Bank's investment policy.
The policy addresses issues of average life, duration, prohibited investments,
and prohibited practices. The Bank recognizes the interest rate risk and
prepayment risks associated with MBS and CMOs. In a declining rate environment,
prepayments from MBS and CMOs would be expected to increase and the expected
life of the investment would be expected to shorten. Conversely, if interest
rates increase, prepayments would be expected to decline and the average life of
the MBS and CMOs would be expected to extend. The Bank has purchased certain of
these investments which are meant to perform well in an increasing rate
environment and others that are meant to perform well in a declining rate
environment, with the ultimate goal of a balanced portfolio. At December 31,
1999, the Bank's market risk was moderately higher in an increasing rate
environment versus a declining rate environment. With an immediate rate increase
of 200 basis points the estimated decrease in the market value of the Bank's
investment portfolio would be $3,962,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
Bank's investment portfolio would be$3,516,000. While an immediate shock of 200
basis points is highly unlikely, the Bank uses those increments to measure its
interest rate risk in accordance with regulatory requirements.
40
<PAGE>
The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of savings, demand
deposits, and certificate of deposit accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in the money
market and prevailing interest rates and competition. The Bank's deposits are
obtained primarily from the geographic area in which its offices are located.
The Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. The Bank does not use
brokered deposits, and based on historical experience, management believes it
will continue to retain a large portion of its time deposit accounts at
maturity.
Interest expense in 1999 was $3,344,000 compared to $4,056,000 in 1998.
This $712,000 or 17.6% decrease can be attributed to lower interest rates in the
first half of 1999 as well as an increase in non-interest bearing deposits as a
percentage of total deposits. Average non-interest bearing deposits for 1999
were $35,212,000 or 23.8% of average deposits compared to $31,548,000 or 22.0%
of average deposits for 1998, an 11.6% increase. This level of increase is not
expected to continue as rates increased twice in the third quarter of 1999 and
again in February 2000. Continued increases in rates would provide more
incentive for depositors to return to interest bearing accounts. Likewise, as
rates increase earnings rates on deposit accounts may increase, providing more
income to offset services used; therefore, less non-interest bearing deposit
balances would be required.
Net interest income before provision for credit losses at December 31,
1999 was $8,009,000, an increase of $153,000, or 2.0%, from the $7,856,000
reported at December 31, 1998. The increase in net interest income can be mainly
attributed to the decrease in interest expense.
The Bank provides for possible credit losses by a charge to operating
income based upon the composition of the loan portfolio, past levels of
delinquencies, losses and non-performing assets, economic and environmental
conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Loans are charged off when they are
considered uncollectible or of such little value that continuance as an active
earning bank asset is not warranted.
The establishment of an adequate credit allowance is based on both an
accurate risk rating system and loan portfolio management tools. Management has
established initial responsibility for the accuracy of credit risk grades with
the individual credit officer. The grading is then submitted to the Chief Credit
Officer (CCO) who then reviews for accuracy. The risk grading and reserve
allocation is analyzed periodically by a third party credit reviewer and by
various regulatory agencies.
The CCO sets the specific reserve for all adversely risk-graded
credits monthly. This process includes the utilization of loan delinquency
reports, classified asset reports, and portfolio concentration reports to assist
in accurately assessing credit risk and establishing appropriate reserves.
Reserves are also allocated to all credits that are not adversely graded. Use of
historical loss experience within the portfolio along with peer bank loss
experience determines the level of reserves held.
The allowance for credit losses is reviewed at least quarterly by the
Directors' Audit Committee and by the Board of Directors. Reserves are allocated
to loan portfolio segments using percentages which are based on both historical
risk elements such as delinquencies and losses and predictive risk elements such
as economic, competitive and environmental factors. The Bank has adopted the
specific reserve approach to allocate reserves to each adversely graded asset,
as well as to each impaired asset for the purpose of estimating potential loss
exposure. Although the allowance for credit losses is allocated to various
portfolio segments, it is general in nature and available for the loan portfolio
in its entirety. Additions may be required based on the results of a contractual
independent loan portfolio examination, a regulatory agency examination, or the
Bank's own internal review process. Additions are also required when, in
management's judgment, the reserve does not properly reflect the potential loss
exposure.
Managing credits identified through the risk evaluation methodology
includes developing a business strategy with the customer to mitigate Bank
losses. Management continues to monitor these credits with a view to identifying
as early as possible when, and to what extent, additional provisions may be
necessary. The provision for credit losses was $1,270,000 in 1999 compared to
$1,722,000 during 1998. The 1999 provision reflects management's evaluation of
continued deterioration in four borrowing relationships.
The ratio of net credit losses to average total loans outstanding was
2.57% in 1999 compared to 1.64% in 1998. Net charge-offs for 1999 were
$1,983,000 compared to $1,372,000 for 1998. The charge-offs in 1999 primarily
related to four commercial credit relationships. In 1999, charge-offs of
$2,533,000 occurred in which $2,406,000 were primarily in the commercial loan
area compared to charge-offs totaling $1,623,000 in 1998 of which $1,216,000
were in the commercial loan area. Offsetting these charge-offs were $550,000 in
recoveries in 1999 compared to $250,000 in recoveries for 1998. Recoveries were
mainly attributable to the commercial loan area. The Bank had no restructured
loans or loans past due 90 days or more at December 31, 1999. For information
regarding impaired loans, refer to Notes 1,3, "Notes to Consolidated Financial
Statements" at page 12.
41
<PAGE>
The allowance for credit losses was $2,236,000 at December 31, 1999,
or 2.74% of total loans, compared to $2,949,000, or 3.93% of total loans, at
December 31, 1998. Based on information currently available, management believes
that the allowance for credit losses is adequate to absorb potential risks in
the portfolio. However, no assurance can be given that the Bank may not sustain
charge-offs which are in excess of the allowance in any given period.
Net interest income after the provision for credit losses increased
$605,000, or 9.9%, in 1999 to $6,739,000 from $6,134,000 in 1998.
Non-interest income increased $320,000, or 12.0%, to $2,997,000 in 1999
from $2,677,000 in 1998. Non-interest income includes fees, charges and other
income, as well as any gain or loss on securities transactions. Increases in
1999 reflect increases in service charges, rentals from equipment leased to
others, and other non-interest income, which were partially offset by decreases
in loan placement fees and loss on investments sold.
Service charge income increased $79,000, or 8.5%, in 1999 compared to
1998. A new fee structure implemented in the first half of 1999 and additional
deposit account growth associated with the increase in average deposit volumes
contributed to the increase.
Rentals from equipment leased to others increased $217,000, or 20.5%,
from 1998 to 1999. Offsetting this increase in income is the related increase in
depreciation on equipment leased to others reflected in non-interest expenses.
Average equipment leased to others increased $252,000, or 10.3%, to $2,697,000
for 1999 from $2,445,000 for 1998. See Note 4 "Notes to Consolidated Financial
Statement", page 17 for details.
The Bank earns loan placement fees from the brokerage of single-family
residential mortgage loans. Loan placement fees decreased $45,000, or 17.3%, to
$215,000 for 1999 compared to $260,000 for 1998. Increased interest rates during
the fourth quarter may have affected purchases and refinancing in the
single-family residential market. Opportunities for refinancing are becoming
more difficult for new homeowners as the rate environment for the past two years
has been relatively low.
Net realized losses on sales of investment securities were $48,000 for
1999. The majority of the loss reflects the replacement of lower yielding
investments with higher yielding investments which resulted in an immediate loss
at the time of sale.
Other non-interest income increased $116,000, or 27.2% to $543,000 in
1999 from $427,000 in 1998. The primary contributors to the increase in 1999
were the recovery on the sale of one other real estate owned (OREO) asset, new
fee income-generating charges and income generated through the sale of
non-deposit investment products through Investment Centers of America. These
increases can be partially attributed to the Bank's overall emphasis on
promoting a cross-selling culture and rewarding all employees for referrals.
Other increases reflect interest received on income tax refunds for prior years
as well as a prior year's operating loss recovery.
Non-interest expense for 1999 increased by $61,000, or 0.7%, compared
to 1998. The major component of the increase was depreciation on equipment
leased to others partially offset by decreases in the provision for other real
estate, legal fees, auditing and accounting fees and other non-interest
expenses.
Depreciation on equipment leased to others increased $165,000, or
18.0% which was offset by an increase in rental income from equipment leased to
others discussed above.
Other expense decreased $250,000, or 7.2%, to $3,237,000 in 1999 from
$3,487,000 in 1998. Major components of the decrease were auditing and
accounting fees, consulting fees which can be attributed to the resolution of
regulatory issues, and the decrease in legal fees which reflects refunded legal
expenses related to on-going litigation involving Clovest and one of its
partnerships. Other contributors were a decrease in OREO valuation expenditures
on a property which was sold in 1999. Refer to Note 15, "Notes to Consolidated
Financial Statement" at page 32 for detail. Offsetting these decreases was the
$361,000 increase in other non-interest expenses.
Other non-interest expenses were $1,495,000 for 1999 compared to
$1,134,000 for 1998. Major contributors were increases in repossession expense
of $20,000, education/training of $14,000, deposit expenses of $15,000,
operating losses of $27,000, deferred compensation expense of $42,000, credit
card expense of $12,000, and computer software expense of $29,000.
Income tax expense was $208,000 for 1999 compared to a tax benefit of
$149,000 for 1998. Income from continuing operations after income taxes was
$717,000 for 1999 compared to $210,000 for 1998.
Income from discontinued operations net of income taxes, which reflects
income from the operations of Clovest, was
42
<PAGE>
$1,000 for 1999 compared to a loss after tax benefits of $602,000 for 1998.
Clovest has been successful in the dissolution of the majority of its
partnerships and LLCs. See "Discontinued Operations", Note 7, "Notes to
Consolidated Financial Statements", at page 19.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Bank's market risk arises primarily from interest rate risk
inherent in loan and deposit functions. Management actively monitors and manages
this interest rate risk exposure.
Fluctuations in market interest rates expose the Bank to potential
gains and losses. The primary objective of asset/liability management is to
manage the balance between rate sensitive assets and rate sensitive liabilities
being repriced in any given period in order to maximize net interest income
during periods of fluctuating interest rates.
Rate sensitive assets are those which contain a provision to
periodically adjust the interest rate (for example, a loan in which prime rate
determines the basis of the rate charged on outstanding balances). Those assets
include certain commercial, real estate mortgage and construction loans and
certain investment securities, Federal funds sold and time deposits in other
financial institutions. Rate sensitive liabilities are those which provide for
periodic changes in interest rate and include interest bearing transaction
accounts, money market accounts and time certificates of deposit. Analysis has
shown that because of time and volume influences, the repricing of assets and
liabilities is not tied directly to the timing of changes in market interest
rates. If repricing assets exceed repricing liabilities in a time period, the
Bank would be considered "asset sensitive" and have a "positive gap".
Conversely, if repricing liabilities exceed repricing assets in a time period
the Bank would be considered "liability sensitive" and have a "negative gap."
Managing interest rate risk is important to the Bank as its net
interest margin can be affected by the repricing of assets and liabilities.
Management uses several different tools to monitor its interest rate risk. One
measure of exposure to interest rate risk is gap analysis. Additionally, the
Bank utilizes an asset/liability model program which provides a detailed
quarterly analysis of the Bank's financial reports, to include a ratio analysis
of liquidity, equity, strategic free capital, volatile liability coverage, and
maturity of the investment portfolio. In addition, a trend analysis is generated
which provides a projection of the Bank's asset and liability sensitivity
position over a one-year period. Exposure to interest rate changes is calculated
within the program to ascertain interest rate risk in actual dollar exposure
resulting from incremental changes in market interest rates. The incremental
changes are generally referred to as "shocks". These "shocks" measure the effect
of sudden and significant rate changes on the Bank's interest income. Because
assets may not reprice in the same way as liabilities, adjustments to the model
are made to reflect these differences. For example, the time between when the
Bank changes its rate on deposits may lag behind the time the Bank changes the
rate it charges on loans. Additionally, the interest rate change may not be in
the same proportion for assets and liabilities. Interest rates on deposits may
not decrease in the same proportion as a decrease in interest rates charged on
loans. Conversely, interest rates on deposits may not be increased in the same
proportion as rates charged on loans.
The following table sets forth the distribution of repricing
opportunities of interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity "gap" (i.e. interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap and the cumulative gap as a percentage of total interest-earning assets as
of December 31, 1999. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should, therefore, be used only as a guide as to
the possible affect changes in interest rates might have on the net interest
margin of the Bank.
Additionally, the table reflects actual maturity of MBS and CMO
securities which are inconsistent with the average life of the securities due to
prepayments and normal paydowns. The inherent weakness in gap analysis is that
it does not consider the cash flow generated by MBS and CMO security investments
throughout the holding of the security and assumes that the total amount of the
security will mature at the stated maturity date. As stated previously, MBS and
CMOs totaled $37,138,000 at December 31, 1999 with a market value of $36,
627,000. The average life table below reflects the expected average life of the
MBS and CMO portfolio based on current paydown levels.
43
<PAGE>
<TABLE>
<CAPTION>
OVER THREE OVER ONE
NEXT DAY TO MONTHS THROUGH YEAR THROUGH OVER FIVE
(DOLLARS IN THOUSANDS) THREE MONTHS TWELVE MONTHS FIVE YEARS YEARS TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $8,921 $ -0- $ -0- $ -0- $ 8,921
Taxable investment securities* 1,820 -0- 9,395 40,891 52,106
Non-taxable investment securities* -0- -0- -0- 2,704 2,704
Loans 44,454 5,396 20,728 10,927 81,505
---------- ----------- --------- --------- --------
Total interest-earning assets $ 55,195 $ 5,396 $ 30,123 $54,523 $145,237
========== =========== ========= ========= ========
Liabilities:
Savings deposits $ 69,152 $ -0- $ -0- $ -0- $ 69,152
Time deposits 22,913 17,441 4,676 -0- 45,030
Notes Payable 155 95 250
----------- --------- --------- --------
Total interest-bearing liabilities $ 92,065 $ 17,596 $ 4,771 $ -0- $114,432
---------- ----------- --------- --------- --------
Net (interest-bearing liabilities) interest-earning $(36,870) $ (12,200) $25,352 $54,523 $ 30,805
assets
Cumulative net(interest-bearing liabilities) interest-
earning assets ("GAP") $(36,870) $ (49,070) (23,718) $30,805
========== =========== ========= =========
Cumulative GAP as a percentage of total interest-
Earning assets (25.39%) (33.79%) (16.33%) 21.21%
========== =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF AVERAGE LIFE OF MBS AND CMOS AT DECEMBER 31, 1999.*
---------------------------------- --------------- ------------------ ----------------------- --------------- -------------------
OVER THREE
NEXT DAY TO MONTHS THROUGH OVER ONE YEAR THROUGH OVER FIVE
(DOLLARS IN THOUSANDS) THREE MONTHS TWELVE MONTHS FIVE YEARS YEARS TOTAL MBS AND CMOS
---------------------------------- --------------- ------------------ ----------------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
At December 31, 1999 $684,000 $2,051,000 $31,375,000 $3,028,000 $37,138,000
---------------------------------- --------------- ------------------ ----------------------- --------------- -------------------
</TABLE>
*Stated at Book Value.
The table indicates that the Bank is liability sensitive in the next day through
5 year periods and becomes asset sensitive in the more than five year period.
The following table sets forth the distribution of the expected
maturities of interest-earning assets and interest-bearing liabilities as of
December 31, 1999 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 2000 maturity category.
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
----------- ---------- ---------- ---------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $8,921 $8,921 $ 8,921
Weighted average rate 4.63% 4.63%
Investment securities (1) 411 $1,473 $4,112 $1,248 $ 3,995 $43,571 54,810 54,170
Weighted average rate 4.63% 6.25% 6.59% 5.41% 5.99% 7.00% 6.84%
Fixed rate loans 8,070 4,344 2,784 2,267 4,204 21,333 43,002 41,558
Weighted average rate 9.97% 9.97% 9.90 9.76% 8.92% 8.90% 9.32%
Variable rate loans (2) 21,728 1,712 444 402 297 13,919 38,502 38,502
Weighted average rate 9.87% 10.36% 9.68% 10.53% 10.55% 9.77% 9.86%
----------- ---------- ---------- ---------- -------- ---------- --------- ----------
Total interest-bearing assets
$39,130 $7,529 $7,340 $3,917 $8,496 $78,823 $145,235 $143,151
=========== ========== ========== ========== ======== ========== ========= ==========
</TABLE>
44
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits(3) $69,152 $69,152 $69,152
Weighted average rate 1.63% 1,63%
Time deposits 37,346 $7,287 $397 45,030 44,905
Weighted average rate 4.69% 4.89% 4.96% 4.82%
----------- ---------- ---------- ---------- -------- ---------- --------- ----------
Notes Payable 155 95 250 240
=== == === ===
Weighted average rate 6.88% 5.65% 6.40%
=========== ========== =========
Total interest-bearing liabilities
$106,653 $7,382 $397 $-0- $-0- $-0- $114,432 $114,297
=========== ========== ========== ========== ======== ========== ========= ==========
</TABLE>
TERMINATION OF REGULATORY ORDERS
During 1998, the Bank was subject to regulatory orders issued by the
FDIC and DFI which addressed certain matters that arose out of a joint
examination of the Bank. The Orders were terminated during the first quarter of
1999 after less than one year and were replaced by a Board Resolution adopted by
the Board of Directors. The Board Resolution was rescinded February 16, 2000.
LIQUIDITY MANAGEMENT
The object of liquidity management is to maintain cashflow adequate to
fund the Bank's operations and to meet obligations and other commitments on a
timely and cost effective basis. Management accomplishes this objective through
the selection of asset and liability maturity mixes that it believes will meet
the Bank's needs.
Liquidity is provided by the Bank's core deposit base, shareholders'
equity, and reductions in assets which can be immediately converted to cash at
minimal cost. Liquid assets, which consist of cash, deposits in other financial
institutions, Federal funds sold and available for sale investment securities,
averaged $61,465,000 for 1999, or 37.0% of average assets compared to
$69,005,000 or 42.8% of average assets for 1998. The ratio of average liquid
assets to average demand deposits was 174.6% for 1999 as compared to 242.1% in
1998. Year 2000 liquidity issues significantly affected the decreases in the
liquidity ratios. The Bank committed $10,519,000 in securities as collateral for
the Federal Reserve Discount Window availability in the event of the need for
immediate liquidity due to Year 2000 issues. Decreases in the loan and deposit
volumes also affected the Bank's liquidity ratios. The Bank's loan to deposit
ratio at December 31, 1999 was 54.5% compared to 49.1% at December 31, 1998.
The Bank adopted SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, early and used the opportunity to re-classify its held -to-
maturity investment portfolio into available for sale. On April 1, 1999, the
Bank transferred all held- to- maturity securities to its available- for- sale
classification. For information regarding the transfer of held-to-maturity
securities, refer to Note 1 and 2 "Notes to Consolidated Financial Statements,
page 14.
Unpledged investment securities may also provide liquidity. At December
31, 1999, $37,891,000 in unpledged securities were available as collateral for
borrowing. Additionally, maturing loans provide liquidity. At December 31, 1999,
approximately $7,537,000 in loans were scheduled to mature within the next
ninety days.
The Bank has unsecured lines of credit with its correspondent banks in
the amount of $5,900,000 at interest rates which are tied to changes in the
Federal funds and Federal Reserve discount rates. The Bank also has a line of
credit with the Federal Reserve Bank of San Francisco collateralized by
$10,043,000 in securities that bears interest at the prevailing discount rate.
As discussed above, the unusually high volume of collateral pledged to the
Federal Reserve Bank was due to Year 2000. The amount of the credit line varies
according to the Bank's deposit base and other factors. At December 31, 1999,
and 1998, the Bank had no outstanding balances on these credit lines.
Year 2000 Data Processing Issues
Clovis Community Bank previously recognized the material nature of the
business issues surrounding computer processing of dates into and beyond the
Year 2000 and began taking corrective action as required pursuant to the
interagency statements issued by the Federal Financial Institutions Examination
Council. Management believes the Bank has completed all of the activities within
its control to ensure that the Bank's systems are Year 2000 compliant. The Bank
has not experienced any interruptions to normal operations due to the start of
the Year 2000.
Clovis Community Bank's Year 2000 readiness costs were approximately
$100,000. The Bank does not currently expect to incur any additional costs to
address Year 2000 issues.
As of February 29, 2000, the Bank has not experienced any material
disruptions of its internal computer systems or software applications and has
not experienced any problems with the computer systems or software applications
of its third party vendors, suppliers or service providers. The Bank will
continue to monitor these third parties to determine the impact, if any, on its
business and the actions it must take, if any, in the event of non-compliance by
any of these third parties. Based upon the Bank's assessment of compliance by
third parties, there appears to be no material business risk posed by any such
non-compliance.
45
<PAGE>
Although Clovis Community Bank's Year 2000 rollover did not present any
material business disruptions, there are some remaining Year 2000 related risks,
including risks due to the fact that the Year 2000 is a leap year. Management
believes that appropriate actions have been taken to address these remaining
Year 2000 issues and contingency plans are in place to minimize the financial
impact to the Bank. Management, however, cannot be certain that Year 2000 issues
affecting its customers, suppliers or service providers will not have a material
adverse impact on the Bank.
Stock Price Information
The Bank's common stock is not listed on any exchange nor is it listed
with NASDAQ. Trading of the Bank's common stock has been limited in volume with
transactions coordinated between buyer and seller utilizing brokers to
accommodate activity. Bid and asked prices for the Bank's common stock are
quoted weekly in "the Fresno Bee" and the "pink sheet" (National Daily Quotation
Service). They can also be found on the internet under the symbol CVIC.
The Bank paid a 10% stock dividend in 1999 and no dividend was paid in
1998. Unless the prior approval of the California Commissioner of Financial
Institutions is obtained, cash dividends are limited to the lesser of the Bank's
retained earnings or undistributed net income for the last three years. As of
March 15, 2000 the Bank had 422 shareholders of record.
<TABLE>
<CAPTION>
BID QUOTATIONS OF
THE BANK'S COMMON STOCK
----------------------------------- ------------------ -------------------
QUARTER ENDED LOW BID HIGH BID
----------------------------------- ------------------ -------------------
<S> <C> <C>
March 31, 1998 $ 24.00 $ 25.00
June 30, 1998 24.50 25.50
September 30, 1998 23.00 25.00
December 31, 1998 23.75 24.25
March 31, 1999 21.50 23.00
June 30, 1999 20.00 21.00
September 30, 1999 16.00 17.50
December 31, 1999 15.00 16.00
</TABLE>
46
<PAGE>
BOARD OF DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
DIRECTORS: OFFICERS:
<S> <C>
Daniel N. Cunningham, Chairman of the Board Daniel J. Doyle
Vice President and Director President and Chief Executive Officer
Quinn Properties
Gayle Graham
Senior Vice President, Cashier
David E. Cook, Secretary Gary Quisenberry
Retired Senior Vice President, Commercial and Business Banking
Sidney B. Cox Carol Simpson
Owner Senior Vice President, Consumer and Retail Banking
Cox Communications
Daniel J. Doyle Thomas L. Sommer
President and CEO Senior Vice President, Chief Credit Officer
Clovis Community Bank
Steven D. McDonald Stan Davis
President Vice President, Branch Manager
McDonald Properties, Inc.
Louis McMurray Bob E. Florence
President Vice President, Business Development
Charles McMurray Co.
Wanda L. Rogers Steve Freeland
Rogers Helicopters, Inc. Vice President, Special Assets Officer
William Smittcamp Frank Gallegos
Owner Vice President, Manager SBA Department
Wawona Frozen Foods
Yoshito Takahashi Barbara Gillmore
Investments Vice President, Human Resources
Joseph B. Weirick, Treasurer Ken Herron
Investments Vice President, Commercial Loan Officer
Independent Auditors Bernie Kraus
Perry-Smith & Co., LLP, Sacramento, CA Vice President, Commercial Loan Officer
Randy Kammerer
Vice President, Commercial Loan Officer
COUNSEL
Lillick & Charles LLP, San Francisc, CA Derrell G. Lejeune
Vice President, Commercial Loan Officer
Debbie Long
Vice President, Manager Real Estate Division
Rona Melkus
Vice President, Controller
Don Mendenhall
Vice President, Commercial Loan Officer
Steve Morales
Vice President, Manager Information Services
</TABLE>
47
<PAGE>
Teresa Palsgaard
Vice President, Development Officer
JoAnn Price
Vice President, Commercial Banking Officer
Locally Owned and Independent since 1980
Clovis Main Office
600 Pollasky Avenue
Clovis, CA 93612
(209) 298-1775
Fig Garden Office
726 West Shaw Avenue
Fresno, CA 93710
(559) 221-2760
River Park Commercial Banking Center
8843 North Fresno Street
Fresno, CA 93720
Foothill Office
29430 Auberry Road
Prather, CA 93651
(209) 855-4100
Shaver Lake Office
Highway 168
Shaver Lake, CA 93664
(209) 8421-7200
SAVE MART IN-STORE OFFICES:
CHAMPLAIN & PERRIN
Fresno, CA 93720
(209) 434-8944
CLOVIS & HENDON
Clovis, CA 93612
(209) 323-2200
FIRST & NEES
Fresno, CA 93720
(209) 447-3350
Real Estate Office
795 Pollasky Avenue, Suite 101
Clovis, CA 93612
(209) 297-6644
48
