INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Six Rivers National Bank
Eureka, California
We have audited the accompanying balance sheets of Six Rivers National Bank as
of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Six Rivers National Bank at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
By: /s/DELOITTE & TOUCHE, LLP
-------------------------
Deloitte & Touche, LLP
Sacramento, California
February 4, 2000
9
<PAGE>
SIX RIVERS NATIONAL BANK
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
ASSETS ------------- -------------
<S> <C> <C>
Cash and due from banks $ 9,842,262 $ 8,357,082
Federal funds sold and repurchase agreements 9,330,000
------------- -------------
Total cash and cash equivalents 9,842,262 17,687,082
Interest bearing deposits in other financial institutions 7,842,665 6,195,724
Held to maturity securities, at amortized cost (fair value of
$1,381,800 and $1,499,850, respectively) 1,470,000 1,485,000
Available for sale securities, at fair value 63,494,798 59,791,846
Loans held for sale 871,385 17,125,392
Loans receivable 111,935,937 89,902,869
Less: Allowance for loan losses 2,346,179 2,801,779
Deferred loan fees 35,136 75,318
------------- -------------
Net loans receivable 109,554,622 87,025,772
Accrued interest receivable 1,351,337 1,288,493
Premises and equipment, net 4,437,441 4,518,958
Other real estate owned 619,366 353,971
FHLB, Federal Reserve Bank and other securities 1,387,135 1,014,776
Goodwill and core deposit intangibles, net 4,422,311 4,670,291
Other assets 2,969,844 2,078,541
------------- -------------
TOTAL ASSETS $ 208,263,166 $ 203,235,846
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 31,570,247 $ 25,260,108
Interest-bearing 122,456,614 134,384,521
Time, $100,000 and over 23,408,787 23,287,418
------------- -------------
Total deposits 177,435,648 182,932,047
Other borrowed funds 6,165,124 677,204
Federal funds purchased 4,400,000
Accrued interest payable 505,635 532,055
Other liabilities 1,161,197 574,552
------------- -------------
Total liabilities 189,667,604 184,715,858
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $5.00 par value, authorized 10,000,000
shares; outstanding, 1,476,128 and 1,461,642 at
December 31, 1999 and 1998 7,380,640 7,308,210
Additional paid-in capital 12,141,117 12,062,715
Retained earnings (deficit) 399,175 (816,383)
Accumulated other comprehensive loss, net of tax (1,325,370) (34,554)
------------- -------------
Total stockholders' equity 18,595,562 18,519,988
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 208,263,166 $ 203,235,846
============= =============
See notes to financial statements.
</TABLE>
10
<PAGE>
SIX RIVERS NATIONAL BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans and loan fees $ 9,840,730 $ 10,013,378 $ 8,358,889
Securities:
U.S. Treasury securities and government agencies 3,096,646 3,281,683 753,625
Other 1,536,728 646,889 469,126
Federal funds sold and repurchase agreements 160,060 972,948 482,035
------------ ------------ ------------
Total interest income 14,634,164 14,914,898 10,063,675
------------ ------------ ------------
INTEREST EXPENSE:
Deposits 5,418,140 5,991,474 3,922,009
Other borrowings 377,759 75,889 70,386
------------ ------------ ------------
Total interest expense 5,795,899 6,067,363 3,992,395
------------ ------------ ------------
NET INTEREST INCOME 8,838,265 8,847,535 6,071,280
PROVISION FOR LOAN LOSSES 220,000 3,904,111 2,240,708
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,618,265 4,943,424 3,830,572
NONINTEREST INCOME:
Customer service fees 1,171,834 1,185,022 645,571
Gain on sale of loans 12,313 36,512 333,273
Other income 446,699 373,180 246,146
------------ ------------ ------------
Total noninterest income 1,630,846 1,594,714 1,224,990
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,687,521 3,512,152 2,387,694
Occupancy 1,225,707 1,196,676 890,271
Professional fees 848,027 966,460 253,941
Advertising 163,222 142,132 166,700
Supplies 180,228 289,575 150,143
ATM expense 197,520 234,180 138,707
FDIC assessment 189,959 58,082 25,349
Amortization of goodwill and core deposit intangibles 247,980 247,980 37,188
Other real estate owned 30,000
Other 1,435,151 1,737,049 862,031
------------ ------------ ------------
Total noninterest expense 8,175,315 8,414,286 4,912,024
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 2,073,795 (1,876,148) 143,538
(PROVISION) BENEFIT FOR INCOME TAXES (858,238) 751,431 (25,526)
------------ ------------ ------------
NET INCOME (LOSS) $ 1,215,558 $ (1,124,717) $ 118,012
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.83 $ (0.77) $ 0.17
============ ============ ============
Diluted $ 0.82 $ (0.77) $ 0.16
============ ============ ============
See notes to financial statements.
</TABLE>
11
<PAGE>
SIX RIVERS NATIONAL BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Comprehensive Retained Other
----------------------- Paid-in Income Earnings Comprehensive
Shares Amount Capital (Loss) (Deficit) Income (Loss) Total
---------- ---------- ----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 564,840 $2,824,200 $ 2,879,436 $ 190,332 $ (139,976) $ 5,753,982
Comprehensive income:
Net income $ 118,012 118,012 118,012
Other comprehensive income, net of
taxes of $(21,032):
Unrealized gain on available-for-
sale securities net of
reclassification adjustment of $0 109,898 109,898 109,898
-----------
Total comprehensive income $ 227,910
===========
Capital contribution 399,942 399,942
Common stock options exercised 3,102 15,510 12,545 28,055
Common stock issuance, net of offering
expenses 862,500 4,312,500 8,513,338 12,825,838
---------- ---------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1997 1,430,442 7,152,210 11,805,261 308,334 (30,078) 19,235,727
Comprehensive loss:
Net loss $(1,124,717) (1,124,717) (1,124,717)
Other comprehensive income, net of
taxes of $(24,989):
Unrealized loss on available-for-
sale securities net of
reclassification adjustment of $0 (4,476) (4,476) (4,476)
-----------
Total comprehensive loss $(1,129,193)
===========
Tax benefit derived from the exercise
of stock options 96,917 96,917
Common stock options exercised 31,200 156,000 160,537 316,537
---------- ---------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1998 1,461,642 7,308,210 12,062,715 (816,383) (34,554) 18,519,988
Comprehensive income (loss):
Net income $ 1,215,558 1,215,558 1,215,558
Other comprehensive income net of
taxes of $(939,214):
Unrealized loss on available-for-
sale securities net of
reclassification adjustment of $10,992 (1,290,816) (1,290,816) (1,290,816)
-----------
Total comprehensive loss $ (75,258)
===========
Tax benefit derived from the exercise
of stock options 3,117 3,117
Common stock options exercised 14,486 72,430 75,285 147,715
---------- ---------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1999 $1,476,128 $7,380,640 $12,141,117 $ 399,175 $(1,325,370) $18,595,562
========== ========== =========== ========== =========== ===========
See notes to financial statements.
</TABLE>
12
<PAGE>
SIX RIVERS NATIONAL BANK
STATEMENTS OF CASH FLOWS
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) $ 1,215,558 $ (1,124,717) $ 118,012
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 540,557 538,954 454,068
Amortization of goodwill and core deposit intangible 247,980 247,980 37,188
Amortization and accretion on securities 38,408 427,599 38,241
Originations of loans held for sale (7,269,347) (23,521,483) (16,078,572)
Proceeds from sale of loans 2,415,087 9,120,917 16,657,000
Gain on sale of loans (12,313) (36,512) (333,273)
Provision (benefit) for deferred taxes 804,971 (518,970) (211)
Gain on sale of premises and equipment (2,619)
Provision for losses on other real estate owned 30,000
Provision for loan losses 220,000 3,904,111 2,240,708
Loss on sale of other real estate owned 15,123
Gain on sale of available for sale securities (10,992)
Effect of changes in:
Accrued interest receivable and other assets (815,661) (1,039,334) (799,691)
Accrued interest payable and other liabilities 560,225 420,293 (189,147)
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,050,404) (11,553,781) 2,144,323
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (26,652,897) (51,305,789) (5,068,608)
Proceeds from sale of available-for-sale securities 1,429,157
Proceeds from maturities, calls, or repayments of available-for-
sale securities 19,267,796 6,923,551 1,889,183
Purchases of held to maturity securities (1,500,000)
Proceeds from maturities of held to maturity securities 15,000 15,000
Purchase of FHLB Federal Reserve Bank and other securities (372,359) (355,431) (82,249)
Proceeds from sale of other real estate owned 335,293 147,139
Net decrease in interest-bearing deposits in other financial institutions (1,646,941) (1,558,277) (4,140,447)
Net decrease in loans receivable (2,249,661) (8,996,899) (14,723,489)
Increase in goodwill and core deposit intangibles (4,955,459)
Proceeds from sale of premises and equipment 3,800
Purchases of premises and equipment (459,040) (893,422) (1,743,260)
------------ ------------ ------------
Net cash used in investing activities (10,333,652) (57,667,467) (28,677,190)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (5,496,399) 10,198,570 80,747,256
Net change in other borrowed funds 5,487,920 (441,697) (251,827)
Proceeds from common stock issuance, net of expenses 12,825,838
Common stock options exercised 147,715 316,537 28,055
Capital contribution 399,942
Net change in federal funds purchased 4,400,000
------------ ------------ ------------
Net cash provided by financing activities 4,539,236 10,073,410 93,749,264
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,844,820) (59,147,838) 67,216,397
CASH AND CASH EQUIVALENTS, beginning of year 17,687,082 76,834,920 9,618,523
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 9,842,262 $ 17,687,082 $ 76,834,920
============ ============ ============
ADDITIONAL INFORMATION:
Cash paid during the year for:
Interest $ 5,822,319 $ 5,959,993 $ 3,785,725
============ ============ ============
Income taxes $ 33,313 $ $ 392,833
============ ============ ============
Noncash transactions:
Transfer of loans held for sale to the loan portfolio $ 21,115,000 $ $
============ ============ ============
Transfer of foreclosed loans from loans receivable
to other real estate owned $ 615,811 $ $ 270,694
============ ============ ============
Tax benefit derived from the exercise of stock options $ 3,117 $ 96,917 $
============ ============ ============
See notes to financial statements.
</TABLE>
13
<PAGE>
SIX RIVERS NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Six Rivers National Bank (the Bank) is a nationally
chartered bank which commenced banking operations on December 27, 1989. In
November 1997, the Bank completed the acquisition of four additional branches,
increasing operations to eight branches. The Bank operates these eight branches
in Humboldt, Mendocino, Trinity and Del Norte Counties in Northern California.
The Bank operates as one business segment providing business banking services to
the Bank's clients in Northern California. The Bank's principal business
consists of attracting deposits from the general public and using the funds to
originate commercial, real estate and installment loans to customers, who are
predominately small and middle market businesses and middle income individuals.
The Bank's primary source of revenues is interest income from its loan and
investment securities portfolios. The Bank is not dependent on any single
customer for more than ten percent of the Bank's revenues.
GENERAL - The accounting and reporting policies of Six Rivers National Bank
conform with generally accepted accounting principles and prevailing practices
within the banking industry. The Bank follows the accrual method of accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent 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 those estimates.
The more significant accounting and reporting policies are discussed below.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows, cash
and cash equivalents have been defined as cash, demand deposits with
correspondent banks, repurchase agreements and federal funds sold. Generally,
repurchase agreements are sold for eight to fourteen day periods and federal
funds are sold for one-day periods. Cash equivalents have remaining terms to
maturity of three months or less from the date of acquisition.
INVESTMENTS - The Bank's policy with regard to investments is as follows:
AVAILABLE FOR SALE SECURITIES are carried at fair value. Unrealized
gains and losses resulting from changes in fair value are recorded, net
of tax, as a separate component of stockholders' equity. Gains or
losses on disposition are recorded in other operating income based on
the net proceeds received and the carrying amount of the securities
sold, using the specific identification method.
14
<PAGE>
HELD TO MATURITY SECURITIES are carried at cost adjusted for
amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. The Bank's policy of
carrying such investment securities at amortized cost is based upon its
ability and management's intent to hold such securities to maturity.
At December 31, 1999 and 1998, the Bank did not have any securities considered
to be held for trading.
LOANS RECEIVABLE - Loans are reported at the principal amount outstanding
adjusted for any specific charge-offs. Interest on loans is calculated by using
the simple interest method on the daily balance of the principal amount
outstanding.
The Bank considers a loan impaired if, based on current information and events,
it is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured of
impairment based on the fair value of the collateral.
The accrual of interest on impaired loans is discontinued when reasonable doubt
exists as to the full and timely collection of interest and principal, or when a
loan becomes contractually past due by 90 days or more with respect to interest
or principal (unless the loan is well secured and in the process of collection)
and such loans are designated as nonaccrual loans. When a loan is placed on
nonaccrual status, all accrued but unpaid interest revenue is reversed by a
charge to earnings. Income on such loans is then recognized only to the extent
that cash is received and where the future collection of principal is determined
by management to be probable. Interest accruals are resumed on such loans when,
in the judgment of management, the loans are estimated to be fully collectible
as to both principal and interest.
ALLOWANCE FOR LOAN LOSSES - The Bank provides for possible loan losses by a
charge to operating income based upon the composition of the loan portfolio,
past loan loss experience, current economic conditions and other factors which,
in management's judgment, deserve recognition in estimating loan losses.
Management will charge off loans when it determines there has been a permanent
impairment of the related carrying values. Management attributes general
reserves to different types of loans using percentages which are based upon
perceived risk associated with the portfolio and underlying collateral,
historical loss experience, and vulnerability to changing economic conditions
which may affect the collectibility of the loans. Specific reserves are
allocated for impaired loans, for loans which have experienced a decline in
internal loan grading, and when management believes additional loss exposure
exists. Although the allowance for loan losses is allocated to various portfolio
segments, it is available for the loan portfolio in its entirety. Management
believes that the allowance for loan losses is adequate to absorbed losses
inherent in existing loans and commitments to extend credit. While management
uses available information to estimate the allowance for loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for losses
on loans. Such agencies may require the Bank to recognize additions to the
allowance based on their analysis of information available to them at the time
of their examination.
15
<PAGE>
DEFERRED LOAN FEES - Loan origination fees and related direct costs are deferred
and amortized to income by a method approximating the level yield interest
method over the estimated lives of the underlying loans.
LOANS HELD FOR SALE are stated at lower of cost or market value as determined by
outstanding commitments from investors or current investor yield requirements
calculated on an aggregate loan basis. Valuation adjustments are charged against
noninterest income.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed on the
straight-line basis over the estimated useful lives of the assets, generally 20
to 30 years for buildings and 4 to 10 years for furniture, fixtures and
equipment. Leasehold improvements are amortized on the straight-line basis over
the period of the leases or the estimated useful lives, whichever is shorter.
Expenditures for major renewals and betterments of premises and equipment are
capitalized and those for maintenance and repairs are charged to operations as
incurred.
OTHER REAL ESTATE OWNED - Real estate properties acquired through, or in lieu
of, foreclosure are expected to be sold and are recorded at the date of
foreclosure at the lower of the recorded investment in the property or its fair
value less estimated costs to sell (fair value) establishing a new cost basis
through a charge to allowance for loan losses, if necessary. Any subsequent
write-downs are recorded as a valuation allowance and charged against operating
expenses. Operating expenses of such properties, net of related income, are
included in noninterest expenses and gains and losses on their disposition are
included in noninterest income or noninterest expense.
GOODWILL AND CORE DEPOSIT INTANGIBLES - In November 1997, the Bank purchased
four additional branches. As a result of this acquisition the Bank recorded
goodwill and core deposit intangibles which are being amortized over 15 and 25
years, respectively, by the straight-line method.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES - The Bank originates and sells residential mortgage loans to the
Federal National Mortgage Association (FNMA) and others. The Bank retains the
servicing on all loans sold. Deferred origination fees and expenses are
recognized at the time of sale in the determination of the gain or loss. To
calculate the gain (loss) on sale of loans, the Bank's investment in a loan is
allocated between the servicing retained and the loan, based on the relative
fair value of each portion. The gain (loss) is recognized at the time of sale
based on the difference between the sale proceeds and the allocated carrying
value of the related loans sold. The fair value of the contractual servicing is
reflected as a servicing asset which is amortized over the period of estimated
net servicing income using a method approximating the interest method. The
servicing asset is included in other assets, and is evaluated for impairment on
a periodic basis.
INCOME TAXES - The Bank accounts for income taxes based on the asset and
liability method. Deferred tax assets and liabilities are calculated by applying
applicable tax laws to the differences between the financial statement basis and
the tax basis of assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
16
<PAGE>
OTHER BORROWED FUNDS - Other borrowed funds consist of amounts borrowed from the
Federal Reserve Bank (FRB) related to Treasury Tax and Loan notes and amounts
borrowed from the Federal Home Loan Bank (FHLB) collateralized by certain real
estate loans.
STOCK-BASED COMPENSATION - The Bank accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles board
(APB) No. 25, Accounting for Stock Issued to Employees. No compensation expense
has been recognized in the financial statements for employee stock arrangements.
The Company presents the required pro from disclosures of the effect of
stock-based compensation on net income and earnings per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation.
EARNINGS (LOSSES) PER SHARE - Basic earnings (losses) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average common shares outstanding for the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
COMPREHENSIVE INCOME - The Bank reports comprehensive income in accordance with
SFAS No. 130, Reporting Comprehensive Income, which requires that an enterprise
report and display, by major components and as a single total, the change in its
net assets during the period from nonowner sources.
DISCLOSURES ABOUT SEGMENTS OF AND ENTERPRISE - The Bank's only operating unit is
Six Rivers National Bank, a commercial bank, which primarily offers similar
products to customers located in Humboldt, Mendocino, Trinity and Del Norte
Counties in Northern California. Accordingly, management evaluates the Bank's
performance as a whole and does not allocate resources based on the performance
of different lending or transaction activities and reports its operations on the
basis of a single business segment.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No. 133, Accounting For Derivative Instruments and
Hedging Activities ("SFAS No. 133), which required adoption effective January 1,
2000. The adoption of SFAS No. 133 was delayed until January 1, 2001 with the
issuance of SFAS No. 137 in June 1999. SFAS No. 133 requires companies to record
all derivatives on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as offsets to the changes in fair
value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of accumulated
comprehensive income in shareholders' equity until the hedged transactions occur
and are recognized in earnings. Management has not completed its assessment of
the effect the adoption of SFAS No. 133 will have on the financial statements of
the Company.
17
<PAGE>
2. SECURITIES
At December 31, the amortized cost of securities and their approximate fair
values are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999:
Available for Sale Securities:
U.S. Treasury Securities $ 1,474,945 $ (8,527) $ 1,466,418
Federal National Mortgage
Associations notes 20,728,128 $ 57,183 (422,115) 20,363,196
Federal Home Loan
Mortgage Corporation notes 15,916,146 (327,335) 15,588,811
Corporate and other securities 16,930,547 21,489 (799,878) 16,152,158
Obligations of foreign
governments 502,618 5,304 507,922
Other U.S. Government
Agency securities 10,227,533 7,311 (818,551) 9,416,293
------------ ------------ ------------ ------------
$ 65,779,917 $ 91,287 $ (2,376,406) $ 63,494,798
============ ============ ============ ============
Held to Maturity Securities:
Corporate and other securities $ 1,470,000 $ $ (88,200) $ 1,381,800
============ ============ ============ ============
December 31, 1998:
Available for Sale Securities:
U.S. Treasury Securities $ 1,499,180 $ 9,454 $ (4,884) $ 1,503,750
Federal National Mortgage
Associations notes 22,565,802 21,114 (122,381) 22,464,535
Federal Home Loan
Mortgage Corporation notes 12,524,494 27,125 (20,287) 12,531,332
Corporate and other securities 11,146,764 72,464 (74,206) 11,145,022
Obligations of foreign
governments 507,106 21,644 528,750
Other U.S. Government
Agency securities 11,608,043 46,951 (36,537) 11,618,457
------------ ------------ ------------ ------------
$ 59,851,389 $ 198,752 $ (258,295) $ 59,791,846
============ ============ ============ ============
Held to Maturity Securities:
Corporate and other securities $ 1,485,000 $ 14,850 $ $ 1,499,850
============ ============ ============ ============
</TABLE>
Gross realized gains on sales of available-for-sale securities was $10,992 in
1999. There were no gross realized gains on sales of securities or gross
realized losses on sales of securities in 1998 and 1997.
Scheduled maturities of held-to-maturity and available-for-sale securities at
December 31, 1999 are shown below. The Bank invests in collateralized mortgage
obligations (CMOs) issued by the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and Government National Mortgage
Association. Actual maturities of CMOs and other securities may differ from
18
<PAGE>
contractual maturities because borrowers have the right to prepay mortgages
without penalty or call obligations with or without call penalties. The Bank
uses the "Wall Street" consensus average life at the time the security is
purchased to schedule maturities of these CMOs and adjusts scheduled maturities
periodically based upon changes in the "Wall Street" estimates.
<TABLE>
<CAPTION>
Held to Maturity Securities Available for Sale Securities
----------------------------- ------------------------------
Amortized
Cost Fair Value
(Carrying Fair Amortized (Carrying
Amount) Value Cost Amount)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,335,037 $ 6,293,930
Due from one year to five years 32,108,037 31,365,368
Due from five to ten years 14,346,900 13,858,000
Due after ten years $ 1,470,000 $ 1,381,800 12,989,943 11,977,500
----------- ----------- ----------- -----------
$ 1,470,000 $ 1,381,800 $65,779,917 $63,494,798
=========== =========== =========== ===========
</TABLE>
At December 31, 1999 and 1998, securities having carrying amounts of
approximately $17,335,000 and $2,675,000 were pledged as collateral for treasury
tax and loan balances, the U.S. Bankruptcy Court, and for other purposes
required by law or contract.
3. LOANS RECEIVABLE
The Bank's borrowers are primarily located in Humboldt, Mendocino, Trinity and
Del Norte Counties. At December 31, 1999, approximately 61% of the Bank's loan
portfolio is comprised of real estate mortgage loans of which 71% are
principally one to four family residential mortgage loans and 29% is secured by
commercial real estate. Approximately 19% of the Bank's loans are for commercial
loans, which are not concentrated in any particular industry. Approximately 19%
of the loan portfolio is comprised of installment and other loans. The remaining
1% of the portfolio are real estate construction loans. The Bank's service area
has a concentration of timber related companies, and accordingly, the ability of
some of the Bank's borrowers to repay loans may be affected by the performance
of this sector of the economy. The Bank has an insignificant amount of direct
timber-related loans. Virtually all loans are collateralized, and a significant
portion have adjustable rates. Generally, real estate loans are secured by real
property and other loans are secured by bank deposits, real estate and business
or personal assets. Repayment is generally expected from the cash flow of the
borrowers.
19
<PAGE>
The major classifications of loans at December 31 are summarized as follows:
1999 1998
------------ ------------
Commercial $ 21,097,353 $ 33,633,699
Real estate-commercial 19,555,157 23,440,188
Real estate-mortgage 48,613,044 19,830,777
Real estate-construction 1,373,591 4,907,309
Installment and other 21,296,792 8,090,896
------------ ------------
Total loans 111,935,937 89,902,869
Less: Allowance for loan loss (2,346,179) (2,801,779)
Deferred loan fees (35,136) (75,318)
------------ ------------
Net loans receivable $109,554,622 $ 87,025,772
============ ============
At December 31, 1999 and 1998, the Bank serviced real estate loans and loans
guaranteed by the Small Business Administration which it had sold to the
secondary market of $47,295,701 and $49,471,251, respectively.
Certain real estate loans receivable are pledged as collateral for available
borrowings with the FHLB. Pledged loans totaled $16,437,242 and $5,784,367 at
December 31, 1999 and 1998.
4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
A summary of the activity in the allowance for loan losses for the years ended
December 31 is as follows:
1999 1998 1997
----------- ----------- -----------
Balance at beginning of year $ 2,801,779 $ 1,158,978 $ 807,778
Provision charged to operations 220,000 3,904,111 2,240,708
Loans charged off, net of recoveries (675,600) (2,261,310) (1,888,508)
----------- ----------- -----------
Balance at end of year $ 2,346,179 $ 2,801,779 $ 1,158,978
=========== =========== ===========
At December 31, 1999 and 1998, the recorded investment in loans for which
impairment has been recognized was approximately $2,399,984 and $3,137,188. The
total allowance for loan losses related to those loans was $570,459 and $869,031
at December 31, 1999 and 1998. For the years ended December 31, 1999, 1998 and
1997 the average recorded investment in loans for which impairment has been
recognized was approximately $2,768,586, $2,444,437 and $2,516,383. During the
portion of 1999, 1998 and 1997 that the loans were impaired, the Bank recognized
$14,322, $59,798, and $15,820 respectively, of interest income on such loans for
cash payments received. The Bank uses the cash basis method of income
recognition for impaired loans.
Included in the impaired loans are loans on nonaccrual status of $1,798,968,
$2,895,617 and $2,823,945 at December 31, 1999, 1998 and 1997, respectively.
Foregone interest on nonaccrual loans was $226,623, $213,344 and $382,935 in
1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, there were no
commitments to lend additional funds to borrowers whose loans were restructured
or classified as nonaccrual.
20
<PAGE>
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1999 1998
----------- -----------
Land $ 715,782 $ 715,782
Buildings 2,585,104 1,826,929
Leasehold improvements 190,959 190,959
Furniture, fixtures and equipment 4,102,268 3,932,771
Work in process 3,245 436,878
----------- -----------
7,597,359 7,103,319
Accumulated depreciation and amortization (3,159,918) (2,584,361)
----------- -----------
Premises and equipment, net $ 4,437,441 $ 4,518,958
=========== ===========
6. DEPOSITS
Included in interest-bearing and time, $100,000 and over, deposits are time
deposits at December 31, 1999, with scheduled maturities as follows:
2000 $56,907,354
2001 6,998,653
2002 2,580,930
2003 300,230
2004 and thereafter 307,882
-----------
$67,095,049
===========
7. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1999 represent amounts borrowed from the
Federal Reserve Bank and the Federal Home Loan Bank. Amounts borrowed from the
FRB of $603,600 consist of Treasury Tax and Loan notes and generally are
required to be repaid within 30 days from the transaction date and are not
included in the schedule below. The amount borrowed from the FHLB of $638,079
bears interest at 6.55%, matures in 2005 and is collateralized by certain real
estate loans. The Bank's noncancelable payments (principal and interest) related
to this borrowing at December 31, 1999 are as follows:
2000 $ 116,079
2001 116,079
2002 116,079
2003 116,079
2004 and thereafter 212,811
-----------
$ 677,127
===========
21
<PAGE>
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 are
summarized as follows:
1999 1998 1997
--------- --------- ---------
Currently payable:
Federal $ 47,008 $(266,788) $ 28,222
State 6,259 34,327 (2,485)
--------- --------- ---------
Total 53,267 (232,461) 25,737
Deferred:
Federal 527,413 (262,215) 43,921
State 277,558 (256,755) (44,132)
--------- --------- ---------
Total 804,971 (518,970) (211)
--------- --------- ---------
Provision (benefit) for income taxes $ 858,238 $(751,431) $ 25,526
========= ========= =========
A reconciliation of the federal statutory tax rate to the effective tax rate on
income is as follows:
1999 1998 1997
---- ---- ----
Federal statutory tax rate 35.0% (35.0)% 35.0%
State income taxes, net of federal benefit 9.0 (7.8) (21.4)
Other (2.7) 2.7 4.2
---- ---- ----
41.3% (40.1)% 17.8%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. The significant
components of the Bank's net deferred tax asset (liability), included in other
assets at December 31, were as follows:
22
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 570,190 $ 724,789
NOL and credit carryforwards 560,707
Securities marked to market for tax purposes 14,800 67,124
Unrealized loss on securities available for sale 959,781 25,021
Other 29,413 204,117
----------- -----------
Total deferred tax assets $ 2,135,891 $ 1,021,051
=========== ===========
Deferred tax liabilities:
Deferred loan fee costs $ (234,065) $ (221,676)
Originated mortgage servicing rights (110,727) (103,132)
State taxes (8,429) (102,799)
Purchase premium and startup costs (82,417) (44,810)
Depreciation (22,774) (20,895)
FHLB stock dividends (10,493)
Securities marked to market for tax purposes (1,030,477)
----------- -----------
Total deferred tax liabilities (1,488,889) (503,805)
----------- -----------
Deferred tax asset - net $ 647,002 $ 517,246
=========== ===========
</TABLE>
The Bank believes that it is more likely than not that it will realize the above
deferred net tax asset in the future periods; therefore, no valuation allowance
has been provided against its deferred tax assets.
9. EARNINGS PER SHARE
There was no difference in the numerator used in the calculations of basic
earnings per share and diluted earnings per share. The following reconciles the
denominator used in the calculation of basic earnings (loss) per common share
and diluted earnings per common and equivalent share for each of the years ended
December 31, 1999. For the year ended December 31,1998, the effect of including
outstanding options in the calculation for diluted earnings per share would be
antidilutive as the Bank had a net loss. As a result, the effect of those
outstanding options has not been included in the calculations.
23
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Calculation of Basic Earnings Per Share:
Numerator - net income (loss) $ 1,215,558 $(1,124,717) $ 118,012
Denominator - weighted average common
shares outstanding 1,467,507 1,453,094 712,093
----------- ----------- -----------
Basic Earnings (Loss) Per Share $ 0.83 $ (0.77) $ 0.17
=========== =========== ===========
Calculation of Diluted Earnings Per Share:
Numerator - net income (loss) $ 1,215,558 $(1,124,717) $ 118,012
Denominator:
Weighted average common shares
outstanding 1,467,507 1,453,094 712,093
Dilutive effect of outstanding options 8,377 40,386
----------- ----------- -----------
Weighted average common shares-diluted 1,475,884 1,453,094 752,479
----------- ----------- -----------
Diluted Earnings (Loss) Per Share $ 0.82 $ (0.77) $ 0.16
=========== =========== ===========
</TABLE>
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is involved in certain legal actions arising from normal business
activities. Management, based upon the advice of legal counsel, believes that
the ultimate resolution of all pending actions will not have a material effect
on the financial statements.
The Bank has operating leases for certain premises and equipment. Rent expense
for the years ended December 31, 1999, 1998 and 1997 was $192,864, $189,770, and
$144,127, respectively.
The following schedule represents the Bank's noncancelable future minimum
scheduled lease payments for the McKinleyville and Garberville branch premises
at December 31, 1999:
2000 $ 150,324
2001 150,324
2002 150,324
2003 150,324
2004 and thereafter 524,676
----------
$1,125,972
==========
The Bank was contingently liable under standby letters of credit issued on
behalf of its customers in the amount of $0 and $10,000 at December 31, 1999 and
1998. Commercial and consumer lines of credit, and real estate loans of
approximately $11,508,264 and $14,279,000 were undisbursed at December 31, 1999
and 1998. These instruments involve, to varying degrees, elements of credit and
market risk in excess of the amounts recognized in the balance sheet. The
contractual or notional amounts of these transactions express the extent of the
Bank's involvement in these instruments and do not necessarily represent the
actual amount subject to credit loss. However, at December 31, 1999 and 1998, no
losses are anticipated as a result of these commitments.
24
<PAGE>
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants, and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash requirements. The bank evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt
securities, equity securities or business assets.
Standby letters of credit are conditional commitments written by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily relating to inventory purchases by the Bank's commercial and
technology division customers, and such guarantees are typically short-term.
Credit risk is similar to that involved in extending loan commitments to
customers, and the Bank accordingly uses evaluation and collateral requirements
similar to those for loan commitments. Virtually all of such commitments are
collateralized.
11. RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank makes loans to directors, executive
officers and principal shareholders on substantially the same terms, including
interest rates and collateral, as comparable transactions with unaffiliated
persons. Loan activity with directors, executive officers, principal
shareholders and their associates for the year ended December 31 was as follows
(renewals are reflected as new loans and repayments):
1999 1998
----------- -----------
Balance, beginning of year $ 1,238,460 $ 1,550,591
Additions 1,047,021 394,262
Collections (488,198) (706,393)
----------- -----------
Balance, end of year $ 1,797,283 $ 1,238,460
=========== ===========
12. STOCK BASED COMPENSATION
The Bank has a stock option plan under which directors, officers and employees
may be granted options to purchase shares of common stock at a price not less
than the fair market value on the date of grant. Options vest when granted.
Unexercised options expire 10 years from the date of grant, currently 2001 to
2009. The exercise price for all options outstanding at December 31, 1999 was
$8.66 to $17.38 per share. Options for 26,397 shares remain available for grant
under the plan.
25
<PAGE>
A summary of stock options follows:
Weighted
Average
Stock Exercise
Options Price
------- --------
Outstanding and exercisable at January 1, 1997 102,729 $ 9.73
Options expired/canceled (115) $ 9.05
Options exercised (3,102) $ 9.05
-------
Outstanding and exercisable at December 31, 1997 99,512 $ 9.76
Options granted (weighted average fair value $7.42) 55,107 $ 16.21
Options expired/canceled (3,180) $ 16.78
Options exercised (31,200) $ 10.15
-------
Outstanding and exercisable at December 31, 1998 120,238 $ 12.43
Options granted (weighted average fair value $6.32) 1,500 $ 10.51
Options expired/canceled (13,100) $ 17.38
Options exercised (14,486) $ 10.20
-------
Outstanding and exercisable at December 31, 1999 94,152 $ 12.07
=======
Information about stock options outstanding at December 31, 1999 is summarized
as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Average Exercise Exercise
Range of Remaining Price of Price of
Exercises Options Contractual Options Options Options
Prices Outstanding Life (Years) Outstanding Exercisable Exercisable
--------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$8.65 - $8.69 10,935 2.52 $ 8.66 10,935 2.52
$9.09 - $9.35 33,733 5.19 $ 9.18 33,733 5.19
$11.25 - $12.88 22,384 7.80 $ 11.63 22,384 7.80
$17.38 27,100 8.25 $ 17.38 27,100 8.25
</TABLE>
The Bank applies APB Opinion 25 and related interpretations in accounting for
its stock option plan. Under the intrinsic value method no compensation cost has
been recognized for its stock option grants. SFAS No. 123, Accounting for
Stock-Based Compensation requires disclosure of pro forma net income and
earnings per share had the Bank adopted the fair value method as of the
beginning of 1996. Had compensation cost for the grants been determined based
upon the fair value method, the Bank's net income and earnings per share would
have been adjusted to the pro forma amounts indicated below.
26
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 1,215,558 $ (1,124,717) $ 118,012
Pro forma $ 1,206,558 $ (1,349,000) $ 118,012
Basic earnings (loss) per common share:
As reported $ 0.83 $ (0.77) $ 0.17
Pro forma $ 0.82 $ (0.93) $ 0.17
Diluted earnings (loss) per common and
equivalent share:
As reported $ 0.82 $ (0.77) $ 0.16
Pro forma $ 0.82 $ (0.93) $ 0.16
</TABLE>
No options were granted in 1997. The fair value of the options granted during
1999 and 1998 is estimated as $14,941 and $386,991, respectively, on the date of
grant using a binomial option-pricing model with the following assumptions: no
annual dividend, volatility of 26.3% and 22.7%, risk-free interest rate of 6.41%
and 4.66%, assumed forfeiture rate of zero, and an expected life of ten years.
The weighted average per share fair value of the 1999 and 1998 awards was $11.58
and $16.21, respectively.
13. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and, possibly, additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
The most recent notifications from the Federal Deposit Insurance Corporation for
the Bank as of December 31, 1999 and 1998, categorized the Bank as well
capitalized under the regulatory framework for prompt correction action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the Bank's category. During 1997, as a result of a regulatory
examination, the OCC asserted that the Bank committed a lending limit violation.
During the fourth quarter of 1997, the Bank charged off four loans in the amount
of $799,942. The Board of Directors of the Bank voluntarily purchased two of the
loans alleged to be in violation of the Bank's lending limit in the amount of
$399,942 by providing additional paid-in capital to the Bank.
27
<PAGE>
During 1998, as a result of a regulatory examination, the OCC asserted that the
Bank committed a second lending limit violation regarding a loan that had been
submitted to, but not yet received approval for, a guarantee by the United
States Department of Agriculture (USDA). The Bank received approval for the
guarantee from the USDA during February 1999.
On February 24, 1999, the Office of the Comptroller of the Currency notified the
Bank that it would be required to enter into a Consent Order ("Order"). The
Order requires that the Bank formulate and implement a plan to strengthen its
policies and procedures relative to its loan administration, credit and
collateral exceptions, classified assets, allowances for loan losses and
violations of law related to lending limits. The Board of Directors has executed
the Order. At that time, the Board adopted an action plan detailing the actions
necessary to comply with the Order.
The Bank's capital ratios at December 31 are shown as follows:
<TABLE>
<CAPTION>
To Be Categorized
As Well As
Capitalized
Under Prompt
For Capital Correction Action
Actual Adequacy Purposes Provisions
--------------------- ---------------------- -----------------------
Minimum Minimum Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital $ 17,113,792 13.24% $ 10,337,096 8.0% $ 12,921,370 10.0%
(to risk weighted assets)
Tier I capital
(to risk weighted assets) $ 15,498,621 11.99% $ 5,168,548 4.0% $ 7,752,822 6.0%
Tier I capital
(to average assets) $ 15,498,621 7.44% $ 8,329,780 4.0% $ 10,412,225 5.0%
As of December 31, 1998:
Total capital
(to risk weighted assets) $ 15,506,512 10.26% $ 12,089,336 8.0% $ 15,111,670 10.0%
Tier I capital
(to risk weighted assets) $ 14,347,534 9.49% $ 6,044,668 4.0% $ 9,067,002 6.0%
Tier I capital
(to average assets) $ 14,347,534 8.69% $ 6,606,098 4.0% $ 8,257,622 5.0%
</TABLE>
Under federal and California state banking laws, dividends paid by the Bank in
any calendar year may not exceed certain limitations without the prior written
approval of the appropriate bank regulatory agency. At December 31, 1999, no
amounts were available for dividends without prior approval of the Bank's
regulators.
28
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following are certain disclosures regarding the estimated fair value of
financial instruments for which it is practicable to estimate. Although
management uses its best judgment in assessing fair value, there are inherent
weaknesses in any estimating technique that may be reflected in the fair values
disclosed. The fair value estimates are made at a discrete point in time based
on relevant market data, information about the financial instruments, and other
factors. Estimates of fair value of instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could significantly affect
these estimates. Fair value has not been adjusted to reflect changes in market
conditions subsequent to December 31, 1999, therefore, estimates presented
herein are not necessarily indicative of amounts which could be realized in a
current transaction.
The carrying values of certain balance sheet financial instruments approximated
their fair value at December 31, 1999. These financial instruments include cash
and cash equivalents, interest bearing deposits in other financial institutions,
available-for-sale securities, FHLB, federal reserve and other securities,
federal funds repurchased and other borrowed funds. Fair values are estimated to
approximate carrying values for these financial instruments as they are
short-term in nature, carrying value approximates fair value or are receivable
of payable on demand.
The following estimates and assumptions were used as of December 31, 1999 and
1998 to estimate the fair value of each class of financial instrument for which
it is practicable to estimate that value.
(a) CASH AND CASH EQUIVALENTS AND INTEREST BEARING DEPOSITS IN OTHER
FINANCIAL INSTITUTIONS - The carrying amount represents a reasonable
estimate of fair value.
(b) SECURITIES - Held to maturity securities are based on quoted market
prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities. Available for sale securities are carried at fair value,
FHLB, federal reserve and other securities are based on the carrying
amount which represents a reasonable estimate of fair value.
(c) LOANS RECEIVABLE AND LOANS HELD FOR SALE - Commercial loans,
residential mortgages, and construction loans, are segmented by
fixed and adjustable rate interest terms, by maturity, and by
performing and nonperforming loans and loans held for sale.
The fair value of performing loans is estimated by discounting
contractual cash flows using the current interest rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Assumptions regarding credit
risk, cash flow, and discount rates are judgmentally determined
using available market information. The fair value of loans held for
sale is estimated based on current market information for similar
loans.
The fair value of nonperforming loans and loans delinquent more than
30 days is estimated by discounting estimated future cash flows
using current interest rates with an additional risk adjustment
reflecting the individual characteristics of the loans.
(d) DEPOSIT LIABILITIES - Noninterest bearing and interest bearing
demand deposits and savings accounts are payable on demand and are
assumed to be at fair value. Time deposits are based on the
discounted value of contractual cash flows. The discount rate is
based on rates currently offered for deposits of similar size and
remaining maturities.
29
<PAGE>
(e) OTHER BORROWED FUNDS - The fair value of other borrowed funds is
estimated by discounting the contractual cash flows using the
current interest rate at which similar borrowing for the same
remaining maturities could be made.
(f) COMMITMENTS TO FUND LOANS/STANDBY LETTERS OF CREDIT - Commitments
are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
The differences between the carrying value of commitments to fund
loans or stand by letters of credit and their fair value is not
significant and, therefore, not included in the following table.
The estimated fair values of the Bank's financial instruments as of December 31
are as follows:
1999
------------------------------
Carrying Fair
Amount Value
----------- -----------
FINANCIAL ASSETS:
Held to maturity securities 1,470,000 1,381,000
Loans receivable and loans
held for sale 112,807,322 108,190,601
FINANCIAL LIABILITIES:
Deposits 177,435,648 177,372,171
15. RETIREMENT AND DEFERRED COMPENSATION PLANS
In 1999, the Company initiated a retirement plan covering key executives. This
plan is a nonqualified defined benefit plan and is unsecured and unfunded. The
Company has purchased insurance on the lives of the participants and intends to
use the cash values of these policies ($576,685 at December 31, 1999) to pay the
retirement obligations. The accrued pension obligation of $42,020 as of December
31, 1999, is included in other liabilities, is equal to the projected benefit
obligation and the amount of service cost to date. The net periodic pension cost
was determined using the following assumptions of a discount rate of 4.64% and a
rate of compensation increase of 6.00%.
16. PLAN OF ACQUISITION AND MERGER
October 4, 1999, the Company entered into a Plan of Acquisition and Merger
(Plan) with North Valley Bancorp (NVB). Under the terms of the agreement, NVB
will acquire all the outstanding common stock of the Company in exchange for
shares of NVB's common stock at an exchange ratio defined by a formula in the
Plan. The merger, which is expected to close in the second quarter of 2000, is
subject to the approval of each company's shareholders, various regulatory
agencies and other conditions that need to be met.
30
