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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________ to ____________________
Commission file number 0-26552
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California Independent Bancorp
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(Exact name of registrant as specified in its charter)
California 68-0349947
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1227 Bridge Street, Suite "C," Yuba City, California 95991
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (530) 674-4444
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]
The aggregate market value of the voting stock held by non-affiliates of
California Independent Bancorp at February 28, 1999 was $32,653,227.
The number of outstanding shares of common stock as of February 28, 1999 was
1,748,280.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A.
Part III, Items 10, 11, 12 and 13
THIS REPORT INCLUDES A TOTAL OF 38 PAGES
EXHIBIT INDEX IS ON PAGE 36
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I N D E X
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<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS . . . . . . . . . . . . . . . . 30
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 32
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . 32
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . . . . . . . . . . 33
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON
FORM 8-K. . . . . . . . . . . . . . . . . . . . . . 34
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K (excluding statements
of fact or historical financial information) involve forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "'safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in Sutter and Yuba counties;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets. Therefore, the
information set forth herein should be carefully considered when evaluating the
business prospects of the Company and Bank.
GENERAL
California Independent Bancorp ("Company") is a California corporation and
the bank holding company for Feather River State Bank ("Bank"), both located in
Yuba City, California. The Company was incorporated on October 28, 1994 and
became the bank holding company for the Bank on May 2, 1995, pursuant to the
Bank Holding Company Act of 1956, as amended ("BHC Act").
The Bank was incorporated as a California state banking corporation on
December 1, 1976 and commenced operations on April 6, 1977. On October 1, 1996,
the Bank acquired an equipment leasing company, E.P.I. Leasing Co., Inc.
("EPI"), and operates it as a wholly-owned subsidiary of the Bank. On June 25,
1984, the Bank formed Yuba-Sutter Financial Services Corporation ("Yuba-Sutter")
as a wholly-owned subsidiary. This subsidiary is inactive.
At December 31, 1998, the Company had two employees, both of which also
serve as executive officers of the Bank. The Bank at December 31, 1998
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employed 180 persons, including 11 part-time employees, 5 executive officers and
54 other officers. None of the Company's or Bank's employees is currently
represented by a union or covered under a collective bargaining agreement.
Management believes that its employee relations are excellent.
The Company itself does not engage in any business activities other than
ownership of the Bank. The Company's primary asset is its ownership of the
Bank's stock, and the dividends paid by the Bank is the Company's primary source
of income. At December 31, 1998, the Company had consolidated assets of
$295,312,605, deposits of $268,808,444, loans of $181,182,515, and shareholders'
equity of $23,655,171.
GENERAL BANKING SERVICES
The Bank engages in a broad range of financial services activities, and
its primary market is located in the northern portion of the Sacramento
Valley, with a total of seven branches in Yuba City, Marysville, Colusa,
Arbuckle, Wheatland, and Woodland, California, serving Sutter, Yuba, Colusa,
and Yolo Counties. In addition, the Bank operates three loan production
offices ("LPOs") which are located in Madera, California, in Madera County;
Citrus Heights, California, in Sacramento County; and Chico, California, in
Butte County. These LPOs emphasize residential mortgage and construction
lending and equipment leasing through EPI. The total population base in the
six counties served by the Bank is approximately 1.8 million people, the
majority of which are in Sacramento County.
With the exception of Sacramento County, whose main economic force is
government, the Bank's operating territory is predominantly agricultural in
nature. A wide variety of food crops are produced in the area. The leading
agricultural commodities produced in the Bank's trade area include peaches,
tomatoes, prunes, rice, and almonds. Plentiful irrigation water and quality
soils result in excellent agricultural diversification.
The Bank's branches in Yuba City, Marysville, Wheatland, and Woodland
(Sutter, Yuba, and Yolo Counties) are in areas that are at the periphery of
housing for those individuals who work in the growing Sacramento area.
The Bank anticipates relocating its Madera, California, LPO to Fresno in
April 1999.
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The Bank currently has no applications pending to open additional branch
offices or LPOs. Further, the Bank may increase the number of its banking
facilities in the Bank's trade areas when such expansion is appropriate. The
Bank's expansion program is dependent on obtaining the necessary governmental
approvals, governmental monetary policies, and competition. No assurance can be
given that all or any part of the Bank's expansion program can be accomplished
without the Bank's being required to raise additional capital in the future.
The Bank is engaged in the commercial banking business, including accepting
demand, savings and time deposits and making commercial, real estate,
agricultural, and consumer loans. The Bank also offers equipment leasing
through its subsidiary, EPI. It also offers installment note collection, issues
cashier's checks and money orders, sells traveler's checks, and provides
bank-by-mail, night depository, safe deposit boxes, ATMs, and other customary
banking services. The Bank also offers home banking whereby its customers can
make transfers between accounts, pay bills, receive balance inquiries and
statements via their personal computer or telephone. The Bank also introduced
Visa debit cards to its demand deposit customers. The Bank does not offer trust
services or international banking services and does not plan to do so in the
near future.
DEPOSITS
Most of the Bank's deposits are obtained from individuals, small and
medium-sized businesses, and professionals. The Bank is able to attract and
retain these deposits through advertising in the local media and because of the
reputation the Bank has established in the communities it serves. No single
depositor or group of related depositors control a significant amount of the
Bank's total deposits. The loss of any one depositor or group of related
depositors should not have a materially adverse effect on the business of the
Bank. The Bank is a member of the Federal Deposit Insurance Corporation
("FDIC"). As a result, deposit accounts held with the Bank are insured in
accordance with the FDIC's rules and regulations.
LENDING ACTIVITIES
The Bank engages in a full complement of lending activities, including
agricultural, real estate, commercial and consumer loans. Additionally, the
Bank purchases leases through outside sources, including its subsidiary EPI.
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Agricultural loans are primarily made to finance agricultural production
expenses generally as non-revolving lines of credit that are drawn upon when
crop expenses are incurred and are repaid as crop sale proceeds are received.
These loans are typically secured by crops and crop proceeds. As of
December 31, 1998, the Bank had agricultural production loans and other loans to
farmers outstanding of $50,505,000, which represented 27.9% of the Bank's loan
portfolio.
Being located in a prime agricultural area, the Bank participates in the
Farmer Mac I loan program, pursuant to which it makes and then sells
agricultural real estate loans to the Travelers Realty Insurance Company and the
Federal Agricultural Mortgage Corporation ("Farmer Mac") and other institutional
investors. In addition, the Bank participates in the Farmer Mac II loan
program, pursuant to which it makes FSA guaranteed farm real estate loans and
subsequently sells the 90% guaranteed portion of these loans directly to Farmer
Mac and retains the servicing of these loans. The Bank is one of the largest
Farmer Mac program lenders in the United States.
The Bank makes real estate loans secured by residential, agricultural, and
commercial property. Residential loans are made to purchase or refinance one
(1) to four (4) family residences or multi-family residential properties and are
secured by a first deed of trust on the property, except for loans to improve
existing properties which are secured by junior liens. Loans secured by
agricultural property include mortgages, loans for farm residences, and other
improvement loans and are secured by liens on real estate. Commercial real
estate loans are made primarily to owner-occupied businesses for such purposes
as offices, warehouses, professional buildings, retail, and storage facilities.
As of December 31, 1998, these types of real estate secured loans totaled
$28,930,000, or 16% of the Bank's loan portfolio.
The Bank also makes real estate construction and development loans for
acquisition of raw land to be developed into subdivisions and for the
construction of one to four family and multi-family housing. These loans are
generally secured by a first deed of trust. As of December 31, 1998, the Bank
had outstanding construction and development loans of $54,829,000 for these
purposes, representing 30.3% of the Bank's loan portfolio as compared to
$38,085,000, or 22.6% as of December 31, 1997. This increase reflects the
continued economic expansion in the real estate sector of the Sacramento Valley
and the successful efforts of the Bank's business development officers.
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In addition to originating loans for its own portfolio, the Bank originates
mortgage loans on residential and farm properties located throughout the
Sacramento Valley and the greater Fresno area, which it sells into the secondary
market. These mortgage loans are pre-sold to minimize the Bank's interest rate
risk, and usually the Bank sells these mortgage loans without retaining the loan
servicing rights in order to receive higher compensation from the secondary
market. The underwriting criteria for residential and agricultural mortgage
loans sold in the secondary market are established by the purchasers of the
loans. These mortgage loans are sold without recourse, and the Bank generally
attempts to retain the servicing rights for the agricultural mortgages.
The Company accounts for the mortgage loans it sells in accordance with
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers of
Financial Assets and Extinguishment of Liabilities." As of December 31, 1998,
1997, and 1996, total loans serviced by the Bank were $146,026,000,
$151,619,000, and $107,637,000, respectively. For the years ended December 31,
1998, 1997, and 1996, total loans sold by the Bank were $65,795,000,
$66,953,000, and $45,614,000, respectively.
The Bank makes a variety of commercial and industrial loans to
small-to-medium-sized businesses for working capital, inventory, accounts
receivable, equipment, and general improvements. Typically, the Bank obtains a
security interest in the collateral being financed or in other available assets
of the customer. As of December 31, 1998, the Bank had outstanding loans for
these purposes of $21,599,000, representing 11.9% of the Bank's loan portfolio.
Additionally, the Bank has made Small Business Administration ("SBA")
loans since its inception. The Bank offers both SBA 7(a) and SBA 504 real
estate guaranteed loans ranging from amounts of $50,000 to $2,000,000. SBA
7(a) loans are for such purposes as working capital, inventory, and other
purposes and are guaranteed up to 80%. SBA 504 loans are made to finance
commercial real estate. The SBA loan program is continually subject to
political and budgetary uncertainty which, in recent years, has resulted in a
reduction of the guaranteed portion of SBA loans and lower maximum loan
amounts.
Furthermore, the Bank also offers business and industrial guaranteed loans
through the Rural Development Administration ("RDA"). These loans are
designated for businesses that create jobs in rural areas. RDA loans are in
amounts up to $10 million and are 90% guaranteed by the RDA. The Bank sells the
guaranteed portion of its SBA and RDA loans in the secondary market.
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Consumer and installment loans are made for household, family, and other
personal expenditures. These loans are made on both a secured and unsecured
basis. As of December 31, 1998, the Bank had a total of $2,443,000 in consumer
and installment loans, or 1.3% of its loan portfolio.
In October 1996, the Bank acquired EPI, as a wholly owned subsidiary, and
thereby increased its lending activity in the commercial lease market. The Bank
originates commercial and industrial equipment leases through EPI. Leases are
made to a wide variety of businesses, including professional, agricultural,
industrial, and construction. Total lease financing receivables as of December
31, 1998 were $23,313,000, or 12.9% of the Bank's portfolio.
INVESTMENT POLICY
The Bank's investment policy is to provide the Bank with the maximum return
on its investment securities consistent with safety and liquidity.
In accordance with this policy and state laws regarding permissible
investments, the Bank invests in U. S. Treasury and Agency securities with a
maturity of 10 years or less, tax-free municipal bonds rated "A" or better by
Moody's with a maturity not to exceed 13 years, and corporate bonds rated "A" or
better by Standard and Poors or Moody's with a maturity not to exceed 7 years.
The Bank also invests in federal funds.
The Bank's investment securities may also be used as collateral for public
deposits and for other borrowings.
OTHER SERVICES
The Bank offers other financial products and services including annuities,
mutual funds, mutual fund advisory service, IRAs, brokerage and custodial
services, 401(k) plans, estate plans, asset management, asset consulting,
charitable remainder trusts, fiduciary services, pension plans, non-qualified
deferred compensation, and retirement plans. All these investments and/or
financial services are offered by a registered investment representative through
the Bank's affiliation with Select Advisors, Inc., a registered broker/dealer
and a member of the National Association of Securities Dealers ("NASD") and the
Securities Investor Protection Corporation ("SIPC").
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COMPETITION
The Bank's primary service area consists of Colusa, Sutter, Yolo, and Yuba
Counties. It is estimated that this service area contains 54 competitive
banking and savings and loan offices, of which seventeen (17) offices are owned
by other independent banks. Based upon total bank deposits as of June 30, 1998
(the last period for which data is available), the Bank is second in market
share in Sutter County, third in Colusa County, fourth in Yuba County, and
eleventh in Yolo County.
The banking business in California and, specifically, in the Bank's primary
service area is highly competitive with respect to both loans and deposits. The
business is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. Such institutions offer certain services such as trust services and
international banking which are not offered directly by the Bank, and, by virtue
of their greater total capitalization, they have substantially higher lending
limits than does the Bank. Other entities, both governmental and in private
industry, seeking to raise capital through the issuance and sale of debt or
equity securities also provide competition for the Bank in the acquisition of
deposits. The Bank also competes with money-market funds for deposits.
In order to compete with major financial institutions and other
competitors, the Bank relies upon the experience of its executive and senior
officers in serving businesses and individuals and upon its specialized
service, local promotional activities, and the personal contacts made by its
officers, directors, and employees. For customers whose loan demands exceed
the Bank's legal lending limit (15% of its capital and allowance for loan
losses for unsecured loans and 25% of its capital and allowance for loan
losses for secured loans), the Bank may arrange to extend such loans on a
participation basis with correspondent banks. In this manner, the Bank is
able to close the loan while selling a portion of the credit to a participant
bank.
SUPERVISION AND REGULATION
Bank holding companies and their subsidiary banks are extensively regulated
under applicable federal and/or state laws and regulations. Statutes,
regulations, and policies affecting the banking industry are frequently being
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reviewed, added to, or changed by Congress, the state legislature, or the
federal or state supervisory agencies responsible for the industry's oversight.
Changes in the laws, regulations, or policies that impact the Company and Bank
cannot always be predicted and may have material impact on earnings and the
manner with which they conduct business.
As a result of the Company's and Bank's disappointing 1997 financial
performance and concerns disclosed during the Bank's December 31, 1997 joint
regulatory examination, the Bank's board of directors passed a resolution to
remedy the concerns. The resolution requires the Bank to: maintaining and, if
necessary, retain qualified management; maintain the Bank's Tier 1 leverage
capital in such an amount as to equal or exceed 7% of the Bank's FDIC Part 325
total assets (as of December 31, 1998, the Bank's Tier 1 leverage capital ratio
stood at 8.14%); continue with the diligent implementation of a previously
adopted plan to reduce the level of non-performing and problem loans and
revision of lending and collection policies and procedures; continue with the
diligent implementation of a revised operating budget and cost control plan in
order to restore the Bank's prior level of profitability; ensure that the Bank
maintains an adequate reserve for loan losses; and seek prior approval of the
Federal Deposit Insurance Corporation ("FDIC") and California Department of
Financial Institutions ("DFI") before the payment of any cash dividends.
Additionally, the FDIC and Federal Reserve Board ("FRB") have notified the
Bank and the Company that they have determined that the condition of the Bank
and the Company are such that prior approval of the regulatory agencies is
necessary before adding or replacing any member of the boards of directors,
employing any person as a senior executive officer, or changing the
responsibilities of any senior executive officer so that the individual would be
assuming a different senior executive officer position. Finally, due to the
Bank's condition, the FDIC is also restricting the Company's and the Bank's
ability to enter into any contracts to pay or make any golden parachute and
indemnification payments to institution-affiliated parties.
Discussed below are brief summaries of certain laws, regulations, or
policies that apply to the operation of bank holding companies and to the banks
they own or control. The summaries are qualified in their entirety by reference
to the full text of the applicable law, regulation, or policy.
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REGULATION OF THE COMPANY
The Company is a registered bank holding company within the meaning of the
BHC Act and is subject to the supervision of the FRB. The FRB requires the
Company to file quarterly and annual reports and may conduct examinations of the
Company and its subsidiaries.
The FRB can require the Company to terminate an activity of, control of,
liquidation of, or divestiture of certain subsidiaries or affiliates when the
FRB believes that the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness, or stability
of any of its banking subsidiaries. The FRB also has the authority to regulate
provisions of certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt. Under certain
circumstances, the Company must file a written notice and obtain approval from
the FRB prior to the purchase or redemption of its own common stock.
Under the BHC Act, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over, or acquires directly
or indirectly, more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. The Company is required to obtain
the FRB's prior approval before it acquires, merges, or consolidates with any
bank or bank holding company. Additionally, any company seeking to acquire,
merge, or consolidate with the Company would also be required to obtain the
FRB's approval.
The BHC Act generally prohibits the Company from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged, in activities that
the FRB has determined to be so closely related to banking, managing, or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
Transactions between the Company, the Bank, and any future subsidiaries of
the Company are subject to a number of other restrictions. FRB policies forbid
the payment by bank subsidiaries of management fees that are
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unreasonable in amount or exceed the fair market value of the services rendered
(or, if no market exists, actual costs plus a reasonable profit). Additionally,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit, sale, or
lease of property, or furnishing of services. Subject to certain limitations,
depository institution subsidiaries of bank holding companies may extend credit
to, invest in the securities of, purchase assets from, or issue a guarantee,
acceptance, or letter of credit on behalf of, an affiliate, provided that the
aggregate of such transactions with affiliates may not exceed 10% of the capital
stock and surplus of the institution, and the aggregate of such transactions
with all affiliates may not exceed 20% of the capital stock and surplus of such
institution. The Company may borrow only from depository institution
subsidiaries if the loan is secured by marketable obligations with a value of a
designated amount in excess of the loan. Further, the Company may not sell a
low-quality asset to a depository institution subsidiary.
The FRB requires the Company to maintain certain levels of capital.
(See "Capital Standards.") The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe
or unsound practice or violates certain laws, regulations, or conditions
imposed in writing by the FRB. (See "Prompt Corrective Action and Other
Enforcement Mechanisms.")
Pursuant to FRB regulations, a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and
may not conduct its operations in an unsafe or unsound manner. In addition,
the FRB has issued a policy that in order to serve as a source of strength to
its subsidiary banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's
failure to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the FRB to be an unsafe and
unsound banking practice or a violation of the FRB's regulations, or both.
The Company is also a bank holding company within the meaning of
California Financial Code section 3700. As a result, the Company and its
subsidiaries are subject to examination by, and may be required to file
reports with, the DFI.
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The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 ("the 1934 Act"). As such,
the Company is subject to the information, proxy solicitation, insider trading,
and other requirements and restrictions of the 1934 Act.
REGULATION OF THE BANK
As a California state chartered bank, the Bank is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC.
Additionally, the Bank is subject to certain regulations promulgated by the FRB.
If the FDIC should determine, as a result of an examination of the Bank,
that the Bank's financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of the Bank's operations are
unsatisfactory or that the Bank or its management is violating, or has violated,
any law or regulation, various actions are available to the FDIC to remedy the
situation. Such remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate the Bank's deposit insurance, which would result in
a revocation of the Bank's California charter. The DFI also has many of the
same remedial powers.
Various other requirements and restrictions under the laws of California
and the United States affect the Bank's operations. State and federal statutes
and regulations which relate to many aspects of the Bank's operations include:
reserve requirements against deposits, ownership of deposit accounts, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices, and capital requirements.
Furthermore, the Bank is required to maintain certain levels of capital. (See
"Capital Standards.")
CAPITAL STANDARDS
The FRB, FDIC, and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets, and transactions,
such as letters of credit, unused commitments, and recourse
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arrangements, which are reported as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. government securities, to 100% for assets with relatively higher
credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock, and
minority interests in certain subsidiaries, less most other intangible assets.
Tier 2 capital may consist of a limited amount of the allowance for possible
loan and lease losses and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital are subject to certain
other requirements and limitations of the federal banking agencies. Since
December 31, 1992, the federal banking agencies have required a minimum ratio of
qualifying total capital to risk-adjusted assets and off balance sheet items of
8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off
balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total average assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets is 3%. It is improbable, however, that an institution with a 3%
leverage ratio would receive the highest rating by the regulators since a strong
capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio is at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, is at least 4% or
5%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
- 15 -
<PAGE>
The following tables present the capital ratios for the Company and the
Bank as of December 31, 1998.
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMPANY BANK
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
Tier 1 Capital $ 23,416 9.12% $ 23,260 9.06%
Tier 1 Capital minimum
requirement 10,270 4.00% 10,264 4,00%
-------- ------ -------- ------
Excess $ 13,146 5.12% $ 12,996 5.06%
-------- ------ -------- ------
-------- ------ -------- ------
Total Capital $ 26,660 10.38% $ 26,502 10.33%
Total Capital minimum
requirement 20,540 8.00% 20,528 8.00%
-------- ------ -------- ------
Excess $ 6,120 2.38% $ 5,974 2.33%
-------- ------ -------- ------
-------- ------ -------- ------
Risk-adjusted assets $256,754 $256,604
-------- --------
-------- --------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly
average total assets $ 23,416 8.20% $ 23,260 8.14%
Minimum leverage
requirement 11,427 4.00% 11,419 4.00%
-------- ------ -------- ------
Excess $ 11,989 4.20% $ 11,841 4.14%
-------- ------ -------- ------
-------- ------ -------- ------
Total Quarterly average assets $285,678 $285,463
-------- --------
-------- --------
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective or other
supervisory action to resolve an insured depository institution's problems.
Problems that may be addressed through such actions include, but are not limited
to, institutions that fall below one or more prescribed minimum capital ratios.
Each federal banking agency has promulgated regulations defining the following
five categories in which an insured depository institution will be placed, based
on its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 1998, the Bank and the Company exceeded all
the required ratios for classification as "well capitalized."
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<PAGE>
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed 2% of the bank's total assets. Federal
guidelines generally define "tangible equity" as a bank's tangible assets less
liabilities. Federal regulators may, among other alternatives, require the
appointment of a conservator or a receiver for a critically undercapitalized
bank. In California, the Commissioner may require the appointment of a
conservator or receiver for a state-chartered bank if its tangible equity does
not exceed 3% of the bank's total assets, or $1 million.
In addition to measures taken under the prompt corrective action
provisions, banks may be subject to potential enforcement actions by the federal
or state regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or any written agreement with the agency.
SAFETY AND SOUNDNESS STANDARDS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") implemented certain specific restrictions on transactions and
required the regulators to adopt overall safety and soundness standards for
depository institutions related to internal control, loan underwriting and
documentation, and asset growth. Among other things, FDICIA limited the
interest rates paid on deposits by undercapitalized institutions, the use of
brokered deposits, and the aggregate extension of credit by a depository
institution to an executive officer, director, principal stockholder, or related
interest, and reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee benefits
accounts.
The federal financial institution agencies published a final rule effective
August 9, 1995, implementing safety and soundness standards. The FDICIA added a
new section 39 to the Federal Deposit Insurance Act, which required the agencies
to establish safety and soundness standards for insured financial institutions
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<PAGE>
covering: (1) internal controls, information systems, and internal audit
systems; (2) loan documentation; (3) credit underwriting; (4) interest rate
exposure; (5) asset growth; (6) compensation, fees, and benefits; (7) asset
quality, earnings, and stock valuation; and (8) excessive compensation for
executive officers, directors, or principal shareholders which could lead to
material financial loss. The agencies issued the final rules in the form of
guidelines that set forth operational and managerial standards relating to:
(i) internal controls, information systems, and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) asset growth;
(v) earnings; and (vi) compensation, fees, and benefits.
In addition, the federal banking agencies have also adopted safety and
soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a system
to identify problem assets and prevent those assets from deteriorating. Under
these standards, an insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in problem assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk. These guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard. Should the agency require submission of a compliance plan and the
institution fails to timely submit an acceptable plan, within 30 days of a
request to do so, or to implement an accepted plan, the agency must require the
institution to correct the deficiency. The agencies may elect to initiate
enforcement action in certain cases rather than rely on an existing plan,
particularly where failure to meet one or more of the standards could threaten
the safe and sound operation of the institution.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions that limit the amount available for
such distribution depending upon the earnings, financial condition, and cash
needs of the
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<PAGE>
institution, as well as general business conditions. FDICIA prohibits insured
depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions, including
dividends, if, after such transaction, the institution would be
undercapitalized.
The FRB has issued a policy statement that a bank holding company should
not declare or pay a cash dividend to its stockholders if the dividend would
place undue pressure on the capital of its subsidiary banks or if the dividend
could be funded only through additional borrowings or other arrangements that
might adversely affect the financial position of the bank holding company.
Specifically, a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully
fund each consistent with its capital needs, asset quality, and overall
financial condition. Further, as previously stated, the Company is expected to
act as a source of financial strength for each of its subsidiary banks and to
commit resources to support each subsidiary bank in circumstances when it might
not do so absent such policy.
The Company's ability to pay dividends depends in large part on the ability
of the Bank to pay management fees and dividends to the Company. The ability of
its subsidiary banks to pay dividends will be subject to restrictions set forth
in California banking law and the regulations of the FDIC.
Under California Financial Code section 642, funds available for cash
dividend payments by a bank are restricted to the lesser of: (i) retained
earnings; or (ii) the bank's net income for its three fiscal years (less any
distributions to stockholders made during such period). However, with the prior
approval of the California Superintendent of Banks, California Financial Code
section 643 provides that a bank may pay cash dividends in an amount not to
exceed the greater of: (1) the retained earnings of the bank; (2) the net
income of the bank for its last fiscal year; or (3) the net income of the bank
for its current fiscal year. However, if the Superintendent finds that the
stockholders' equity of the bank is not adequate or that the payment of a
dividend would be unsafe or unsound, the Superintendent may order such bank not
to pay a dividend to stockholders.
Additionally, under FDICIA a bank may not make any capital distribution,
including the payment of dividends, if, after making such distribution, the bank
would be in any of the "under-capitalized" categories under the FDIC's Prompt
Corrective Action regulations.
Also, under the Financial Institution's Supervisory Act, the FDIC has the
authority to prohibit a bank from engaging in business practices that the FDIC
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<PAGE>
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of a bank and other factors, that the FDIC could assert that the
payment of dividends or other payments in some circumstances might be such an
unsafe or unsound practice and thereby prohibit such payment.
Finally, the Bank is subject to certain restrictions imposed by federal law
on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Company or other affiliates, the purchase of, or
investments in, stock or other securities thereof, the taking of such securities
as collateral for loans, and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate are limited,
individually, to 10% of the Bank's capital and surplus (as defined by federal
regulations), and such secured loans and investments are limited, in the
aggregate, to 20% of the Bank's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect to
transactions involving the Company and other controlling persons of the Bank.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions of federal law.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law, effectively
permitting nationwide banking. The Interstate Act provides that adequately
capitalized and adequately managed bank holding companies may acquire banks in
any state, even in those jurisdictions that currently bar acquisition by
out-of-state institutions, subject to deposit concentration limits. The deposit
concentration limits provide that regulatory approval by the FRB may not be
granted for a proposed interstate acquisition if, after the acquisition, the
acquirer on a consolidated basis would control more than 10% of the total
deposits nationwide or would control more than 30% of deposits in the state
where the acquiring institution is located. The deposit concentration state
limit does not apply for initial acquisitions in a state and, in every case, may
be waived by the state regulatory authority. Interstate acquisitions are
subject to compliance with the Community Reinvestment Act (the "CRA"). States
are permitted to impose age requirements not to exceed five years on target
banks for interstate acquisitions.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing new
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<PAGE>
branches in another state. Interstate branching is also subject to a
30% statewide deposit concentration limit on a consolidated basis and a
10% nationwide deposit concentration limit. The laws of the host state
regarding community reinvestment, fair lending, consumer protection (including
usury limits), and establishment of branches shall apply to the interstate
branches.
The opening of a new branch by an out-of-state bank is not permitted unless
the host state expressly permits such an opening. The establishment of an
initial new branch in a state is subject to the same conditions as apply to
initial acquisition of a bank in the host state, other than the deposit
concentration limits.
The Interstate Act permits bank subsidiaries of a bank holding company to
act as agents for affiliated depository institutions in receiving deposits,
renewing time deposits, closing loans, servicing loans, and receiving payments
on loans and other obligations. A bank acting as agent for an affiliate shall
not be considered a branch of the affiliate. Any agency relationship between
affiliates must be on terms that are consistent with safe and sound banking
practices. The authority for an agency relationship for receiving deposits
includes the taking of deposits for an existing account, but is not meant to
include the opening or origination of new deposit accounts. Subject to certain
conditions, insured savings associations that were affiliated with banks as of
June 1, 1994 may act as agents for such banks. An affiliate bank or savings
association may not conduct any activity as an agent which it is prohibited from
conducting as a principal.
If an interstate bank decides to close a branch located in a low or
moderate income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies have
implemented regulations prohibiting interstate branches from being used as
"deposit production offices." The regulations include a provision to the effect
that if loans made by an interstate branch are less than 50% of the average of
all depository institutions in the state, then the regulator must review the
loan portfolio of the branch. If the regulator determines that the branch is
not meeting the credit needs of the community, it has the authority to close the
branch and to prohibit the bank from opening new branches in the state.
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<PAGE>
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Act"), effective October 2, 1995, amends
the California Financial Code to, among other matters, regulate the
operations of state banks to eliminate conflicts with and to implement the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 discussed
above. The Caldera Act includes: (1) an election to permit early interstate
merger transactions; (2) a prohibition against interstate branching through
the acquisition of a branch business unit located in California without
acquisition of the whole business unit of the California bank; and (3) a
prohibition against interstate branching through de novo establishment of
California branch offices. The Caldera Act mandates that initial entry into
California by an out-of-state institution be accomplished by acquisition of
or merger with an existing whole bank that has been in existence for at least
five years.
COMMUNITY REINVESTMENT ACT
The Bank is subject to the fair lending requirements and reporting
obligations involving home mortgage lending operations and CRA activities. The
CRA generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. The federal banking agencies may take compliance with such laws
and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is based on a performance-
based evaluation system, which bases CRA ratings on an institution's lending
service and investment performance. When a bank holding company applies for
approval to acquire a bank or other bank holding company, the FRB will review
the assessment of each subsidiary bank of the applicant bank holding company,
and such records may be the basis for denying the application. Based on an
examination conducted in the third quarter of 1997, the Bank was rated
satisfactory in complying with its CRA obligations.
DEPOSIT INSURANCE PREMIUMS
The Bank's deposit accounts are insured by the FDIC's Bank Insurance Fund
("BIF") to the maximum permitted by law. This deposit insurance may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or
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<PAGE>
has violated any applicable law, regulation, rule, order, or condition imposed
by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits. As of
December 31, 1998, the assessment ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996
("EGPRA"), at January 1, 1997, the Bank began paying, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points per $100 of insured deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the
Savings Association Insurance Fund ("SAIF"), by contrast, pay, in addition to
their normal deposit insurance premium, approximately 6.4 basis points. Under
the EGPRA, the FDIC is not permitted to establish SAIF assessment rates that are
lower than comparable BIF assessment rates. Beginning no later than January 1,
2000, the rate paid to retire the Fico Bonds will be equal for members of the
BIF and the SAIF. Should the insurance funds be merged before January 1, 2000,
the rate paid by all members of this new fund to retire the Fico Bonds would be
equal.
ASSET CONSERVATION, LENDER LIABILITY, AND DEPOSIT INSURANCE
PROTECTION ACT OF 1996
Environmental Protection Agency regulations excluding financial
institutions from liability for the clean up of toxic materials on property held
as collateral for loans were overturned by the federal courts. Due to concerns
expressed by interested parties (owners, realtors, and lenders), Congress passed
amendments to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA") to reinstate certain safeguards for fiduciaries
and lenders. A bank or other party acting as a fiduciary may hold property in
such capacity and shall have no liability for the release or threatened release
of a hazardous substance in excess of the value of the property held in a
fiduciary capacity. For example, a bank acting as trustee under the terms of a
written trust agreement will not have any liability in excess of the actual
value of the assets in that particular trust. The assets of the Bank will not
be at risk for a release occurring on property belonging to the trust. This
amendment does not limit the liability of the fiduciary to private parties that
may have a cause of action outside the scope of CERCLA. "Fiduciary," as used
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<PAGE>
in CERCLA, includes trustees, executors, administrators, custodians, guardians,
receivers, conservators, and personal representatives.
The amendments to CERCLA include changes in the definitions contained in 42
U.S.C. section 9601(20), entitled "Definitions." A major change in the
definition of "Owner" or "Operator" has the effect of limiting the liability of
a financial institution that does not participate in management of an
environmentally impaired property. Section 9607 of CERCLA states that owners
and operators of a vessel or facility are liable for damages arising out of
discharge of a hazardous substance on property. The amendment specifically
states that a financial institution holding a deed of trust on real property
that does not participate in the management of the operations carried out on the
property is not an owner or an operator under the statute. The amendments
further state that a financial institution that forecloses on such property does
not incur liability simply by the act of foreclosing on the property or through
the subsequent sale of the property to a third party.
PROPOSED LEGISLATION
Other legislation and government regulations have been proposed which could
also affect the business activities of the Company and the Bank, and it is
likely that additional legislation will be introduced in Congress or in state
legislatures in the future which may impact their business. The proposed
legislation includes wide-ranging bills that would alter the structure,
regulation, and competitive relationships of the nation's financial services
industry, such as proposals to alter the present statutory separation of
commercial and investment banking; to permit bank holding companies and banks to
engage in certain securities underwriting and distribution activities and
certain real estate investment activities; to permit bank holding companies to
own or control thrift institutions; to subject banks to increased disclosure and
reporting requirements; and to generally expand the range of financial services
that can be provided by bank holding companies as well as by other financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the present or future business
of the Company or the Bank may be affected.
IMPACT OF MONETARY POLICIES
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
other borrowings and the interest rate earned by a bank on loans, securities,
and other interest-earning assets comprises the major source of a bank's
earnings. Thus, the earnings and growth of banks are subject to the influence
of economic conditions
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<PAGE>
generally, both domestic and foreign, and also to the monetary and fiscal
policies of the United States and its agencies, particularly the FRB. The FRB
implements national monetary policy, such an seeking to curb inflation and
combat recession, by its open-market dealings in United States government
securities, by adjusting the required level of reserves for financial
institutions subject to reserve requirements and through adjustments to the
discount rate applicable to borrowings by banks that are members of the FRB.
The actions of the FRB in these areas influence the growth of bank loans,
investments, and deposits and also affect interest rates. The nature and timing
of any future changes in such policies and their impact on the Bank cannot be
predicted. In addition, adverse economic conditions could make a higher
provision for loan losses a prudent course and could cause higher loan loss
charge-offs, thus adversely affecting a bank's net earnings.
ACCOUNTING PRONOUNCEMENTS
SFAS NO. 125 - "ACCOUNTING FOR THE TRANSFER AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES"
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 125,
"Accounting for the Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities" effective for transactions occurring after
December 31, 1996. SFAS No. 125 requires that an asset seller must meet defined
conditions to demonstrate that it has surrendered control over the assets. The
failure to meet these conditions usually results in on-balance-sheet treatment
for the assets and a liability for the sale proceeds received. SFAS No. 125
also requires that contracts to service are recorded as an asset or a liability
based on fair value or on an allocation of the carrying amount of the financial
asset. SFAS No. 125 covers subsequent accounting, including impairments, and
eliminates the distinction between excess and normal servicing. In December
1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" to defer for one year the effective date
of implementation for transactions related to repurchase agreements, dollar-roll
repurchase agreements, securities lending, and other similar transactions. The
Company does not believe that adoption of these standards will have a
significant impact on its financial position or results of operations.
SFAS NO. 130 - "REPORTING COMPREHENSIVE INCOME"
For financial statements issued after December 31, 1997, the FASB mandates
compliance with SFAS No. 130, "Reporting Comprehensive Income." SFAS provides
guidance as to the presentation and display of comprehensive income and
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<PAGE>
its components in the financial statements. The statement defines
"comprehensive income" to include revenues, expenses, gains, and changes in
equity from transactions during the period. The Company has adopted SFAS No.
130, and does not expect the statement to have a material impact on its
financial statements.
SFAS NO. 131 - "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION"
SFAS No. 131 establishes standards for public business enterprises'
reporting of information about operating segments in annual financial
statements. The Statement requires that the enterprises report selected
information concerning operating segments in interim financial reports issued to
shareholders. Additionally, the Statement establishes requirements for related
disclosures about products, services, geographic areas, and major customers.
SFAS No. 131 requires public business enterprises to report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. The Statement further requires reconciliation of total segment
revenues, total segment profit or loss, total segment assets, and other amounts
disclosed for segments to corresponding amounts in the enterprise's general
purpose financial statements. It requires that all public business enterprises
report information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets, and about major customers
regardless of whether that information is used in making operating decisions.
However, SFAS No. 131 does not require an enterprise to report information that
is not prepared for internal use if reporting it would be impracticable. SFAS
No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
The Company has adopted SFAS No. 131. The adoption of the applicable
provisions did not have a material effect on the Company, as management believes
that it operates only in one segment - the commercial banking segment.
SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES"
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires
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<PAGE>
recognition of all derivatives as either assets or liabilities in the statement
of financial condition and the measurement of those instruments at fair value.
Recognition of changes in fair value will be recognized into income or as a
component of other comprehensive income depending upon the type of the
derivative and its related hedge, if any. SFAS No. 133 is effective for the
Company beginning January 1, 2000. The Company is in the process of determining
the impact of SFAS No. 133 on the Company's financial statements, which is not
expected to be material.
SFAS NO. 134 - "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED
AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE
BANKING ENTERPRISE"
FASB issued SFAS No. 134 in October of 1998, to be effective the first
fiscal quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65 to
require entities engaged in mortgage banking activities to classify their
mortgage-backed securities, or other retained interests, based upon their
ability and intent to sell or hold those investments. The intent of the
statement is to conform the subsequent accounting for securities retained after
mortgage loan securitization with the subsequent accounting for securities
retained after the securitization of other types of assets by mortgage banking
entities. The Company has adopted SFAS No. 134 and does not expect the
statement to have a material impact on its financial statements.
YEAR 2000 COMPLIANCE
The Federal Financial Institutions Examination Council issued an
interagency statement in May 1997 regarding year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there may be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies have been conducting year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. (For a further discussion of the Company's
and the Bank's efforts regarding "Year 2000" compliance, see "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.")
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OTHER INFORMATION
There has been no material effect upon the Bank's capital expenditures,
earnings, or competitive position as a result of federal, state, or local
provisions regarding the discharge of materials into the environment.
ITEM 2. PROPERTIES
The Bank currently conducts its banking operations from an administrative
office, seven branch offices, and three loan production offices ("LPO") and its
subsidiary EPI. Rental expense for all premises leased totaled $177,344 for the
year ended December 31, 1999. It is estimated that rental expense for leased
premises will be approximately $139,000 for 1999.
The Bank's principal office in Yuba City, California, is located at
777 Colusa Avenue in a modern, single-story, shopping center end building, which
has drive-up windows and off-street parking for its customers. This office was
opened in 1982 and has a total square footage of 9,122.
In 1991, the Bank purchased a 3,694 square foot building located at
1005 Stafford Way, Yuba City, California, located directly behind its main
branch. The Bank's note department moved from the Bank's Colusa Avenue office
to this location in the third quarter of 1997, as the Company's headquarters
moved to another location.
The Bank purchased land for the Bank's office at 1221 Bridge Street,
Yuba City, California, in 1978. In 1991, the Bank purchased a combined 14,972
square foot retail and office building with parking located at 1227 Bridge
Street, adjacent to the Bank's Bridge Street branch. Currently, the Bank's Data
Center, the headquarters for the Company, and administrative services and
financial consulting services are located in this building.
The Bank's Marysville office is located at 700 "E" Street in Marysville,
California. The Bank purchased this 3,702 square foot building, which was a
branch of another bank, in September 1995.
The Bank's Colusa branch office is located at 655 Fremont Street in a
2,819 square foot office building that was converted to banking quarters. The
Bank owns the land and premises for the branch.
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<PAGE>
In 1985, the Bank purchased a 5,306 square foot premises for its Arbuckle
office located at the corner of Amanda and Sixth Streets. The Bank moved its
Arbuckle office to this location in June 1986. The Bank leases 1,800 square
feet plus a common area of these premises to an unaffiliated party.
In 1993, the Bank purchased a 4,427 square foot building that is now the
location of its Woodland, California, branch office located at 203 Main Street.
This was formerly the site of a branch of another bank.
The Bank leased the land and a module on the property located at 114 "D"
Street, Wheatland, California, from March 1997 until April 1998 for its
Wheatland branch office. In April 1998, the Bank entered a new lease for the
same sight together with a new freestanding building. The 2,831 square foot
building was completed on September 21, 1998, at which time the Bank relocated
from the previously leased module. The term of the lease is 10 years with the
option and right to extend the original term of this lease for two periods of
five years each. The monthly lease payment is $2,797 and is subject to annual
adjustments on the anniversary of the lease commencement date.
The Bank moved its Roseville LPO to a new office in Citrus Heights in
October 1997. The rent is $1,158 per month for this office. The lease is for
two years.
On December 1, 1997, the Bank's Chico LPO relocated to 500 Main Street in
Chico, California. The lease is for three years at a rent of $1,783 per month.
On December 2, 1996, the Bank purchased a former bank branch located at
995 Tharp Road in Yuba City, California. After remodeling, the Bank relocated
its Agricultural Real Estate and Residential Real Estate Departments at this
location.
In connection with the purchase of EPI, the Bank entered into a 17-month
lease commencing August 1, 1996 for premises where EPI is located at 6929
Sunrise Boulevard in Citrus Heights. The lease has been extended to
December 31, 1999, at a monthly rent of $5,276.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business. In addition, the Bank is a party to a lawsuit entitled FEATHER RIVER
STATE BANK V. THIARA ENTERPRISES, ET AL. and the corresponding cross-complaint
entitled THIARA ENTERPRISES, ET AL. V. FEATHER RIVER STATE BANK, which could be
considered material
- 29 -
<PAGE>
pending litigation. This suit stems from a defaulted loan obligation. The Bank
took legal action against the debtor to enforce the terms of its loan
agreements. The Bank's suit lists various causes of action, including
foreclosure of real and personal property, temporary restraining order,
permanent injunction, and certain fraud counts. The debtor's cross-complaint
alleges breach of contract and seeks punitive damages. Subsequently, the debtor
filed for bankruptcy protection. On December 4, 1998, the parties entered into
a Settlement, Modification Agreement and General Release. The agreement is
subject to the bankruptcy court's approval.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is trading on the NASDAQ National Market under
the trading symbol "CIBN." The Company's common stock began trading on the
NASDAQ National Market on July 31, 1996. Prior to that time, the Company's
common stock was listed on the NASDAQ Bulletin Board and was the subject of
limited trading.
Set forth below is information regarding trading in the Company's common
stock for the last two years.
The prices indicated below may not necessarily represent actual
transactions.
SALE PRICE OF COMMON STOCK
--------------------------
<TABLE>
<CAPTION>
PERIOD ENDED 1998 BID ASK
--- ---
<S> <C> <C>
March 31 $24.50 $26.25
June 30 25.00 27.50
September 30 22.50 24.50
December 31 20.00 20.12
</TABLE>
- 30 -
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED 1997 BID ASK
--- ---
<S> <C> <C>
March 31 $26.25 $28.00
June 30 26.75 28.50
September 30 25.00 27.00
December 31 24.13 26.25
</TABLE>
Cash dividends paid on the Company's common stock were $.42 per share for
the year ending December 31, 1998, and $.40 per share for the year ending
December 31, 1997. These figures have been adjusted for the 5% stock dividend
paid in 1997 and in 1998.
It is currently the intention of the Board of Directors of the Company to
pay cash dividends on a quarterly basis. However, there is no assurance that
cash dividends will be paid in the future as they are dependent upon the
earnings, financial condition, and capital requirements of the Company and its
subsidiary, Feather River State Bank, as well as legal and regulatory
requirements.
Federal and State banking and corporate laws could limit the Bank' ability
to pay dividends to the Company. The Bank has issued a policy statement that a
bank holding company should not declare or pay a cash dividend to its
shareholders if the dividend would place undue pressure on the capital of its
subsidiary banks or if the dividend could be funded only through additional
borrowings or other arrangements that may adversely affect the financial
position of the Company. In addition, a bank holding company may not continue
its existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend, and its prospective rate of earnings
retention is sufficient to fully fund each dividend and appears consistent with
its capital needs, asset quality, and overall financial condition.
As a result of the Bank's disappointing 1997 financial performance and
concerns disclosed during the Bank's December 31, 1997, joint regulatory
examination, the Bank's Board of Directors has passed a resolution that requires
the Bank to seek the written approval of the FDIC and California Department of
Financial Institutions prior to the payment of any cash dividends.
As of February 28, 1999, there were 1,110 holders of record of the
Company's common stock.
- 31 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
For the "Selected Financial Data," see page 1 of the Company's 1998 Annual
Report to the Shareholders, which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the "Management's Discussion and Analysis of Financial Condition and
Results of Operations," see pages 9-21 of the Company's 1998 Annual Report to
the Shareholders, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the discussion of "Quantitative and Qualitative Disclosures About
Market Risk," see section titled "Interest Rate Sensitivity" at pages 17-18 of
the Company's 1998 Annual Report to the Shareholders, which is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For "Financial Statements and Supplemental Data," see pages 22-39 of the
Company's 1998 Annual Report to the Shareholders, which is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 32 -
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors and executive officers of the Company,
see "ELECTION OF DIRECTORS" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the definitive Proxy Statement for the Company's 1999
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the
"Proxy Statement"), which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners
and management, see "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions,
see "Indebtedness of Management and Other Transactions" in the Proxy Statement,
which is incorporated herein by reference.
- 33 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and subsidiaries,
other financial information, and the Independent Auditors' Report on
Consolidated Financial Statements are contained herein under Item 8.
2. FINANCIAL STATEMENT SCHEDULES
In accordance with Regulation S-X, the financial statement schedules have
been omitted because (a) they are not applicable to or required of the Company;
or (b) the information required is included in the consolidated financial
statements or notes thereto.
3. EXHIBITS
See Index to Exhibits of this Form 10-K.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ending December
31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly issued this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA INDEPENDENT BANCORP
Date: March 16, 1999
By: /s/ Robert J. Mulder
- ------------------------------------
Robert J. Mulder, President
and Chief Executive Officer
- 34 -
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Annette Dier Bertolini Senior Vice President March 16, 1999
- -------------------------- and Chief Financial Officer
ANNETTE DIER BERTOLINI (Principal Financial and
Accounting Officer)
/s/Harold M. Eastridge Director March 16, 1999
- --------------------------
HAROLD M. EASTRIDGE
/s/William H. Gilbert
- -------------------------- Director March 16, 1999
WILLIAM H. GILBERT
/s/ Donald H. Livingstone
- -------------------------- Director March 16, 1999
DONALD H. LIVINGSTONE
/s/ Robert J. Mulder
- -------------------------- President, Chief March 16, 1999
ROBERT J. MULDER Executive Officer and
Director
/s/ David A. Offutt
- -------------------------- Chairman of the Board March 16, 1999
DAVID A. OFFUTT of Directors, and Director
/s/William K. Retzer
- -------------------------- Director March 16, 1999
WILLIAM K. RETZER
/s/Ross D. Scott
- -------------------------- Director March 16, 1999
ROSS D. SCOTT
- 35 -
<PAGE>
/s/ Louis F. Tarke
- -------------------------- Director March 16, 1999
LOUIS F. TARKE
/s/ Michael C. Wheeler
- -------------------------- Director March 16, 1999
MICHAEL C. WHEELER
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<C> <S>
2.1 Plan of Reorganization and Merger Agreement dated January 30, 1995 by
and between Feather River State Bank, FRSB Merger Company and California
Independent Bancorp. Filed as Exhibit 2.1 to the Company's General Form
for Registration of Securities on Form 10 (File No. 0-26552).*
3.1 Articles of Incorporation of California Independent Bancorp. Filed as
Exhibit 3.1 to the Company's General Form for Registration of Securities
on Form 10 (File No. 0-26552).*
3.2 Bylaws of California Independent Bancorp. Filed as Exhibit 3.2 to the
Company's General Form for Registration of Securities on Form 10 (File
No. 0-26552).*
10.1 Salary Continuation Agreements dated April 28, 1993 with Robert J.
Mulder, Ronald W. Kelly and Annette Dier Bertolini. Filed as Exhibit
10.1 to the Company's General Form for Registration of Securities on
Form 10 (File No. 0-26552).*
10.2 Agreement for the purchase of 203 Main Street, Woodland, California, by
and between Feather River State Bank and Bank of America, NT & SA
successor to Security Pacific National Bank. Filed as Exhibit 10.2 to
the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.3 Consolidated Agreement dated April 30, 1993 with Unisys Corporation.
Filed as Exhibit 10.3 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
</TABLE>
- 36 -
<PAGE>
<TABLE>
<C> <S>
10.4 Agreements with Information Technologies, Inc. Filed as Exhibit 10.4 to
the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.5 Lease for 6545 Sunrise Boulevard, Suite 201, Citrus Heights, California.
Filed as Exhibit 10.5 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
10.6 Deferred Compensation Agreement dated July 19, 1994 with William H.
Gilbert. Filed as Exhibit 10.6 to the Company's General Form for
Registration of Securities on Form 10 (File No. 0-26552).*
10.7 Feather River State Bank Employee Ownership Plan. Filed as Exhibit 10.7
to the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.8 Bank Affiliate Agreement between Feather River State Bank and Lexington
Capital Management, Inc. Filed as Exhibit 10.8 to the Company's General
Form for Registration of Securities on Form 10 (File No. 0-26552).*
10.9 California Independent Bancorp 1989 Amended and Restated Stock Option
Plan including related Incentive and Non Statutory Stock Option
Agreements. Filed as Exhibit 4 to Amendment No. 1 to the Company's
Registration Statement on Form S-8/SEC Registration No. 333-09813 dated
November 26, 1996.*
10.10 California Independent Bancorp 1996 Stock Option Plan and related
Incentive Stock Option and Nonstatutory Stock Option Agreements. Filed
as Exhibit to Amendment No. 1 to the Company's Form S-8/SEC Registration
No. 333-09823 dated November 26, 1996.*
10.11 Purchase and Sale Agreement and Joint Escrow Instructions by and between
First Interstate Bank of California and Feather River State Bank for
700 "E" Street, Marysville. Filed as Exhibit 10.10 to the Company's
Form 10-K for December 31, 1995.*
10.12 Stock Purchase Agreement dated September 16, 1996 between Feather River
State Bank and Carolyn E. Roth and related Employment Agreement and
Noncompetition Agreement. Filed as Exhibit 2 to the Company's Form 8-K
dated October 1, 1996.*
</TABLE>
- 37 -
<PAGE>
<TABLE>
<C> <S>
10.13 Purchase and sale by and between Wells Fargo Bank, N.A. and Feather
River State Bank for 995 Tharp Road, Yuba City, California. Filed as
Exhibit 10.14 to the Company's Form 10-K for December 31, 1997.*
10.14 Executive Salary Continuation Agreement dated February 4, 1997 by and
between Feather River State Bank and Robert J. Mulder. Filed as Exhibit
10.16 to the Company's Form 10-K for December 31, 1996.*
10.15 Lease by and between Anderson and Associates and E.P.I. Leasing Co.,
Inc., for the premises at 6929 Sunrise Boulevard, Citrus Heights,
California. Filed as Exhibit 10.17 to the Company's Form 10-K for
December 31, 1996.*
10.16 Lease by and between Raj J. Sharma and Feather River State Bank for 114
D Street, Wheatland, California.
10.17 Lease by and between Diana Holmes, Trustee, and Feather River State Bank
for the Chico, California Loan Production Office located at 500 Main
Street, Chico, California.
13 California Independent Bancorp's 1998 Annual Report to Shareholders.
(Deemed filed only with respect to those sections which have been
incorporated into this Form 10-K by reference.)
21 Feather River State Bank, a California banking corporation, is the only
subsidiary of Registrant.
23 Consent of Arthur Andersen LLP for audited financial statements for the
year ended December 31, 1998.
27 Financial Data Schedule
</TABLE>
- ---------------
* Document incorporated herein by reference.
- 38 -
<PAGE>
LEASE
THIS LEASE AGREEMENT is made and entered into this 28 day of April, 1998 (the
"Effective Date"), by and between Raj Sharma and Narmata Sharma, husband and
wife, ("Landlord") and Feather River State Bank, a California corporation,
("Tenant").
I. DESCRIPTION OF PREMISES
Landlord, for and in consideration of the rent to be paid by Tenant and of the
covenants and provisions to be kept and performed by Tenant under this Lease,
hereby leases to Tenant, and Tenant agrees to lease from Landlord, the
following: The real property commonly known as 114 "D" Street, Wheatland,
California, also known as Yuba County Assessor's Parcel No. 015-282-017-000
("the Property"), together with the free standing building to be constructed
thereon by Landlord pursuant to the terms of this Lease ("the Building"). The
term "Premises" as used in and throughout this Lease shall mean both the
Property and the Building, and all rights and appurtenances to either.
II. TERM
(a) Original Term. This lease shall have a term (the "Original Term") of ten
(10) years from the Rent Commencement Date (as hereinafter defined).
(b) Extended Term. Provided that Tenant is not then in default under this Lease,
Tenant shall have the option and right to extend the original term of this Lease
for two periods of five (5) years each, commencing at midnight on the day on
which the Original Term of this Lease terminates (the "extended Term"). The
Extended Term provided for herein shall be renewed upon Tenant giving Landlord
written notice that it does elect to renew the term of this Lease at least 90
days prior to expiration of the original term of this Lease. During the Extended
Term of this Lease, if any, all of the obligations, covenants, and agreements of
this Lease shall bind Landlord and Tenant. Following expiration of Extended Term
if any, Landlord land Tenant agree to meet and confer regarding further
extensions of the Lease, which extensions would be at Landlord's option.
III. FIRST RIGHT OF REFUSAL
(a) Right of First Refusal to Purchase Leased Premises. If Landlord, during
the Original Term or any Extended Term, elects to sell all or any portion
of the Premises, Tenant shall have the right to first refusal to meet any
bona fide written offer of sale from a third party on the same terms and
conditions of that offer, including but not limited to the price and date
for close of escrow, provided Tenant is not then in default under this
lease. On receipt of a bona fide third party offer for purchase of the
premises, Landlord shall notify
1
<PAGE>
Tenant in writing of the offer and its terms and conditions. Tenant, within
30 days after the date of Landlord's notice to Tenant, shall notify
Landlord in writing whether or not Tenant agrees to purchase the Premises
on the same terms and conditions as contained in the third party offer. A
failure by Tenant to give Landlord any written notification within the
prescribed time period shall be deemed an election by Tenant not to
purchase the Premises. If Tenant elects not to purchase the Premises,
Landlord shall be free to sell the premises or portion thereof to that
third party in accordance with the terms and conditions of the third party
offer.
(b) Exclusions from Right. The right of first refusal granted to Tenant shall
exclude all of following transfers: any transfer resulting from the
Landlord's death; any transfer by Landlord to Landlord's spouse or any of
Landlord's children; any transfer by Landlord to any trust the
beneficiaries of which are Landlord and/or Landlord's immediate family and
any transfer by Landlord to any entity in which Landlord holds a 51 percent
or greater ownership interest. The right of first refusal granted to Tenant
also shall not apply in the event of foreclosure (or a deed in lieu of
foreclosure) or to a sale of the Premises by a lender who has foreclosed.
(c) Personal Right of Tenant. The right of first refusal granted to Tenant
under this lease is personal, and Tenant shall have no right to assign or
transfer the right of first refusal either separately from or together with
a transfer of Tenant's leasehold interest. Any purported assignment shall
be null and void.
(d) If the Premises are sold to any third party during the term of this lease,
then the provisions of this section shall thereafter be of no further force
or effect.
IV. CONSTRUCTION
(a) Landlord's Construction Obligation. Landlord shall construct on the
Property substantially in accordance with the Final Plans, as defined
below, a building, containing approximate total floor space of two thousand
three hundred thirty-one (2331) square feet and to be used by Tenant for
operation of its retail banking business. Landlord's obligation for
construction described herein shall be limited to construction of a
finished shell, including air and heating system, exclusive of all Tenant
improvements, fixtures, equipment, all as more particularly described in
the Final Plans.
(b) Final Plans. The parties acknowledge and agree that prior to execution of
this Lease, final plans, specifications and working drawings ("Final
Plans") have been prepared for the Property. Landlord and Tenant hereby
approve these Final Plans, which are attached hereto as Exhibit "A".
(c) Governmental Approval. Landlord has obtained all governmental approvals
necessary to commence construction of the building.
2
<PAGE>
(d) Construction Period. Within 30 days after the Effective Date, Landlord
shall enter into a construction contract with a licensed California general
contractor ("the Contractor") for construction of the Building in
accordance with the Final Plans. Landlord shall cause the Contractor to
commence construction of the Building not later than 45 days after the
Effective Date and to complete construction not later than 4 months from
the "Effective Date" ("the Construction Period"). The Construction Period
shall be extended by a number of days equal to the number of days during
which construction commencement or work or both are delayed by: (1) any
change requested by Tenant to the Final Plans; (2) any changes in
governmental ordinances and regulations applicable to the type of
construction, or (3) strike, boycott, shortage of material, act of God,
inclement weather preventing construction or other event whether of like or
different kind beyond the control of Landlord or Contractor. Landlord must
approve any changes in the Final plans requested by Tenant, and Tenant
therefor shall pay the cost. In the event construction of the Building is
not completed on or before 4 months from the "Effective Date" for any
reason except delays caused by (1), (2) or (3) above, the existing land
lease between the parties shall be extended at the reduced rate of Ten
Dollars ($10.00) per month. If Landlord fails to complete construction by
the end of the additional 3-month period, Tenant shall have the right to
terminate all obligations under this lease and the existing land lease.
(e) Tenant Inspection and Punchlist. Landlord shall notify Tenant in writing
when the construction of the Building and other improvements on the
Premises has been substantially completed, and Tenant shall, within 10 days
after the date of Landlord's notice, inspect the Building and other
improvements on the Premises. Also within said 10-day period, Tenant shall
prepare a "Punchlist" of work it deems to be uncompleted and/or defective
and deliver said list to Landlord. Landlord shall promptly repair or
complete all items listed, on the punchlist which, in the opinion of
Landlord or his designers, are necessary to render the Building and other
improvements on the Premises in substantial compliance with the Final
Plans. If Tenant fails to deliver a punchlist to Landlord within the
required 10-day period, Tenant shall be deemed to have accepted the
Building and other improvements on the Premises and approved the
construction of same.
(f) Building Completion. The building and other improvements on the Premises
shall be deemed fully completed by Landlord upon certification by
Landlord's architect that the Building and other improvements on the
Premises as herein contemplated have been completed in accordance with the
Final Plans, (the "Completion Date").
(g) Tenant Fixturing Period. A reasonable time prior to the date the Building
is expected to be substantially complete, Landlord shall so notify Tenant,
who shall then have the right to commence construction of tenant
improvements and installation of equipment and fixtures, provided such work
does not interfere with Landlord's construction. Such partial occupancy by
Tenant shall be subject to all of the terms and conditions of this Lease.
On taking physical possession of the Premises, Tenant, at Tenant's sole
cost, shall diligently proceed with its equipping and fixturing of the
Building in accordance with the Plans and Specifications for Tenant
Improvements attached hereto as Exhibit "B" and incorporated herein by this
reference.
3
<PAGE>
V. RENT AND SECURITY DEPOSIT
(a) Minimum Rent: Tenant covenants and agrees to pay to Landlord a minimum
guaranteed rent of $33,566.40 per year for the first year of this lease,
which rent shall be payable in equal monthly installments of $2,797.20 in
advance on the first day of each and every, calendar month during the first
year of this Lease, except as otherwise provided in subparagraph (c),
below.
(b) Annual Rent Increases. Annually, on the anniversary of the Rent
Commencement Date, the minimum rent shall be increased according to the
formula set forth below.
The minimum Rent shall be subject to annual adjustments each year on
the anniversary of the Rent Commencement Date (collectively the
"Adjustment Dates"). Increases in the Minimum Monthly Rent shall occur
annually on the Adjustment Dates, and shall be equal to the increase,
if any, of the Consumer Price Index, "CPI Increase" as described below
The base for computing the CPI Increase is the Consumer Price Index
for all Urban Consumers, San Francisco-Oakland City Average
(1982~84=100) (all terms), published by the United States Department
of Labor, Bureau of Labor Statistics, the "Index", for the month
immediately preceding the Commencement Date, the "Beginning Index".
If the Index published for the month immediately preceding each of
the Adjustment Dates (the "Extension Index") has increased over the
Beginning Index, the Minimum Rent for the period until the next
Adjustment Date shall be set by multiplying the Minimum Rent effective
for the twelve (12) month period immediately preceding the Adjustment
Date by a fraction, the numerator of which is the Extension Index and
the denominator of which is the Beginning Index.
If the Index is changed so that the base year differs from that used,
as of the Commencement Date, the index shall be converted in
accordance with the conversion factor published by the United States
Department of Labor, Bureau of Labor Statistics. If the Index is
discontinued or revised during the term of this Lease such other
government index or computation with which it is replaced shall be
used in order to obtain substantially the same result as would be
obtained if the Index had not been discontinued or revised.
(c) Commencement of Rent. The first rent payment shall be due and owing 30
days after the Completion Date (the "Rent Commencement Date"). Successive
monthly rent payments shall be due on the first day of each calendar month.
In the event that the Rent Commencement Date of this Lease falls on a day
other than the first day of a calendar month, the first rent payment shall
be prorated accordingly.
4
<PAGE>
VI. INSURANCE
(a) Fire and Extended Coverage. From and after the Completion Date for
construction and continuing throughout the term of this Lease and any
extension thereof, Tenant, shall procure, carry, and pay for wind, storm,
fire, and extended coverage insurance, insuring the Building and other
improvements on the Premises for the full cash value thereof, which
policies shall name Landlord as an additional insured and shall be issued
by responsible insurance companies authorized to do business in California.
(b) Each of such insurance policies shall be in form reasonably satisfactory to
Landlord and shall carry an endorsement that before changing or canceling
any policy the insurance company issuing the same shall give Landlord at
least 30 days' prior written notice. Duplicate originals or certificates
of all such insurance policies shall be delivered to Landlord.
(c) Public Liability and Property Damage Insurance. From and after the
Completion Date, for construction of the Building and other improvements on
the Premises and continuing throughout the Original Term and the Extended
Term, if any, of this Lease, Tenant shall protect, indemnify, and save
harmless Landlord from and against any and all liability to third parties
incurred by and act or neglect of Tenant, or any of its agents, servants,
or employees, in, on or about the demised premises, and shall at all times
at its own cost protect Tenant and Landlord with public liability insurance
and property damage insurance with a responsible insurance company or
companies authorized to do business in California in such form as may be
reasonably satisfactory to Landlord, with a combined single limit of not
less than One Million Dollars ($1,000,000.00). The property damage
insurance coverage required hereunder should not be less Five Hundred
Thousand Dollars ($500,000.00) in case of damage to property arising out of
one accident. Tenant shall within 10 days of the Completion Date for
construction of the Building and other improvements on the Premises,
deposit with Landlord a certificate showing this insurance to be then in
force and naming Landlord as an additional insured.
VII. TAXES AND ASSESSMENTS
(a) All real property taxes, municipal, county, and state, and improvement
liens or betterment assessment's levied or assessed against the Premises
shall be paid, prior to delinquency, by Landlord.
(b) Tenant shall, prior to delinquency, pay all taxes on its personal property
located in the Building or on the Premises.
VIII. UTILITIES
Tenant shall pay all costs for water, sewer, gas, and electric current, garbage
pickup and disposal,
5
<PAGE>
and other utilities used or consumed on the Premises as and when the charges for
the same become due and payable.
IX. USE
Tenant shall not use or permit the Premises or any part thereof, to be used for
any purpose other than a retail bank, without the written consent of Landlord,
which shall not be reasonably withheld. Tenant shall at all times during the
term of this lease operate its business in a reputable manner consistent with a
first- Class retail bank.
X. SIGNS
Tenant may erect, maintain, permit, and from time to time remove such signs in
or about the Premises, as Tenant may deem necessary or desirable provided that
any signs erected or maintained by Tenant shall comply with all requirements of
any governmental authority with jurisdiction.
XI. REPAIRS
(a) Landlord's Repairs. Landlord agrees, at its own cost and expense, to make
all structural repairs to the Building including but not limited to
foundation, walls, and roof. The Landlord is to be notified by Tenant of
necessary repairs, which will be commenced promptly by Landlord. In the
event that such work has not been commenced within thirty (30) days from
the date of such notice and completed within a reasonable time, thereafter,
given the nature and extent of the repair, Landlord agrees that such
repairs may be accomplished by Tenant, and Landlord will promptly reimburse
Tenant for same.
Landlord and its agents shall have the right to enter on the Premise after
reasonable notice to tenant (and at any time during an emergency) for the
purpose of inspecting the same or to make any repairs required to be made
by Landlord hereunder. Structural repairs as used in this Article XI menas
and is limited to repairs (other than replacement of worn out parts) to the
foundations, structural portions of exterior walls, concrete slabs, beams
and columns and walls bearing the main load of the roof and floors, but
excluding floor covering and any improvements, additions, or changes,
structural or otherwise, made by Tenant.
(b) Tenant's Repairs: Tenants agrees that it will, at its own cost and expense,
make all repairs of whatever kind and nature, foreseen and unforeseen, to
keep the Premises and the Building and other improvements on the Premises
in good condition, other than the repairs to be performed by Landlord
pursuant to the preceeding subparagraph (a). "Premises and the Building
and other improvements on the Premises" as sued in this subparagraph
includes heating and air conditioning unit, interior walls, floor coverings
and ceilings, painting and maintenance of exterior walls, the interior and
exterior portions of all doors, windows, and plate glass, paved driveways
and parking areas and landscaping. Landlord hereby assigns to Tenant all
warranties and guarantees of work and material made to Landlord by any
person
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performing work or furnishing materials for the construction of the
Building and other improvements on the Premises.
XII. ALTERATIONS
Tenant shall have the right to make any nonstructural alterations, additions,
or improvements to the interior of the Building that Tenant deems necessary or
desirable. All structural alterations, additions, or improvements, to the
Building shall require the prior written approval of Landlord, which approval
shall be granted or withheld in Landlord's sole discretion.
XIII. DESTRUCTION OF PREMISES
(a) Landlord's Obligation to Repair. Except as otherwise provided in
subparagraph (b), below, if at anytime during the Original term of this
Lease or any Extended Term, the Building on the premises is damaged or
destroyed by a cause for which insurance is carried on the Premises or
Building, Landlord shall promptly repair, rebuild, or restore the Building
to substantially the same condition as the Building was delivered to Tenant
when newly constructed (i.e., exclusive of tenant fixtures and equipment)
and shall be entitled for such purpose to all insurance proceeds. Except
for proceeds covering Tenant fixtures and equipment and reimbursement of
expenses for business interruption and relocation expense.
(b) Right to Terminate. Notwithstanding subparagraph (a), above, Landlord or
Tenant shall have the right to terminate this Lease and shall have no
obligation to repair, restore, or rebuild the Premises or the Building
under any of the following Circumstances:
(c) Damage or destruction from an insured casualty when the damage or
destruction cannot reasonably be repaired, restored, or rebuilt within a
period of 180 days;
(d) Damage or, destruction from an uninsured casualty when the cost of repair,
restoration, or rebuilding exceeds a total of One Hundred Thousand Dollars
($100,000.00);
(e) Damage or destruction from an insured or uninsured casualty occurring
during the last two years of the Original Term of this Lease if Tenant has
not, prior to occurrence of the casualty, elected to extend the Original
Term of the lease, or occurring during the last five years of the Extended
Term, if any, of this Lease;
(f) If Landlord or Tenant elects to terminate this Lease under any of the above
Circumstances, written notice shall be given to the other not later than 30
days after occurrence of the casualty.
XIV. DEFAULT
(a) Default Defined. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
(i) Any failure by Tenant to pay the rent or to make any other
payment required to
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be made by Tenant hereunder (when such failure continues
for 10 days after written notice thereof by Landlord to
Tenant).
(ii) The abandonment or vacation of the Premises by Tenant (the
absence of Tenant from or the failure by Tenant to conduct
business on the Premises for a period in excess of 14
consecutive days shall Constitute and abandonment or vacation
for purposes of this Lease).
(iii) A failure by Tenant to observe and perform any other
provision of this Lease to be observed or performed by
Tenant, when such failure continues for 30 days after written
notice thereof by Landlord to Tenant; provided, however, that
if the nature of such default is such that the same cannot
reasonably be cured within a 30-day period, Tenant shall not
be deemed to be in default if Tenant commences such cure
within the 30-day period and thereafter diligently prosecutes
the same to completion.
(iv) The making by Tenant of any general assignment for the
benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a petition
for reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within 60 days) the appointment
of a trustee or receiver to take possession of substantially
all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, when possession is not restored to
Tenant within 30 days; or the attachment, execution, or other
judicial seizure of substantially all of Tenant's assets
Indicated at the Premises or of Tenant's interest in this
Lease, when such seizure is not discharged within 30 days.
(b) Landlord's Right to Terminate. In the event of any such default by Tenant
then in addition to any other remedies available to. Landlord at law or in
equity, Landlord shall have the right, but no obligation, to terminate this
Lease and all rights of Tenant hereunder by giving written notice of such
intention to terminate. No act of Landlord shall be construed as
terminating this Lease except written notice given by Landlord to Tenant
advising Tenant that Landlord elect to terminate the lease. In the event
Landlord elects to terminate this Lease, then Landlord may recover from
Tenant:
(i) The worth at the time of award of any unpaid rent that had
been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination
until the amount of award exceeds the amount of such rental
loss Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
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(iv) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform
its obligations under this Lease, and
(v) At Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to
time by applicable California law.
The term "rent;" as used herein, shall mean the minimum annual rent
and all other sums required to be paid by Tenant pursuant to the terms
of this Lease.
As used in subparagraph (i) and (ii), above, the "worth at the time of award" is
computed by allowing interest at the rate of 10 percent per annum. As used in
subparagraph (vi), above the worth at the time of award is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus 1 percent.
(c) Landlord's Right to Relet. Landlord may elect, in the event of a default
by Tenant, to continue this Lease in full force and effect and to collect
rent as it becomes due under this Lease In such event, Landlord may enter
on and relet the Premises or any part thereof to a third party or third
parties for such time or terms and at such rental or rentals and on such
other terms and conditions as Landlord in its sole discretion may deem
advisable and shall have the right to make alterations and repairs to the
Premises Tenant shall be liable for all Landlords' costs in reletting,
including but not limited to remodeling costs required for the reletting.
In the event Landlord relets the premises, Tenant shall pay all rent due
under and at the times specified in this Lease, less any amount or amounts
actually received by Landlord from this reletting. After a default by
Tenant and continuing for so long as Landlord does not terminate this
Lease, Tenant shall have the right to assign or sublease the Premises with
the Landlord's consent, which shall not be unreasonably withheld. The
consent by Landlord to an assignment or sublease shall not release Tenant
from liability under this lease.
(d) Application of Rent from Reletting. In the event that Landlord elects to
relet all or a portion of the Premises following a default by Tenant, then
rent received by Landlord from the reletting shall be applied: first, to
the payment of any indebtedness other than rent due hereunder from Tenant
to Landlord; second, to the payment of any cost of the reletting; third, to
the payment of the cost of any alterations and repairs to the Premises;
fourth, to the payment of rent due and unpaid under this Lease. The
residue, if any, shall be held by Landlord and applied in payment of
future rent as the same may be come due and payable hereunder. Should
that portion of rent received from the reletting during any month, which
is applied to the payment of rent hereunder, be less than the rent
payable during that month by Tenant hereunder, lien Tenant shall pay
such deficiency to Landlord immediately on demand therefor by Landlord.
Such deficiency shall be calculated and paid monthly. Tenant shall also
pay to Landlord, as soon as ascertained, any costs and expenses incurred
by Landlord in such
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reletting or in making such alterations and repairs not covered by the rent
received from the reletting.
(e) Other Rights of Landlord. No act of Landlord, including but not limited to
Landlord's entry on the Premises, efforts to relet the Premises, or
maintenance of the Premises shall be construed as an election to terminate
this Lease unless a written notice of such intention is given to Tenant or
unless the termination thereof is decreed by a court of competent
jurisdiction.
XV. LANDLORD'S RIGHT TO CURE TENANT DEFAULTS
If Tenant breaches or fails to perform any of the covenants or provisions of
this Lease, Landlord may, but shall not be required to, cure Tenant's breach.
Tenant shall reimburse any sum expended by Landlord, with the then maximum legal
rate of interest to Landlord with the next due rent payment under this Lease.
XVI. SURRENDER OF POSSESSION
(a) Surrender of Possession. On the expiration or earlier termination of the
original or extended term of this Lease, Tenant shall surrender and yield
up peacefully and quietly to Landlord possession of the Premises in as good
condition as they were at the time of delivery of possession as herein
provided, reasonable wear and tear excepted;
(b) Trade Fixtures. On expiration or sooner termination of this Lease, Tenant
shall have the privilege and right at its own expense. To remove its
moveable furniture, machinery, equipment, signs, insignia and other indicia
of Tenant's tenancy or use. Any damage to the Building caused by such
removal shall be repaired at Tenant's expense. All attached fixtures and
improvements shall remain and become the property of Landlord.
XVII. SUBORDINATION
This Lease and the rights of Tenant hereunder shall be prior to any encumbrance
hereafter placed by Landlord on the Premises except, however, that if any lender
requires that this lease be subordinate to its encumbrance, this Lease shall be
subordinate to that encumbrance provided that any such encumbrance shall contain
the provision that neither the bolder thereof nor any purchaser at a foreclosure
sale shall deprive Tenant of the use and possession of the Premises, so long as
tenant shall fully comply with all the terms, covenants, and provisions of this
Lease. Tenant shall promptly execute any documents requested by a lender to
effect any subordination described herein and shall attorn to any purchaser at a
foreclosure sale or to any grantee named in a deed given in lieu of foreclosure.
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XVIII. CONDEMNATION
(a) Continuation of Lease on Partial Taking. Except as otherwise provided in
subparagraph (b), below, if any part of the Premises or the Building is
taken or condemned by right of eminent domain or sold under threat of
eminent domain for a public or quasi-public use, this Lease, as to the part
of the Premises so taken, shall terminate as of the date title vests in
the condemnor, but shall continue in full force and effect as to the part
of the Premises not taken.
(b) Termination for Partial or Total Taking. If Tenant's operations are or will
be substantially curtailed by a partial condemnation of the Premises (the
taking of any portion of the Building or of 30 percent or more of the
parking area that is not replaceable by Landlord from contiguous land shall
be deemed to render the use by Tenant of the premises unprofitable or
impractical so as to constitute substantial curtailment by partial
condemnation), Tenant shall have the right to cancel this Lease by giving
30 days' prior written notice to Landlord within 10 days after Tenant
receives notice of the taking that designates the precise area of the
Premises to be taken. If all of the Premises are taken or condemned, then
this Lease shall terminate as of the date title vests in the condemnor.
(c) Allocation of Award of Purchase Price Tenant shall have no claim to any
part of any award or purchase price for the taking, in whole or in part, of
the Premises, except for that portion of the price allocated to business
interruptions and relocation expenses.
XIX. ASSIGNMENT OR TRANSFER BY LANDLORD
Landlord may assign or transfer this Lease in Landlord's sole discretion.
Landlord covenants that any assignee or transferee shall assume and agree to be
bound by the terms of this Lease.
XX. ASSIGNMENT OR TRANSFER BY TENANT
Tenant shall not without Landlord's priors written consent (which consent shall
not be unreasonably withheld) assign, sublet, or transfer any or all of its
rights and privileges under this Lease, provided, however, that no such
assignment, subletting, or transfer shall operate to relieve Tenant of its
obligation for the performance of all of the terms and conditions of this Lease,
including the payment of the rent herein reserved.
XXI. NOTICES
All notices to Tenant shall be sent by registered or certified mail addressed to
the Tenant at its business offices or at such other address as the Tenant shall
designate in writing. All notices to the Landlord shall be sent by registered or
certified mail to the Landlord at any address as the Landlord shall designate in
writing. Notwithstanding any provisions in this Lease to the contrary concerning
modifications, a change in address may be effected by a registered or certified
letter sent by either party to the other. All payments to the Landlord under the
terms of
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this Lease shall be made at the address designated for notices to the Landlord
or, at Landlord's option, by electronic funds transfer to an account designated
by Landlord. If payments are made by electronic funds transfer, the transfer
shall occur on or as soon as possible after the first day of each month.
XXII. MODIFICATIONS
No modification, alteration, or amendment of this Lease shall be binding unless
in writing and executed by the parties hereto, their heirs, successors, or
assigns.
XXIII. ENTIRE AGREEMENT
Neither Landlord nor Tenant nor any of their agents have made any statement,
promises, or agreements verbally or in writing in conflict with the terms of
this Lease. Any and all presentations by either of the parties or their
agents made during negotiations prior to execution of this Lease and which
representations are not contained in the provisions hereof shall not be
binding on either of the parties hereto. Landlord and Tenant agree to
indemnify and hold each other harmless from any and all claims, costs, or
damages by any person or film claiming to have negotiated, instituted or
brought about this Lease. It is further agreed that this Lease contains the
entire agreement between the parties, and no rights are to be conferred on
Landlord or Tenant until this Lease has been executed by the Tenant.
XXIV. NUMBER AND GENDER
All terms and words used in this Lease, regardless of the number and gender in
which they are used, shall be deemed and construed to include any other number,
singular, or plural, and any other gender, masculine, feminine or neuter, as the
context or sense of this Lease or any paragraph or clause herein may require,
the same as if such words had been fully and properly written in the number and
gender.
XXV. COUNTERPARTS EXECUTION
This Lease may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed an original, but such counterpart
together shall constitute but one and the same instrument.
XXVI. NO JOINT VENTURE OR PARTNERSHIP
Landlord and Tenant are not and shall be considered neither joint venturers nor
partners and neither shall have the power to bind nor obligate the other except
as set forth herein.
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XXVII. HEADINGS
The Paragraph headings for this Lease are inserted only as a matter of
convenience and for reference, and in no way confine, limit, or describe the
scope or intent of any Paragraph of this Lease, nor in any way affect this
Lease.
XXVIII. SUCCESSORS AND ASSIGNS
The covenants and agreements herein contained shall be binding on, and shall
inure to, the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns.
XXIX. ATTORNEYS' FEES
If any party hereto brings any suit, actions, counterclaim or arbitration to
enforce the provisions of the Lease (including without limitation enforcement
of any award or judgment obtained with respect to this Lease, the prevailing
party shall be entitled to recover a reasonable allowance of attorney's fees
and litigation expenses in addition to court costs. "Prevailing party" within
the meaning of this Section includes without limitation a party who agrees to
dismiss an action or proceeding upon the other's payment of the sums
allegedly due or performance of the covenants allegedly breached, or who
obtains substantially the relief sought by it. The parties shall bear their
own costs, litigation expenses, and attorneys' fees in any other matter. Each
party has been represented by counsel in the negotiation and execution of
this Lease.
XXX. BINDING ARBITRATION
If a dispute arises from or relates to this contract or the breach thereof and
if the dispute cannot be settled through direct discussions, the parties agree
to endeavor first to settle the dispute in an amicable manner by mediation
administered by the American Arbitration Association under its Commercial
Mediation Rules before resorting to arbitration. Thereafter, any unresolved
controversy or claim arising from or relating to this contract or breach thereof
shall be settled by arbitration administered by the American Arbitration
Association in accordance with its Commercial Arbitration Rules, and judgment on
the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
XXXI. GOVERNING LAW
The rights and obligations of the parties shall be governed by, and this Lease
shall be construed and enforced in accordance with the laws of the State of
California, excluding its conflict of laws rules to the extent such rules would
apply the law of another jurisdiction.
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XXXII. JURISDICTION AND VENUE
The parties hereto consent to the jurisdiction of all federal and state courts
in California, and agree that venue shall lie exclusively in Yuba County,
California.
XXXIII. CONSTRUCTION OF AGREEMENT
The parties have negotiated the terms of this Lease hereto, and no provision of
this Lease shall be construed against either party as the drafter thereof.
LANDLORD: TENANT:
FEATHER RIVER STATE BANK, a
/s/ Raj Sharma California corporation
- -----------------------------------
Raj Sharma
/s/ Narmata Sharma By: /s/ Ronald W. Kelly
- ----------------------------------- -----------------------------------
Narmata Sharma Its: EXECUTIVE VICE PRESIDENT
-----------------------------
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NCR (No Carbon Required)
COMMERCIAL LEASE AND DEPOSIT RECEIPT
RECEIVED FROM Feather River State Bank, hereinafter referred to as LESSEE, the
sum of $3465.00 (Three Thousand Four Hundred Sixty Five & NO/100 dollars),
evidenced by a check, as a deposit which will belong to Lessor and will be
applied as follows:
<TABLE>
<CAPTION>
TOTAL RECEIVED BALANCE DUE PRIOR TO OCCUPANCY
<S> <C> <C> <C>
Rent for the period from 12-1-97 to 1-1-98. . . . . . . . . . . . $ 1732.50 $ 1732.50 $
--------- --------- ---------
Security deposit (NOT applicable toward last month's rent). . . . $ $ $
--------- --------- ---------
Other Last Month's Rent. . . . . . . . . . . . . . . . . . . . . $ 1732.50 $ 1732.50 $
--------- --------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3465.00 $ 3465.00 $
--------- --------- ---------
</TABLE>
In the event this Lease is not accepted by the Lessor within 14 days, the
total deposit received will be refunded.
Lessee offers to lease from Lessor the premises situated in the City of
CHICO, County of BUTTE, State of CALIF, described as W.50' of 500 MAIN ST,
consisting of approximately 1925 square feet, upon the following terms and
conditions:
1. TERM. The term will commence on Dec. 1, 1997, and end on Nov. 30, 2000.
2. RENT. The total rent will be $62,370.00, payable at $1732.50 per month
(based on first year's rates) payable on the 1St day of each month. All
rents will be paid to Lessor or his or her authorized agent, at the
following address DIANA HOLMES, TRUSTEE, PO BOX 325, OAKVILLE, CA 94562,
or at such other places as may be designated by Lessor from time to
time. In the event rent is not paid WITHIN 15 DAYS after due date,
Lessee agrees to pay A LATE CHARGE of $15.00 plus interest at 8% per
annum on the delinquent amount. Lessee further agrees to pay $15.00 for
each dishonored bank check. The late charge period is NOT a grace
period, and Lessor is entitled to make written demand for any rent if
not paid when due.
3. USE. The premisses are to be used for the operation of A MORTGAGE LOAN
BUSINESS, and for no other purpose, without prior written consent of
Lessor. Lessee will not commit any waste upon the premises, or any
nuisance or act which may disturb the quiet enjoyment of any tenant in
the building.
4. USES PROHIBITED. Lessee will not use any portion of the premises for
purposes other than those specified. No use will be made or permitted
to be made upon the premises, nor acts done, which will increase the
existing rate of insurance upon the property, or cause cancellation of
insurance policies covering the property. Lessee will not conduct or
permit any sale by auction on the premises.
5. ASSIGNMENT AND SUBLETTING. Lessee will not assign this Lease or sublet
any portion of the premises without prior written consent of the Lessor,
which will not be unreasonable withheld. Any such assignments or
subletting without consent will be void and, at the option of the
Lessor, will terminate this Lease.
6. ORDINANCES AND STATUTES. Lessee will comply with all statutes,
ordinances, and requirements of all municipal, state and federal
authorities now in force, or which may later be in force, regarding the
use of the premises. The commencement or pendency of any state or
federal court abatement proceeding affecting the use of the premises
will, at the option of the Lessor, be deemed a breach of this Lease.
7. MAINTENANCE, REPAIRS, ALTERATIONS. Unless otherwise indicated, Lessee
acknowledges that the premises are in good order and repair. Lessee
will, at his or her own expense, maintain the premises in a good and
safe condition, including plate glass, electrical wiring, plumbing and
heating and air conditioning installations, and any other system or
equipment. The premises will be surrendered, at termination of the
Lease, in as good condition as received, normal wear and tear excepted.
Lessee will be responsible for all repairs required, except the
following which will be maintained by Lessor: roof, exterior walls,
structural foundations (including any retrofitting required by
governmental authorities) and: NO OTHER Lessee / / will /X/ will not
maintain the property adjacent to the premises, such as sidewalks,
driveways, which would otherwise be maintained by Lessor.
No improvement or alteration of the premises will be made without the
prior written consent of the Lessor. Prior to the commencement of any
substantial repair, improvement, or alteration, Lessee will give Lessor
at least TWO (2) DAYS WRITTEN NOTICE in order that Lessor may post
appropriate notices to avoid any liability for liens.
8. ENTRY AND INSPECTION. Lessee will permit Lessor or Lessor's agents to
enter the premises at reasonable times and upon reasonable notice for
the purpose of inspecting the premises, and will permit Lessor, at any
time WITHIN SIXTY (60) DAYS prior to the expiration of this Lease, to
place upon the premises any usual "For Lease" signs, and permit persons
desiring to lease the premises to inspect the premises at reasonable
times.
9. INDEMNIFICATION OF LESSOR. Lessor will not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on
the premises. Lessee agrees to hold Lessor harmless from any claims for
damages arising out of Lessee's use of the premises, and to indemnify
Lessor for any expense incurred by Lessor in defending any such claims.
10. POSSESSION. If Lessor is unable to deliver possession of the premises
at the commencement date set forth above, Lessor will not be liable for
any damage caused by the delay, nor will this Lease be void or voidable,
but Lessee will not be liable for any rent until possession is
delivered. Lessee may terminate this Lease if possession is not
delivered WITHIN______DAYS of the commencement term in Item 1.
11. LESSEE'S INSURANCE. Lessee, at his or her expense, will maintain plate
glass, public liability, and property damage insurance insuring Lessee
and Lessor with minimum coverage as follows: 200,000.00/500,000.00
Lessee will provide Lessor with a Certificate of Insurance showing
Lessor as additional insured. THE POLICY WILL REQUIRE TEN (10) DAY'S
WRITTEN NOTICE TO LESSOR PRIOR TO CANCELLATION OR MATERIAL CHANGE OF
COVERAGE.
12. LESSOR'S INSURANCE. Lessor will maintain hazard insurance covering one
hundred percent (100%) actual cash value of the improvements throughout the
Lease term. Lessor's insurance will not insure Lessee's personal property,
leasehold improvements, or trade fixtures.
CAUTION: THE COPYRIGHT LAWS OF THE UNITED STATES FORBID THE UNAUTHORIZED
REPRODUCTION OF THIS FORM BY ANY MEANS INCLUDING SCANNING OR COMPUTERIZED
FORMATS.
Page 1 of 3 PROFESSIONAL
<PAGE>
NCR (No Carbon Required) Property Address 500 MAIN ST
13. SUBROGATION. To the maximum extent permitted by insurance policies which
may be owned by the parties, Lessor and Lessee waive any and all rights of
subrogation which might otherwise exist.
14. UTILITIES. Lessee agrees that he or she will be responsible for the
payment of all utilities, including water, gas, electricity, heat and other
services delivered to the premises, except: NONE.
15. SIGNS. Lessee will not place, maintain, nor permit any sign or awning on
any exterior door, wall, or window of the premises without the express
written consent of Lessor, which will not be unreasonably withheld, and of
appropriate governmental authorities.
16. ABANDONMENT OF PREMISES Lessee will not vacate or abandon the premises at
any time during the term of this Lease. If Lessee does abandon or vacate
the premises, or is dispossessed by process of law, or otherwise, any
personal property belonging to Lessee left on the premises will be deemed
to be abandoned, at the option of Lessor.
17. CONDEMNATION. If any part of the premises is condemned for public use, and
a part remains which is susceptible of occupation by Lessee, this Lease
will, as to the part taken, terminate as of the date the condemnor acquires
possession. Lessee will be required to pay such proportion of the rent for
the remaining term as the value of the premises remaining bears to the
total value of the premises at the date of condemnation; provided, however,
that either party may, at his or her option, terminate this Lease as of the
date the condemnor acquires possession. In the event that the premises are
condemned in whole, or the remainder is not susceptible for use by the
Lessee, this Lease will terminate upon the date which the condemnor
acquires possession. All sums which may be payable on account of any
condemnation will belong solely to the Lessor; except that Lessee will be
entitled to retain any amount awarded to him or her for his of her trade
fixtures and moving expenses.
18. TRADE FIXTURES. Any and all improvements made to the premises during the
term will belong to the Lessor, except trade fixtures of the Lessee.
Lessee may, upon termination, remove all his or her trade fixtures, but
will pay for all costs necessary to repair any damage to the premises
occasioned by the removal.
19. DESTRUCTION OF PREMISES. In the event of a partial destruction of the
premises during the term, from any cause except acts or omission of Lessee,
Lessor will promptly repair the premises, provided that such repairs can be
reasonably made WITHIN SIXTY (60) DAYS. Such partial destruction will not
terminate this Lease, except that Lessee will be entitled to a
proportionate reduction of rent while such repairs are being made, based
upon the extent to which the making of such repairs interferes with the
business of Lessee on the premises. If the repairs cannot be made WITHIN
SIXTY (60) DAYS, this Lease may be terminated at the option of either party
by giving written notice to the other party WITHIN THE SIXTY (60) DAY
PERIOD.
20. HAZARDOUS MATERIALS. Lessee will not use, store, or dispose of any
hazardous substances upon the premises, except the use and storage of such
substances that are customarily used in Lessee's business, and are in
compliance with all environmental laws. Hazardous substances means any
hazardous waste, substance or toxic materials regulated under any
environmental laws or regulations applicable to the property. Lessee will
be responsible for the cost of removal of any toxic contamination caused by
lessee's use of the premises.
21. INSOLVENCY. The appointment of a receiver, an assignment for the benefits
of creditors, or the filing of a petition in bankruptcy by or against
Lessee, will constitute a breach of this Lease by Lessee.
22. DEFAULT In the event of any breach of this Lease by Lessee, Lessor may, at
his or her option, terminate the Lease and recover from Lessee: (a) the
worth at the time of award of the unpaid rent which had been earned at the
time of termination; (b) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of the award exceeds the amount of such rental loss that the
Lessee proves could have been reasonably avoided; (c) the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (d) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform his or her obligations under the Lease or
which in the ordinary course of things would be likely to result therefrom.
Lessor may, in the alternative, continue this Lease in effect, as long
as Lessor does not terminate Lessee's right to possession, and Lessor may
enforce all of Lessor's rights and remedies under the Lease, including the
right to recover the rent as it becomes due under the Lease. If said
breach of Lease continues, Lessor may, at any time thereafter, elect to
terminate the Lease.
These provisions will not limit any other rights or remedies which
Lessor may have.
23. SECURITY. The security deposit will secure the performance of the Lessee's
obligations. Lessor may, but will not be obligated to, apply all or
portions of the deposit on account of Lessee's obligations. Any balance
remaining upon termination will be returned to Lessee. Lessee will not
have the right to apply the security deposit in payment of the last month's
rent.
24. DEPOSIT REFUNDS. The balance of all deposits will be refunded WITHIN THREE
(3) WEEKS (or as otherwise required by law), from date possession is
delivered to Lessor or his or her authorized agent, together with a
statement showing any charges made against the deposits by Lessor.
25. ATTORNEY FEES. In any action or proceeding involving a dispute between
Lessor and Lessee arising out of this Lease, the prevailing party will be
entitled to reasonable attorney fees.
26. WAIVER. No failure of Lessor to enforce any term of this Lease will be
deemed to be a waiver.
27. NOTICES. Any notice which either party may or is required to give, will be
given by mailing the notice, postage prepaid, to Lessee at the premises, or
to Lessor at the address shown in Item 2, or at such other places as may be
designated in writing by the parties from time to time. Notice will be
effective FIVE (5) DAYS AFTER MAILING, or on personal delivery, or when
receipt is acknowledged in writing.
28. HOLDING OVER. Any holding over after the expiration of this Lease, with
the consent of Owner, will be a month-to-month tenancy at a monthly rent of
$ TBA, payable in advance and otherwise subject to the terms of this Lease,
as applicable, until either party will terminate the tenancy by giving the
other party THIRTY (30) DAYS WRITTEN NOTICE.
29. TIME. Time is of the essence of this Lease.
30. HEIRS, ASSIGNS, SUCCESSORS. This Lease is binding upon and inures to the
benefit of the heirs, assigns, and successors of the parties.
31. TAX INCREASE. In the event there is any increase during any year of the
term of this Lease in real estate taxes over and above the amount of
such taxes assessed for the tax year during which the term of this Lease
commences, Lessee will pay to Lessor an amount equal to ___% of the
increase in taxes upon the land and building in which the leased premises
are situated. In the event that such taxes are assessed for a tax year
extending beyond the term of the Lease, the obligation of Lessee will be
prorated. Lessee will not be responsible for any tax increase occasioned
solely by a sale or transfer of the premises by Lessor.
CAUTION: THE COPYRIGHT LAWS OF THE UNITED STATES FORBID THE UNAUTHORIZED
REPRODUCTION OF THIS FORM BY ANY MEANS INCLUDING SCANNING OR COMPUTERIZED
FORMATS.
Page 2 of 3
<PAGE>
Property Address 500 MAIN ST.
32. COST OF LIVING INCREASE. The rent provided for in Item 2 will be adjusted
effective upon the first day of the month immediately following the
expiration of 12 months from date of commencement of the term, and upon the
expiration of each 12 months thereafter, in accordance with changes in the
U.S. Consumer Price Index for All Urban Consumers (1982-84=100) ("CPI").
The monthly rent will be increased to an amount equal to the monthly
rent set forth in Item 2, multiplied by a fraction the numerator of which
is the CPI for the second calendar month immediately preceding the
adjustment date, and the denominator of which is the CPI for the second
calendar month preceding the commencement of the Lease term; provided,
however, that the monthly rent will not be less than the amount set forth
in Item 2.
33. OPTION TO RENEW. Provided that Lessee is not in default in the performance
of this Lease will have the option to renew the Lease for an additional
term of 24 months commencing at the expiration of the initial Lease term.
All of the terms and conditions of the Lease will apply during the renewal
term, except that the monthly rent will be the sum of $TBA which will be
adjusted in accordance with the cost of living increase provision set forth
in Item 32.
The option will be exercised by written notice given to Lessor NOT
LESS THAN 30 DAYS prior to the expiration of the initial Lease term. If
notice is not given within the time specified, this Option will expire.
34. AMERICANS WITH DISABILITIES ACT. The parties are alerted to the existence
of the Americans With Disabilities Act, which may require costly structural
modifications. The parties are advised to consult with a professional
familiar with the requirements of the Act.
35. LESSOR'S LIABILITY. In the event of a transfer of Lessor's title or
interest to the property during the term of this Lease, Lessee agrees that
the grantee of such title or interest will be substituted as the Lessor
under this Lease, and the original Lessor will be released of all further
liability; provided, that all deposits will be transferred to the grantee.
36. ESTOPPEL CERTIFICATE.
(a) On TEN (10) DAYS' PRIOR WRITTEN NOTICE from Lessor, Lessee will
execute, acknowledge, and deliver to Lessor a statement in writing: [1]
certifying that this Lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification and certifying that
this Lease, as so modified, is in full force and effect), the amount of any
security deposit, and the date to which the rent and other charges are paid
in advance, if any; and [2] acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective buyer or encumbrancer of the premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time will be a material breach of this Lease or will be
conclusive upon Lessee:[1] that this Lease is in full force and effect,
without modification except as may be represented by Lessor; [2] that there
are no uncured defaults in Lessor's performance; and [3] that not more than
one month's rent has been paid in advance.
(c) If Lessor desires to finance, refinance, or sell the premises, or
any part thereof, Lessee agrees to deliver to any lender or buyer
designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or buyer. All financial statements will
be received by the Lessor or the lender or buyer in confidence and will be
used only for the purposes set forth.
37. ENTIRE AGREEMENT. The foregoing constitutes the entire agreement between
the parties and may be modified only in writing signed by all parties. The
following exhibits are a part of this Lease:
Exhibit A: SEE ATTACHED
-----------------------------------------------------------------
Exhibit B:
-----------------------------------------------------------------
Exhibit C:
-----------------------------------------------------------------
THE UNDERSIGNED LESSEE ACKNOWLEDGES THAT HE OR SHE HAS THOROUGHLY READ AND
APPROVED EACH OF THE PROVISIONS CONTAINED IN THIS OFFER, AND AGREES TO THE TERMS
AND CONDITIONS SPECIFIED.
Lessee___________ Date __________ Lessee____________ Date _________
Receipt for deposit acknowledged by _______________________ Date _________
ACCEPTANCE
THE UNDERSIGNED LESSOR ACCEPTS THE FOREGOING OFFER AND AGREES TO LEASE THE
PREMISES ON THE TERMS AND CONDITIONS SET FORTH ABOVE.
NOTICE: THE AMOUNT OR RATE OF REAL ESTATE COMMISSIONS IS NOT FIXED BY LAW. THEY
ARE SET BY EACH BROKER INDIVIDUALLY AND MAY BE NEGOTIABLE BETWEEN THE OWNER AND
BROKER.
The Lessor agrees to pay to ___________________________, the Broker in this
transaction, the sum of $__________ for services rendered and authorizes Broker
to deduct said sum from the deposit received from Lessee.
In the event the Lease is extended for a definite period of time or on a
month-to-month basis after expiration of the original term, Lessor will pay to
Broker an additional commission of ________% of the total rental for the
extended period. This commission will be due and payable at the commencement of
the extended period if for a fixed term, or if on a month-to-month basis, at
the termination of Lessee's occupancy or one year, whichever is earlier.
In any action for commission, the prevailing party will be entitled to
reasonable attorney fees.
Lessor___________ Date _________ Lessor____________ Date _________
Lessee acknowledges receipt of a copy of the accepted Lease on (date)________
[_______][______]
Initials
---------------
Rev. by______
Date_________
---------------
CAUTION: THE COPYRIGHT LAWS OF THE UNITED STATES FORBID THE UNAUTHORIZED
REPRODUCTION OF THIS FORM BY ANY MEANS INCLUDING SCANNING OR COMPUTERIZED
FORMATS.
Page 3 of 3
<PAGE>
FINANCIAL HIGHLIGHTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARY
AS OF YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
FOR THE YEAR 1998 1997 1996 1995 1994
- ------------ ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest income $24,826,536 $23,392,573 $20,574,833 $19,002,834 $15,120,346
Interest expense 8,830,774 9,288,694 7,448,898 6,316,594 4,502,067
---------- ----------- ---------- ----------- -----------
Net interest income 15,995,762 14,103,879 13,125,935 12,686,240 10,618,279
Provision for loan losses 2,246,145 6,153,000 385,000 875,000 347,000
---------- ----------- ---------- ----------- -----------
Net interest income after
provision for loan losses 13,749,617 7,950,879 12,740,935 11,811,240 10,271,279
Noninterest income 5,601,176 5,057,284 3,136,423 2,226,967 1,878,349
Noninterest expense (14,756,017) (13,582,493) (10,269,529) (8,936,485) (8,189,991)
---------- ----------- ---------- ----------- -----------
Income before provision
for income taxes 4,594,776 (574,330) 5,607,829 5,101,722 3,959,637
Provision for income taxes 1,714,300 (412,900) 2,206,778 2,036,000 1,540,000
---------- ----------- ---------- ----------- -----------
Net income 2,880,476 $ (161,430) $ 3,401,051 $ 3,065,722 $ 2,419,637
---------- ----------- ---------- ----------- -----------
---------- ----------- ---------- ----------- -----------
Per Common Share Data
Basic earnings per share $ 1.72 $ (0.10) $ 2.09 $ 1.83 $ 1.38
Cash dividends $ 0.42 $ 0.40 $ 0.38 $ 0.37 $ 0.32
Book value $ 14.09 $ 12.90 $ 13.45 $ 11.03 $ 9.11
Dividend payout ratio 25.58% n/a 19.05% 21.70% 23.80%
Weighted Average Common
Shares Outstanding 1,679,436 1,656,111 1,626,550 1,710,948 1,668,318
Financial Ratios
Return on average assets 1.00% (0.06)% 1.51% 1.56% 1.33%
Return on average common
shareholders' equity 12.51% (0.71)% 16.71% 17.54% 15.92%
Net interest margin 5.39% 4.91% 5.64% 5.45% 4.96%
Net charge-offs to
average loans, net 0.91% 2.76% 0.16% 0.19% 0.12%
Allowance for loan loss
as a percent of net loans 3.32% 3.29% 2.68% 3.05% 2.57%
Efficiency ratio 68.32% 70.89% 63.05% 59.92% 65.54%
</TABLE>
[GRAPH]
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
CALIFORNIA INDEPENDENT BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1998
Certain statements in the following Management Discussion and Analysis of
Financial Condition and Results of Operations (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; the loss of key personnel; changes in the
regulatory environment; changes in business conditions; volatility of rate
sensitive deposits; operational risks including data processing system failures
or fraud; asset/liability matching risks and liquidity risks; and changes in the
securities markets.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
Bank's financial condition, operating results, asset and liability management,
liquidity and capital resources and should be read in conjunction with the
Consolidated Financial Statements of the Company and its accompanying Notes.
SUMMARY OF FINANCIAL RESULTS
California Independent Bancorp (the "Company") through its wholly owned
subsidiary, Feather River State Bank (the "Bank") engages in a broad range of
financial service activities. The Bank commenced operations in 1977. The Company
was formed in 1994 and, after receiving regulatory and shareholder approval,
became the holding company for the Bank in May 1995. In October 1996, the Bank
acquired E.P.I. Leasing Co., Inc. ("EPI") and operates it as a subsidiary.
In 1998, the Company regained its consistent profitability and recognized
earnings of $2,880,476, a substantial increase of $3,041,906 over 1997. In 1997,
the Company suffered a net loss of $161,430, representing a decrease in earnings
of $3,562,841 or 104.7% from 1996 earnings of $3,401,051. The decrease, after
fourteen consecutive annual increases, was the result of a provision for loan
and lease losses of $6,153,000, which was required to recognize the increased
risk exposure in a small number of sizeable loans in the Bank's portfolio.
The increase in the Company's net interest income after allocations for loan
losses from 1996 to 1998 (excluding the significant 1997 provision for loan and
lease losses) reflects an increase in the volume of interest-earning assets. The
yield on interest-earning assets was 9.61%, 9.59% and 10.22% in 1998, 1997 and
1996, respectively. Interest-earning assets consist of overnight Federal Funds
Sold, Investment Securities and Loans and Leases. These assets averaged
$258,392,000, $243,808,000 and $201,233,000 in 1998, 1997 and 1996,
respectively. The majority of these interest-earning assets, loans and leases,
averaged $190,419,000, $174,094,000 and $148,294,000 in 1998, 1997 and 1996,
respectively, representing increases of 9.4% in 1998 over 1997 and 17.4% in 1997
over 1996.
Earnings per share in 1998 were $1.72, an increase over the 1997 per share loss
of ($0.10). Both years were less than 1996, which stood at $2.09 per share. The
decreases over 1996 were primarily due to the need to provide for additional
loan and lease losses.
The Company paid cash dividends of $.42 per share in 1998, $.40 per share in
1997 and $.38 in 1996, and 5% stock dividends in 1998, 1997 and 1996. Earnings
per share have been adjusted retroactively to reflect the stock dividends.
Average interest-bearing liabilities, consisting of interest paid on
interest-bearing deposits and other borrowed money, increased to $209,492,000 in
1998, from $198,616,000 in 1997, and $162,582,000 in 1996. The average rate paid
on these interest-bearing liabilities was 4.22%, 4.68% and 4.58%, respectively.
The primary component of interest-earning liabilities is interest-bearing
deposits which stood at $201,569,000, $197,995,000 and $161,724,000 in 1998,
1997 and 1996, respectively, representing limited growth of 1.8% in 1998 over
1997 and a substantial increase of 22.4% in 1997 over 1996.
The Company recognized a substantial increase in other borrowed money in 1998
over 1997 and 1996. The average balance of other borrowed funds was $7,923,000,
$621,000 and $858,000, in 1998, 1997 and 1996, respectively. The increase in
1998 was due to the Banks need to borrow funds
9
<PAGE>
on its seasonal credit line with the Federal Reserve Bank, in order to fund the
increased loan demand during its peak lending periods in the second and third
quarters of the year.
Average noninterest-bearing demand accounts, consisting primarily of business
checking accounts, have increased to $52,364,000 in 1998, from $49,283,000 in
1997 and $40,128,000 in 1996. The increase in deposits from 1996 to 1998
reflects the opening of the new office of the Bank in Wheatland, California,
during 1997. Additionally, the increases were attributed to the marketing
efforts of the Bank and the acquisition of deposits resulting from large
financial institution branch consolidations and closings in the Company's market
area.
Management believes that the Company has adequate liquidity to meet its needs,
such as funding the undisbursed portion of borrower's lines of credit,
withdrawals by depositors, managing interest and market rate risk in the event
of significant changes in interest rates, and meeting its cash needs. Federal
Funds Sold is the means by which the Company invests its excess cash overnight
with other banks.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - AVERAGE BALANCE SHEETS
1998 1997
---------------------------------------- --------------------------------------------
AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT BALANCE RATE AMOUNT
---------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning-Assets
Short-Term Investments:
Federal Funds Sold $ 10,196,017 5.26% $ 536,411 $ 29,191,325 5.39% $ 1,573,312
- ----------------------------------------------------------------------------------------------------------------------------
Total 10,196,017 5.26% 536,411 29,191,325 5.39% 1,573,312
- ----------------------------------------------------------------------------------------------------------------------------
Investment Securities:
Taxable 51,637,291 6.23% 3,219,517 35,319,174 6.55% 2,313,612
Non-Taxable 6,139,576 4.74% 291,112 5,202,958 5.28% 274,620
- ----------------------------------------------------------------------------------------------------------------------------
Total 57,776,867 6.08% 3,510,629 40,522,132 6.39% 2,588,232
- ----------------------------------------------------------------------------------------------------------------------------
Loans: 190,418,971 10.91% 20,779,496 174,094,049 11.04% 19,231,028
- ----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 258,391,855 9.61% 24,826,536 243,807,506 9.59% 23,392,572
Allowance for
Possible Loan Losses (5,622,159) (4,137,285)
Non-Earning Assets
Cash and due from banks 16,838,189 16,352,541
Premises and Equipment 8,028,423 7,944,483
Other 10,394,031 9,641,086
------------ ------------
Total Non-Earning Assets 35,260,643 33,938,110
------------ ------------
Total Assets $288,030,339 $273,608,331
------------ ------------
------------ ------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $107,440,206 3.00% $ 3,225,520 $104,673,000 3.73% $ 3,904,112
Time Certificates 94,129,266 5.50% 5,176,284 93,321,953 5.74% 5,360,741
Other 7,922,863 5.41% 428,970 621,054 3.84% 23,841
- ----------------------------------------------------------------------------------------------------------------------------
Total 209,492,335 4.22% 8,830,774 198,616,007 4.68% 9,288,694
- ----------------------------------------------------------------------------------------------------------------------------
Non Interest-Bearing Deposits
and Other Liabilities:
Demand,
Non Interest-Bearing 52,364,097 49,283,416
Other Liabilities 3,139,968 3,017,102
Shareholders' Equity 23,033,939 22,691,806
------------ ------------
Total 78,538,004 74,992,324
------------ ------------
Total Liabilities and
Shareholder's Equity $288,030,339 $273,608,331
------------ ------------
------------ ------------
Net Interest Income $15,995,762 $14,103,878
----------- -----------
Net Interest Margin 5.39% 4.91%
----- -----
<CAPTION>
1996
----------------------------------------
AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT
----------------------------------------
<S> <C> <C> <C>
ASSETS
Earning-Assets
Short-Term Investments:
Federal Funds Sold $ 27,962,872 5.30% $1,482,801
- ---------------------------------------------------------------------------
Total 27,962,872 5.30% 1,482,801
- ---------------------------------------------------------------------------
Investment Securities:
Taxable 20,654,011 7.70% 1,591,086
Non-Taxable 4,322,277 6.36% 274,808
- ---------------------------------------------------------------------------
Total 24,976,288 7.47% 1,865,894
- ---------------------------------------------------------------------------
Loans: 148,293,868 11.62% 17,226,138
- ---------------------------------------------------------------------------
Total Earning Assets 201,233,028 10.22% 20,574,833
Allowance for
Possible Loan Losses (3,952,228)
Non-Earning Assets
Cash and due from banks 13,751,241
Premises and Equipment 6,769,581
Other 7,140,684
------------
Total Non-Earning Assets 27,661,506
------------
Total Assets $224,942,306
------------
------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $ 92,765,254 3.80% $ 3,524,331
Time Certificates 68,959,042 5.64% 3,891,406
Other 858,176 3.86% 33,161
- ---------------------------------------------------------------------------
Total 162,582,472 4.58% 7,448,898
- ---------------------------------------------------------------------------
Non Interest-Bearing Deposits
and Other Liabilities:
Demand,
Non Interest-Bearing 40,127,679
Other Liabilities 1,881,981
Shareholders' Equity 20,350,174
------------
Total 62,359,834
------------
Total Liabilities and
Shareholder's Equity $224,942,306
------------
------------
Net Interest Income $13,125,935
-----------
Net Interest Margin 5.64%
-----
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
NET INTEREST INCOME
Net interest income, the difference between interest earned on loans and
investments and the interest paid on deposits and other sources of funds, is the
principal component of the Company's earnings. The preceding table shows the
composition of average earning assets and average interest-bearing liabilities,
average yields and rates and the Company's net interest margin.
Interest income increased to $24,827,000 in 1998, from $23,393,000 or 6.13% in
1997 and was $20,575,000 in 1996, representing an increase of 13.7% in 1997 over
1996. The average interest rate earned on loans was 10.91% in 1998, compared to
11.05% in 1997 and 11.62% in 1996.
The Company's loan portfolio consists mainly of loans that reprice immediately
with changes in the bank reference rate, therefore, closely following interest
rate trends. The increase in interest income in 1998 is a result of the increase
in the volume of interest-earning assets.
Average Federal Funds Sold were $10,196,000 in 1998, $29,191,000 in 1997 and
$27,963,000 in 1996, representing a decrease of 65.07% in 1998 over 1997 and an
increase of 4.39% in 1997 over 1996. The decrease in 1998 was primarily due to
the Company's shifting of funds into longer term, higher yielding investments.
Total interest expense decreased to $8,831,000 or 4.93% in 1998 from $9,289,000
in 1997. Total interest expense increased 24.7% in 1997 from $7,449,000 in 1996.
The decrease in interest expense in 1998 over 1997 was due to a decline in the
rates paid on deposits, thereby, decreasing the Company's cost of funds. The
rise in 1997 over 1996 was due to an increase of 22.2% in interest-bearing
liabilities.
CHANGES IN VOLUME/RATE
Changes in the rates earned and paid and the volume of interest-earning assets
and interest-bearing liabilities affect the Company's net yield on
interest-earning assets. The impact of changes in volume and rate on net
interest income in 1998 and 1997 is shown in the following table. Changes
attributable to both volume and rate have been allocated to rate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES IN VOLUME/RATE
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------------- ---------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $(1,024) $ (13) $(1,037) $ 65 $ 25 $ 90
Investment Securities:
Taxable 1,069 (163) 906 1,129 (406) 723
Nontaxable 49 (33) 16 56 (56) -
Loans 1,810 (341) 1,469 2,998 (993) 2,005
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,905 $ (551) $ 1,354 $4,248 $(1,430) $2,818
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Demand, Savings and
Money Market 103 (781) (678) 453 (73) 380
Time Certificates 46 (231) (185) 1,374 96 1,470
Other 280 125 405 (9) 0 (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 430 $(888) $ (458) $1,818 $ 23 $1,841
- -----------------------------------------------------------------------------------------------------------------------------------
Increase(Decrease) in Net Interest Income $ 1,475 $ 337 $ 1,812 $2,430 $(1,453) $ 977
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS
Outstanding total loans averaged $190,419,000 in 1998, as compared to
$174,094,000 in 1997 and $148,294,000 in 1996. This represents increases of
$16,325,000 or 9.4% in 1998, $25,800,000 or 17.4% in 1997 and $16,401,000 or
12.4% in 1996. The Company continues to emphasize its agricultural, real estate,
commercial and lease financing activities.
The increase in average total loans during 1998 primarily reflects increases in
real estate lending activities. Both construction and mortgage lending increased
substantially during the year. The Company has increased its lending activities
in these markets due to the favorable economic conditions in the real estate
market.
11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO
DECEMBER 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial and Agricultural $ 81,112,377 $ 79,384,520 $ 71,527,482 $ 74,355,093 $ 69,143,245
Real Estate-Construction 37,382,839 23,927,538 29,916,204 18,048,005 12,647,669
Real Estate-Mortgage 36,538,047 28,032,552 28,564,640 28,288,337 33,450,751
Consumer 2,443,283 1,956,254 2,983,939 2,814,717 3,111,243
Lease Financing 23,313,399 33,465,023 15,892,783 3,216,140 6,501,110
Other 392,570 1,021,665 2,214,574 1,522,174 3,109,201
- ----------------------------------------------------------------------------------------------------------
Total $181,182,515 $167,787,552 $151,099,622 $128,244,466 $127,963,219
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company lends to consumers, small to medium sized businesses and small to
medium sized farmers within its market area, which is comprised principally of
Sutter, Yuba, Colusa and Yolo counties and, secondarily, Butte, Glenn,
Sacramento, Placer, Madera and Fresno Counties.
A significant portion of the Company's loan portfolio consists of loans secured
by residential, commercial and agricultural real estate.
Real estate mortgage and construction loans, including loans secured by
agricultural real estate, equaled $73,921,000 or 41% and $51,960,000 or 31% of
the total loan portfolio at December 31, 1998 and 1997, respectively. These
loans are secured by real estate, and advances are limited to a range of
appraised value depending on the type of loan.
The Company makes agricultural production loans and other agricultural loans
that are secured by growing crops and crop proceeds. These loans generally are
at their peak in the third quarter of each year. The Company had $50,505,000 or
27.9% and $30,132,000 or 18.0% of its loan portfolio in agricultural production
loans outstanding at December 31, 1998 and 1997, respectively. Approximately 3%
of these loans are guaranteed by the Farm Service Agency, which is an agency of
the U.S. Department of Agriculture.
The Company originates mortgage loans on residential and agricultural
properties, most of which it sells into the secondary market to divest itself of
the interest rate risk associated with these mostly fixed-interest rate
products. The Company accounts for these loans in accordance with Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers of Financial
Assets and Extinguishment of Liabilities."
As of December 31, 1998, 1997, and 1996, total loans serviced by the Company
were $146,026,000, $151,619,000 and $107,637,000. Total loans sold by the
Company were $65,795,000 in 1998, $66,953,000 in 1997, and $45,614,000 in 1996.
The decrease in loans sold during 1998 is a function of modestly lower
production in farm mortgage lending and the Company's strategy to retain some
real estate secured loans in its loan portfolio. The Company moderately expanded
its mortgage origination departments during 1998 to keep pace with loan demand.
QUALITY OF LOANS
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with the type of loan extended and
the creditworthiness of the borrower. To reflect the estimated risks of loss
associated with its loan portfolio, provisions are made to the Company's
allowance for loan losses. As an integral part of this process, the allowance
for loan losses is subject to review and possible adjustment as a result of
Management's assessment of risk or through regulatory examinations conducted by
governmental agencies.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company uses the allowance method in providing for loan losses. Loan losses
are charged to the Allowance for Loan and Lease Losses ("Allowance") and
recoveries are credited to the Allowance. The Allowance at December 31, 1998 was
$6,024,000 or 3.3% of total loans outstanding as compared to $5,514,000 or 3.3%
of total loans outstanding at December 31, 1997. Management, after a thorough
analysis and a third party loan review, believes that the Allowance at December
31, 1998, was adequate to provide for losses that can be reasonably anticipated.
Additions to the Allowance are made by provisions for loan and lease losses. The
provision is charged as an operating expense and is based upon past loan loss
experience and estimates of potential losses that, in Management's judgment,
deserve current recognition. Management determines the appropriate size of the
Allowance based upon specific allocations for classified and impaired loans and
a general allocation for other loans based upon the loss experience during the
past twelve rolling months for each particular type of loan. Other factors
considered by Management include growth, composition and overall quality of the
loan portfolio, and current economic conditions that may affect the borrower's
ability to pay. Actual losses may vary from current estimates. The estimates are
reviewed periodically, and adjustments, as necessary, are charged to operations
in the period in which they became known.
12
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
ACTIVITY IN ALLOWANCE FOR LOAN AND LEASE LOSSES
1998 1997 1996 1995 1994
-------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans and leases outstanding $181,183 $167,788 $151,100 $128,244 $127,963
Average loans and leases 190,419 174,094 148,294 131,893 118,956
Balance, January 1 5,514 4,053 3,911 3,288 3,087
Charge-off by loan category
Commercial and other 2,095 4,311 323 413 29
Consumer 49 73 - 46 43
Real Estate 189 335 4 96 125
- ------------------------------------------------------------------------------------------------------
Total 2,333 4,719 327 555 197
- ------------------------------------------------------------------------------------------------------
Recoveries by loan category
Commercial and other 499 19 53 249 48
Consumer 98 3 31 44 3
Real Estate - 5 - 10 -
- ------------------------------------------------------------------------------------------------------
Total 597 27 84 303 51
- ------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 1,736 4,692 243 252 146
Provision charged to expense 2,246 6,153 385 875 347
- ------------------------------------------------------------------------------------------------------
Balance, December 31 $ 6,024 $ 5,514 $ 4,053 $ 3,911 $ 3,288
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Ratios:
Net charge-offs (recoveries)
to average loans 0.91% 2.76% 0.16% 0.19% 0.12%
Allowance to loans at
end of Year 3.32% 3.29% 2.68% 3.05% 2.57%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The Company had loan charge-offs of $2,333,000 in 1998, $4,719,000 in 1997 and
$327,000 in 1996 and net loan charge-offs (which include recoveries) of
$1,736,000, $4,692,000, $243,000 in 1998, 1997 and 1996, respectively. These net
charge-offs are equal to 0.91%, 2.76% and 0.16% of average loans for 1998, 1997
and 1996.
Loan losses sustained during 1998 are divided among five loan categories.
Commercial loan losses totaled $699,000 or 30% of total loan losses,
agricultural loan losses totaled $775,000 or 33%, lease losses totaled $621,000
or 27%, consumer loan losses totaled $49,000 or 2% and real estate loan losses
totaled $189,000 or 8%.
Five sizeable charged off loans accounted for 64% of the total loan losses
($1,500,000) and one of these five credits accounted for 33% of total loan
losses ($770,000) during 1998. The large agricultural loan loss was a livestock
loan. The producer experienced severe financial difficulty due to adverse market
trends and production problems. The other four loans in this grouping were all
commercial credits. Each of these businesses sustained cash flow difficulties
largely due to adverse economic conditions.
During 1998, the Company's loan collection team also focused on the recovery of
previously charged-off loans. The Company successfully recovered $597,000 or 26%
of total 1998 charge-offs.
During 1997, loan losses were centered in five credit relationships and a group
of twenty-two leases. This grouping of credits comprised 93% of total loan and
lease losses. Of the five loans, two were agricultural loans (total charge-off
of $2,218,260), two were commercial loans (total charge-off of $1,406,253) and
one was a real estate development loan (total charge-off of $343,424). The
aggregate lease losses totaled $401,921.
The charged-off loans in 1996 included two row crop loans consisting of a
charge-off of $203,000 of a loan with an original balance of $1,500,000, a
charge-off of $42,000 from an original balance of $450,000, and a letter of
credit of $35,000, which the Company was obligated to pay when its customer
defaulted on an obligation.
13
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE
1998 1997 1996 1995 1994
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
---------------- ---------------- ---------------- ---------------- ---------------
$ % $ % $ % $ % $ %
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE APPLICABLE TO:
Commercial and Agricultural $3,644 60.49% $3,423 62.07% $1,918 47.34% $2,267 57.98% $1,776 54.02%
Real Estate-Construction 925 15.36% 897 16.28% 802 19.80% 550 14.07% 325 9.88%
Real Estate-Mortgage 610 10.13% 392 7.11% 766 18.90% 863 22.06% 860 26.16%
Consumer 32 0.53% 31 0.56% 80 1.97% 86 2.19% 80 2.43%
Leases 706 11.72% 656 11.89% 364 8.97% - - - -
Other 107 1.78% 115 2.09% 123 3.02% 145 3.70% 247 7.51%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $6,024 100.00% $5,514 100.00% $4,053 100.00% $3,911 100.00% $3,288 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS:
Loans Accounted for on
a Nonaccrual Basis $5,644 $7,585 $ 846 $ 293 $1,110
Other Loans Contractually
Past Due 90 Days or More 854 328 2,202 60 50
------ ------ ------ ------- ------
Total $6,498 $7,913 $3,048 $ 353 $1,160
------ ------ ------ ------- ------
------ ------ ------ ------- ------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The allocation of the Allowance as of the end of the last five fiscal years is
summarized in the table above. Any allocation or breakdown in the Allowance
lends an appearance of exactness that does not exist. Thus, the allocation above
should not be interpreted as an indication of expected amounts or categories
where charge-offs will occur.
Management believes the total Allowance is adequate. While Management uses
available information to provide for loan loss reserve allocations, future
additions to the allowance may be necessary based upon changes in economic
conditions and other variables.
NONPERFORMING LOANS
The trend in nonperforming loans has improved over the past year as
nonperforming assets decreased from $7,913,000 or 4.4% of the portfolio on
December 31, 1997 to $6,498,000 or 3.9% of the portfolio on December 31, 1998.
The Company has reduced nonperforming assets by $2,068,000 or 27% in the past
year. This achievement is attributable to the successful execution of a
classified asset reduction plan and enhanced quality control in the management
of the loan portfolio. Furthermore, this improvement was achieved despite the
years poor agricultural results for the Company's agricultural customers due to
crop production and quality suffered from the El Nino weather patterns, and the
Asian economic crisis causing lower commodity prices.
Loans are generally placed on nonaccrual status when they are 90 days past due
as to either interest or principal. At that time, any accrued but uncollected
interest is reversed, and additional income is recorded on a cash basis as
payments are received. However, loans that are in the process of renewal in the
normal course of business, or are well-secured and in the process of collection,
may not be placed on nonaccrual status, at the discretion of Management. A
nonaccrual loan may be restored to an accrual basis when interest and principal
payments are current and the prospects for future payments are no longer in
doubt.
At December 31, 1998, nonaccrual loans amounted to $5,644,000 or 3.1% of total
loans compared to $7,585,000 or 4.5% of total loans at December 31, 1997 and
$846,000 or 0.56% of total loans at December 31, 1996. A 26% decrease in
nonaccrual loans was achieved during 1998. Again, the decrease is attributable
to a successful classified asset reduction plan and enhanced quality control
procedures.
The Company's nonaccrual assets as of December 31, 1998 included twelve loan
relationships and thirteen leases. However, 70% of these nonaccrual loans were
concentrated in two credit relationships. The largest nonaccrual loan complex is
an agricultural loan. Nonaccrual loans to this borrower comprised 46% of the
Company's total nonaccrual loans as of December 31, 1998. The Company completed
a loan restructuring with this debtor that created a plan for orderly debt
repayment over a period of years. The debtor made a substantial payment to the
Company during 1998. Provided the debtor performs under this restructuring, the
loan may qualify for transfer out of nonaccrual status as early as 1999.
Twenty-three percent of the Company's nonaccrual loans were extended to a real
estate developer. The restructuring plan with this debtor has failed and the
Company is now in the foreclosure process. The Company expects to acquire this
real property during 1999 and liquidate the collateral. Both of these large
nonaccrual loans have been partially charged down to a level below the value of
the loan collateral.
The Company's nonaccrual assets at December 31, 1997 included twelve loan
relationships and ten leases. Ninety-two percent of these nonaccrual loans were
concentrated in five credit relationships. The largest nonaccrual loan complex
was an agricultural loan and the second largest was a loan to a real estate
developer. These two loans remain on the Company's
14
<PAGE>
books and are discussed above. Nineteen percent of the Company's December 31,
1997 nonaccrual loans existed in a loan to a livestock producer. This loan was
not on the Company's books at December 31, 1998. The remaining balance of the
December 31, 1997, nonaccrual loans are distributed among a number of smaller
loans and leases. These loans are either in the process of collection or in the
process of being restructured.
At December 31, 1996, the nonaccrual loans included three loans totaling
approximately $542,000 related to a residential real estate development where it
was necessary for the developer to change the type of housing to be constructed.
Additionally, land values in the area decreased due to over-building and a
general decline in sales activity. The Company successfully negotiated a loan
restructure with this borrower during 1997. Other nonaccrual loans included two
business loans with government guarantees, a commercial loan which was
ultimately restructured with additional collateral and a crop loan that was 90%
guaranteed by the Farm Service Agency.
Loans on accrual status that were past due 90 days or more as to principal and
interest increased on December 31, 1998 to $854,000 compared to $328,000 on
December 31, 1997 and $2,202,000 on December 31, 1996. The increase in 1998 was
due to one large loan which was in the process of being modified. This
modification closed in January 1999 and the loan became current. The past due
loan totals as of December 31, 1996, were high due to some special circumstances
surrounding certain loans at that time.
INVESTMENTS
In 1998, the Company's investment portfolio was $60,639,000 or 20.5% of total
assets, an increase from $57,198,000 or 19.5% of total assets in 1997, and
$34,664,000 or 13.2% of total assets in 1996. At December 31, 1998, 1997 and
1996, Federal Funds Sold were $12,100,000, $35,600,000 and $41,300,000,
respectively. Federal Funds Sold are overnight deposits with other banks. In
1998 and 1997, the increase in investment securities was due in part to the
transfer of funds from overnight Federal Funds to longer term investments that
yield a higher rate of return. In addition, the increase in the investment
portfolio was due to deposits growing at a faster pace than loans.
Under Statement of Financial Accounting Standard No. 115 (SFAS 115), investments
of a bank in debt and equity securities must be classified in three different
categories: "Trading," "available-for-sale" and "held-to-maturity," and there
are different accounting methods for each category. The Company has classified
all of its investment securities as either "available-for-sale" or
"held-to-maturity."
SFAS 115 requires that any unrealized gain or loss of the "available-for-sale"
category be reported as an adjustment to the Company's equity capital, even
though this gain or loss would only be realized if the investment were actually
sold. If the investment is in the "held-to-maturity" category, no unrealized
gains or losses need be reported.
The following table summarizes the distribution of the Company's investment
securities as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government agencies $51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
$51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $ 301,007 $ 2,181 $ - $ 303,188
Obligations of states and political subdivisions 4,062,556 41,186 (900) 4,102,842
Corporate obligations and other securities 4,742,466 59,380 (5,096) 4,796,750
- ------------------------------------------------------------------------------------------------------------------------
$ 9,106,029 $102,747 $ (5,996) $ 9,202,780
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government agencies $38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
$38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $10,751,994 $ 49,638 $ (1,050) $10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 - 7,012,911
Corporate obligations and other securities 1,424,875 6,765 - 1,431,640
- ------------------------------------------------------------------------------------------------------------------------
$19,156,186 $ 89,997 $ (1,050) $19,245,133
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
As of December 31, 1998, the Company's "available-for-sale" category adjustment
reflected a net unrealized gain of $33,930 net of taxes, and the approximate
market value of the Company's total investment portfolio was $60,736,000,
reflecting an unrealized gain of $158,441.
As of December 31, 1997, the Company's "available-for-sale" category adjustment
reflected a net unrealized loss of $1,202 net of taxes, and the approximate
market value of the Company's total investment portfolio was $57,287,000,
reflecting an unrealized gain of $86,760.
The Company had investment securities pledged as collateral for certain
deposits, typically deposits of government entities and for the Bank's seasonal
borrowing line of $18,766,000, $11,652,000 and $10,375,000, at December 31,
1998, 1997 and 1996, respectively.
DEPOSITS
Total deposits at December 31, 1998, 1997 and 1996 were $268,808,000,
$266,931,000 and $237,892,000. These figures represent an increase of $1,877,000
or 0.7% during 1998 and $29,039,000 or 12.2% during 1997. Average total deposits
were $253,934,000 in 1998, $247,278,000 in 1997 and $201,852,000 in 1996. The
increase in deposits reflect both normal growth and the acquisition of deposits
resulting from branch consolidations and closings in the Company's market area
by large financial institutions coupled with the Company's aggressive marketing
efforts. In addition, 1997 reflects deposits gained from a newly opened branch.
Average time certificates of deposit increased to $94,129,000 in 1998, from
$93,322,000 in 1997, and $68,959,000 in 1996, representing a slight increase of
0.9% in 1998. The larger increase in 1997 primarily reflects the acquisition of
new deposits, and depositors shifting funds from other interest-bearing accounts
at the Company to higher yielding time certificates. The Company has been able
to attract and retain deposits by providing interest rates on deposits
competitive with other financial institutions in its market area.
The remaining maturities of the Company's certificates of deposit in amounts of
$100,000 or more, including public time deposits, as of December 31, 1998 and
1997, are indicated in the table below. Interest expense on these certificates
of deposit totaled $2,124,000 in 1998 and $2,187,000 in 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MATURITY OF CERTIFICATES OF DEPOSITS $100,000 OR MORE
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three month or less $15,604 $14,692
Over three months
through twelve months 14,473 20,714
Over one year
through three years 8,131 3,558
Over three years 4,332 1,798
- -------------------------------------------------------------------------------
Total $42,540 $40,762
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
Noninterest income for 1998 was $5,601,000, an increase of 10.8% over 1997,
which stood at $5,057,000 and $3,136,000 in 1996. The table below sets forth the
components of noninterest income for the years indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NONINTEREST INCOME (DOLLARS IN THOUSANDS)
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Service charges on deposit accounts $ 918 $1,009 $ 917
Service charges & fees on loans 507 572 487
Brokered loan fees 1,252 1,029 557
Lease commissions 2,025 1,671 271
Other 899 776 904
Total $5,601 $5,057 $3,136
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Service charges and fees on deposit accounts, one of the primary components in
noninterest income, decreased in 1998 to $918,000 or 9.0% over the 1997 amount
of $1,009,000. This decrease was primarily the result of the Banks decision to
tighten its overdraft policy, thereby foregoing a portion of the income earned
on returned checks. Loan servicing fees in 1998 were $507,000, $572,000 in 1997
and $487,000 in 1996. Brokered loan fees, another primary source of noninterest
income, were $1,252,000 in 1998, an increase of 21.8% over 1997 which stood at
$1,029,000, an increase of 84.7% over 1996 brokered loan fee income of $557,000.
These increases were the result of increased business volume in residential and
agricultural mortgage loans.
Lease commissions increased to $2,025,000 or 21.2% in 1998 and $1,671,000 or
517% over 1996 commissions of $271,000. These increases were due to a higher
volume of leases by the Bank's subsidiary, EPI. The Bank purchased EPI in
October 1996, therefore, commission income was reported for three months in 1996
compared to twelve months of income in 1997 and 1998.
16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
1998 1997 1996
------------------------- ---------------------------- -----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF AVERAGE OF AVERAGE OF AVERAGE
AMOUNT EARNING ASSETS AMOUNT EARNING ASSETS AMOUNT EARNING ASSETS
---------- --------------- -------- --------------- --------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 8,484 3.28% $ 7,768 3.19% $ 5,513 2.74%
Occupancy 821 0.32% 735 0.30% 572 0.28%
Equipment 1,442 0.56% 1,293 0.53% 998 0.50%
Advertising and promotion 302 0.12% 370 0.15% 342 0.17%
Telephone expense 349 0.14% 395 0.16% 236 0.12%
Directors fees 216 0.08% 219 0.09% 391 0.19%
Attorney fees 799 0.31% 345 0.14% 209 0.10%
Other 2,343 0.91% 2,457 1.01% 2,008 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Total $14,756 5.71% $13,582 5.57% $10,269 5.10%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense increased in 1998 to $14,756,000 or 8.6% over 1997,
$13,582,000 or 32.3% in 1997 over 1996 noninterest expense of $10,269,000.
Salaries and employee benefits were $8,484,000 in 1998, $7,768,000 in 1997 and
$5,513,000 in 1996 representing increases of 9.2% and 40.9% in 1998 and 1997,
respectively. During 1998, continued centralization of services created
additional personnel efficiencies, thereby reducing the growth in staffing
expense. The substantial savings that came with these personnel efficiencies was
offset partially by the need for the Bank to expand its Loan Administration
staff in order to recognize the increased loan volume and to implement the
restructuring of the department.
The increase in 1997's noninterest expense reflects salary and benefit expense
for a full twelve months for EPI, which was acquired by the Bank in October
1996. This increase in 1997 over 1996 amounted to approximately $1,100,000. In
addition, the Bank recognized an increase in salaries due to commissions paid to
its real estate sales staff. The Bank recognized a substantial volume increase
in real estate mortgage refinancing, which in turn increased income to the Bank
and commissions paid to generate that increased volume. The Bank also
restructured its salaries to a level competitive with other banks in its
operating areas.
Another component of noninterest expense is attorney fees. These fees increased
in 1998 to $799,000 or 131.6% over the 1997 expense of $345,000 which increased
over 1996 by 65.1% from $209,000. The increase in attorney fees during 1998 is
attributed to the escalated legal expenses associated with the collection and
resolution of nonperforming loans.
INCOME TAXES
The provision (benefit) for income taxes was $1,714,000 in 1998, ($413,000) in
1997 and $2,207,000 in 1996. The Company's effective tax rate was 37.3%,
(71.9%), and 39.4% for 1998, 1997 and 1996, respectively.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities reprice than assets in a given period, a
liability sensitive position is created. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets reprice
more quickly than liabilities in a given period (an asset sensitive position), a
decline in market rates will have an adverse effect on net interest income.
The Company is subject to considerable competitive pressure in generating
deposits and loans at rates and terms prevailing in the Company's market areas.
However, Management's objective is to maintain the stability of the net interest
margin in times of fluctuating interest rates by maintaining an appropriate mix
of interest rate sensitive assets and liabilities. Management does not manage
its interest rate sensitivity to maximize income based on its prediction of
interest rates, but rather to minimize interest rate risk to the Company by
stabilizing the Company's net interest margin in all interest rate environments.
The risks associated with commercial banking consist primarily of interest rate
risk and credit risk. The Bank attempts to manage its interest rate risk by
making variable rate loans and by interest rate gap analysis. Credit risk
relates to the ability of borrowers to repay the principal and interest on their
loan in a timely manner. This risk is managed by adherence to credit standards
and the taking of collateral to secure most of the Bank's loans.
The majority of the Bank's loan portfolio consists of loans with variable
interest rates. The following table illustrates the composition of the Bank's
loan portfolio as of December 31,1998, as it pertains to interest-rate
sensitivity.
17
<PAGE>
This table shows that a total of $127,926,000 of the Bank's loans are
repriceable within one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL LOAN VARIABLE RATE FIXED RATE LOANS
PORTFOLIO LOANS UNDER 1 YEAR OVER 1 YEAR
------------- -------------- ---------------- -------------
<S> <C> <C> <C>
$181,183,000 $102,524,000 $25,402,000 $53,257,000
- -------------------------------------------------------------------------------
</TABLE>
On a monthly basis, the Bank calculates its interest-rate gap position whereby
interest-rate sensitive assets are compared with interest-rate sensitive
liabilities for specific periods to determine if the Bank is susceptible to
significant earnings changes as a result of changes in interest rates. If the
gap percentage is positive, the Bank's interest earnings would increase during a
period of increasing interest rates and the Bank's interest earnings would
decrease during a period of declining interest rates. The reverse would be true
if the Bank has a negative gap. The Bank puts more emphasis on its gap position
for periods up to one year, as it is felt that a longer horizon gives the Bank
more time and flexibility to reposition its assets and liabilities to counteract
any potential earnings decrease.
It is the Bank's policy to limit the one-year, one percent shock Net Interest
Margin change to 5% of total annual projected Net Interest Margin.
Additionally, Management has developed a matrix that, on a monthly basis,
calculates changes to the projected one-year Net Interest Margin in both an
increasing rate environment and a decreasing rate environment. A 200 basis point
(2%) shock rate is used for this calculation. The matrix calculates a one-year
Interest Rate Risk taking into consideration the delays in the timing of
repricing based on actual experience.
The one-year Interest Rate Risk ratios at December 31,1998, for a 200 basis
point increasing and decreasing rate environment were 13.8% and 25.4%,
respectively. This means that if interest rates go up the Net Interest Margin of
the Bank will increase; if interest rates go down it will decrease.
The following table presents the interest rate sensitivity of the Company as of
December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 1998
REPRICING OPPORTUNITY
OVER THREE
THREE MONTHS
MONTHS THROUGH 1 YEAR- OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal Funds Sold $ 12,100 $ - $ - $ - $ 12,100
Loans 113,050 14,876 10,161 43,096 181,183
Taxable Investments 6,936 2,372 2,370 44,898 56,576
Non-taxable Investments 1,050 350 1,658 1,005 4,063
- ---------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 138,353 $ 17,754 $ 14,429 $83,386 $253,922
- ---------------------------------------------------------------------------------------------------------------
Interest Bearing Demand 51,851 - - - 51,851
Savings and Money Market Deposits 54,125 - - - 54,125
Time Certificates 39,690 39,002 11,311 6,821 96,824
- ---------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 145,666 39,002 11,311 6,821 202,800
- ---------------------------------------------------------------------------------------------------------------
Gap $ (7,313) $(21,248) $ 3,118 $76,565 $ 51,122
- ---------------------------------------------------------------------------------------------------------------
Cumulative Gap (7,313) (28,561) (25,443) 51,122
--------- -------- -------- -------
--------- -------- -------- -------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY
To maintain adequate liquidity requires that sufficient resources be available
at all times to meet cash flow requirements of the Company. The need for
liquidity in a banking institution arises principally to provide for deposit
withdrawals, credit needs of its customers and to take advantage of investment
opportunities. A company may achieve desired liquidity from both assets and
liabilities. The Company considers cash and deposits held in other banks,
federal funds sold, other short term investments, maturing loans and
investments, receipts of principal and interest on loans available for sale
investments and potential loan sales as sources of asset liquidity. Deposit
growth and access to credit lines established with correspondent banks and
market sources of funds are considered by the Company as sources of liability
liquidity.
Historically, during the first two quarters of each year the Bank generally has
experienced excess liquidity. The Bank's seasonal agricultural loan demand tends
to challenge the Bank's liquidity position, beginning in the second quarter and
continuing into the third quarter of each year. The Bank's liquid assets consist
of cash and due from banks, federal funds sold and investment securities with
maturities of one year or less. The Company's liquid assets totaled $53,712,000
and $65,025,000 at December 31, 1998 and 1997, respectively. Liquid assets as a
percentage of total assets were 18.2% and 22.3%, respectively
18
<PAGE>
as of those dates. Liquidity is also affected by collateral requirements of its
public deposits and certain borrowings.
The Bank has formal and informal borrowing arrangements with the Federal Reserve
Bank to meet unforeseen deposit outflows or seasonal loan funding demands. The
Bank has also entered into an agreement with Lehman Brothers for a standby
short-term loan secured by U.S. Government and Agency Obligations in the Bank's
investment portfolio, in order to fund any liquidity needs not met by other
sources of funding as warranted by loan demand. As of December 31, 1998 and
December 31, 1997, the Bank had no outstanding balances on these lines. At
December 31, 1998, Management believes that the Company maintains adequate
amounts of liquid assets to meet its liquidity needs.
CAPITAL RESOURCES
The Company and the Bank are subject to requirements of the Federal Reserve
Board and FDIC, respectively, governing capital adequacy. These guidelines are
intended to reflect the degree of risk associated with both on and off balance
sheet items. Financial institutions are expected to comply with a minimum ratio
of qualifying total capital to risk-weighted assets of 8%, at least half of
which must be in Tier 1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4%,
which is intended to supplement the risk-based capital requirements and to
ensure that all financial institutions continue to maintain a minimum level of
core capital.
Total shareholders' equity on December 31, 1998, increased by $2,285,000 to
$23,655,000 over December 31, 1997, total shareholders' equity of $21,370,000.
As can be seen by the following table, the Company and Bank exceeded all
regulatory capital ratios on December 31, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1998
COMPANY BANK
AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 Capital $ 23,416 9.12% $ 23,260 9.06%
Tier 1 Capital minimum requirement 10,270 4.00% 10,264 4.00%
- -----------------------------------------------------------------------------------------
Excess $ 13,146 5.12% $ 12,996 5.06%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Capital 26,660 10.38% 26,502 10.33%
Total Capital minimum requirement 20,540 8.00% 20,528 8.00%
- -----------------------------------------------------------------------------------------
Excess $ 6,120 2.38% $ 5,974 2.33%
- -----------------------------------------------------------------------------------------
Risk-adjusted assets $256,754 $256,604
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Leverage Capital Ratio
Tier 1 Capital to quarterly $ 23,416 8.20% $ 23,260 8.14%
average total assets
Minimum leverage requirement 11,427 4.00% 11,419 4.00%
- -----------------------------------------------------------------------------------------
Excess $ 11,989 4.20% $ 11,841 4.14%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Quarterly average assets $285,678 $285,463
-------- --------
-------- --------
- -----------------------------------------------------------------------------------------
</TABLE>
INFLATION
It is Management's opinion that the effects of inflation on the Company's
financial statements for the years ended December 31, 1998, 1997 and 1996 are
not material.
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment and are
subject to supervision and examination by various federal and state regulatory
agencies. The Company, as a bank holding company, is subject to regulation and
supervision by primarily the Federal Reserve. The Bank, as a
California-chartered commercial bank, is subject to supervision and regulation
by primarily the Federal Deposit Insurance Corporation ("FDIC") and the
California State Department of Financial Institutions ("DFI"). Federal and
California state laws and regulations govern numerous matters involving both
entities, including maintenance of adequate capital and financial condition,
permissible types, amounts and terms of extensions of credit and investments,
permissible non-banking activities, the level of reserves against deposits,
19
<PAGE>
and restrictions on dividend payments. The federal and state regulatory agencies
possess extensive discretion and powers to prevent or remedy unsafe or unsound
practices or violations of law by banks and bank holding companies. The Company
and the Bank also undergo periodic examinations by one or more of these
regulatory agencies, which may subject them to changes in asset valuations, in
amounts of required loss allowances and in operating restrictions resulting from
the regulators' judgments based on information available to them at the time of
their examination. The Bank's operations are also subject to a wide variety of
state and federal consumer protection and similar statutes and regulations.
Those and other restrictions limit the manner in which the Company and the Bank
may conduct business and obtain financing. The laws and regulations to which the
Company and the Bank are subject can and do change significantly from time to
time, and such changes could materially affect the Company's business, financial
condition and operating results.
As a result of the Company's and Bank's disappointing 1997 financial performance
and concerns disclosed during the Bank's December 31, 1997 joint regulatory
examination, the Bank's board of directors passed a resolution to remedy the
concerns which include: maintaining and, if necessary, retaining qualified
management; maintaining the Bank's Tier 1 Leverage Capital in such an amount as
to equal or exceed seven percent (7%) of the Bank's FDIC Part 325 total assets
(as of December 31, 1998, the Bank's Tier 1 Leverage Capital ratio stood at
8.20%); continuing with the diligent implementation of a previously adopted plan
to reduce the level of non-performing and problem loans, and revision of lending
and collection policies and procedures; continuing with the diligent
implementation of a revised operating budget and cost control plan in order to
restore the Bank's prior level of profitability; ensuring that the Bank
maintains an adequate Allowance for loan and lease losses; and, requiring the
Bank to seek prior approval of the FDIC and DFI before the payment of any cash
dividends.
Additionally, the FDIC and Federal Reserve Board ("FRB") have notified the Bank
and Company that they have determined that the condition of the Bank and Company
are such that prior approval of the regulatory agencies is necessary before
adding or replacing any member of the boards of directors, employing any person
as a senior executive officer, or changing the responsibilities of any senior
executive officer so that the individual would be assuming a different senior
executive officer position. Finally, due to the Bank's condition, the FDIC is
also restricting the Company's and the Bank's ability to enter into any
contracts to pay or make any golden parachute and indemnification payments to
institution affiliated parties.
SEGMENT REPORTING
SFAS No. 131 establishes standards for public business enterprises' reporting of
information about operating segments in annual financial statements. The
Statement requires the enterprises to report selected information concerning
operating segments in interim financial reports issued to shareholders.
Additionally, the Statement establishes requirements for related disclosures
about products, services, geographic areas and major customers.
SFAS No. 131 requires public business enterprises to report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
The Statement further requires reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company has adopted SFAS No. 131 which did not have a
significant effect since the Company believes that it operates in one segment -
the commercial banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of computers
systems, software, and other equipment utilizing microprocessors to distinguish
the year 1900 from the year 2000. The Year 2000 issue poses significant risks
for all businesses, households, and governments and could result in system
failures and miscalculations causing disruptions in normal business and
governmental operations if action is not taken to fix the problem before the
year 2000 arrives.
The impact of Year 2000 issues on the Company will depend not only on corrective
actions taken by the Company but may also be impacted by the way in which Year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company.
COMPANY'S COMPLIANCE EFFORTS
The Company is currently engaged in a four-phase management program that
includes assessment, renovation, validation and implementation. To ensure Year
2000 compliance, the Company has identified all major applications and systems
that may require modification. The Company's program includes all computer
systems, including PC and network hardware and software, and mainframe and
mainframe software. The program also covers all equipment and other systems
utilized in the Company and Bank's operations or on the premises from which the
Company and Bank operates. The Company is on schedule to meet all internal
deadlines set in the plan.
20
<PAGE>
In addition, the Bank is in the process of communicating with its large
borrowers, customers and major vendors to determine the Bank's and/or the
Company's vulnerability to those third parties should they fail to resolve their
Year 2000 issues. The responses are being evaluated; however, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on time, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a materially adverse effect on the Company.
COMPLIANCE EXPENSES
The Company's program calls for the utilization of internal and external
resources to implement its Year 2000 project. The Company has completed the
assessment phase of its plan and believes that there is adequate time remaining
to assess and correct any significant issues that may materialize. The purchase
of any necessary hardware and software will be capitalized in accordance with
normal policy. Personnel and all other costs related to the project are being
expensed as incurred. To date, the Company has expended approximately $302,000
on its Year 2000 compliance efforts. Management estimates an additional
expenditure of $136,000 will be required to complete its program. The majority
of these costs are expected to be incurred during 1999 and are not expected to
have a material impact on the Company's cash flows, results of operations, or
financial condition.
RISKS OF NONCOMPLIANCE
The failure to address all Year 2000 issues could result in substantial
interruptions to the Company's normal business activities. These interruptions
could in turn affect its financial condition as well as the business activities
of its customers. Through the efforts involved in its Year 2000 project, no
major interruptions are expected. However, due to the uncertainty involved in
the Year 2000 problem, all of the effects of the century date change to the
organization cannot be absolutely determined. Although at this time it is not
possible to determine the extent of the adverse financial effects, with any
specificity, the Company is preparing contingency plans if disruptions occur.
Given the Year 2000 project progress to date and with successful implementation
of the remaining phases of the project, Management believes that the Company is
well positioned to significantly reduce potential negative effects that may
exist.
CONTINGENCY PLAN
A contingency plan is in the process of being developed in order to structure a
methodology that would allow the Company to continue operations in the event the
Company, its key suppliers, customers or third party service providers prove not
to be year 2000 compliant, and such noncompliance is expected to have a material
adverse impact on the Company's operations. The Company's contingency plan
mitigates risk by: (1) identifying and assuring that alternative key suppliers
and computer backup computers will be available; (2) providing additional loan
reserves in the event of customer loan repayment problems attributed to Year
2000 issues; and (3) providing plans and procedures to assure that the Bank has
sufficient liquidity and currency available to allow customers access to their
funds even in the event of power or computer systems failure.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
The dates on which the Company believes the Year 2000 Project will be completed
and implemented are based on Management's best estimates, which were derived
utilizing numerous assumptions of future events. Such assumptions include, but
are not limited to, the continued availability of certain financial resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with the implementation of the Year 2000
Project. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and
cost-effectively resolve problems associated with the Year 2000 issue that may
affect its operations and business, or expose it to third-party liability.
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of California Independent Bancorp:
We have audited the accompanying consolidated balance sheets of CALIFORNIA
INDEPENDENT BANCORP (a California corporation) AND SUBSIDIARIES as of December
31, 1998 and 1997, 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, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of California Independent Bancorp
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Anderson, LLP
Sacramento, California
February 12, 1999
22
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
1998 1997
------------ --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,900,727 $ 18,425,047
Federal funds sold 12,100,000 35,600,000
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents 43,000,727 54,025,047
Investment securities held-to-maturity 9,106,029 19,156,186
Investment securities available-for-sale 51,533,305 38,041,857
- ------------------------------------------------------------------------------------------------
Total investments 60,639,334 57,198,043
Loans and leases 150,919,757 131,673,564
Loans and leases held-for-sale 30,262,758 36,113,988
Less - allowance for loan and lease losses (6,024,111) (5,514,299)
- ------------------------------------------------------------------------------------------------
Net loans 175,158,404 162,273,253
Premises and equipment, net 7,848,799 8,177,800
Interest receivable 2,854,674 2,670,933
Other real estate owned 101,014 917,535
Other assets 5,709,653 6,266,985
- ------------------------------------------------------------------------------------------------
Total assets $295,312,605 $291,529,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 66,008,029 $ 62,224,350
Interest-bearing 202,800,415 204,706,508
- ------------------------------------------------------------------------------------------------
Total deposits 268,808,444 266,930,858
Interest payable 1,622,659 1,814,197
Other liabilities 1,226,331 1,414,227
- ------------------------------------------------------------------------------------------------
Total liabilities 271,657,434 270,159,282
COMMITMENTS
Shareholders' equity:
Common stock, no par value-
Authorized -- 20,000,000 shares
Issued and outstanding -- 1,744,580 shares in 1998 and
1,733,688 shares in 1997 15,561,767 13,587,419
Retained earnings 8,099,474 7,864,097
Debt guarantee of ESOP (40,000) (80,000)
Accumulated other comprehensive income 33,930 (1,202)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 23,655,171 21,370,314
- ------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $295,312,605 $291,529,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
23
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $20,779,496 $19,231,028 $17,226,138
Interest on investments-
Taxable interest income 3,219,517 2,313,613 1,591,086
Nontaxable interest income 291,112 274,620 274,808
Interest on federal funds sold 536,411 1,573,312 1,482,801
- ----------------------------------------------------------------------------------------------------
Total interest income 24,826,536 23,392,573 20,574,833
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 8,401,804 9,264,853 7,415,738
Interest on other borrowings 428,970 23,841 33,160
- ----------------------------------------------------------------------------------------------------
Total interest expense 8,830,774 9,288,694 7,448,898
- ----------------------------------------------------------------------------------------------------
Net interest income 15,995,762 14,103,879 13,125,935
PROVISION FOR LOAN AND LEASE LOSSES 2,246,145 6,153,000 385,000
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan
and lease losses 13,749,617 7,950,879 12,740,935
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 918,118 1,008,691 917,466
Lease commissions 2,025,400 1,670,636 271,070
Brokered loan fees 1,252,066 1,028,550 557,007
Other 1,405,592 1,349,407 1,390,880
- ----------------------------------------------------------------------------------------------------
Total noninterest income 5,601,176 5,057,284 3,136,423
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 8,484,040 7,768,328 5,512,769
Occupancy expense 821,435 734,772 572,532
Furniture and equipment expense 1,441,597 1,293,088 998,145
Other 4,008,945 3,786,305 3,186,083
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 14,756,017 13,582,493 10,269,529
- ----------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 4,594,776 (574,330) 5,607,829
PROVISION (BENEFIT) FOR INCOME TAXES 1,714,300 (412,900) 2,206,778
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 2,880,476 $ (161,430) $ 3,401,051
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS
Basic earnings per share $ 1.72 $ (0.10) $ 2.09
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.62 $ (0.10) $ 1.98
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Cash dividends per common share $ 0.42 $ 0.40 $ 0.38
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,679,436 1,656,111 1,626,550
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
24
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
--------- ------------ ------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 1,446,888 $ 9,303,841 $ 9,706,538
Comprehensive income:
Net income -- -- 3,401,051
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income (loss), net of tax: -- -- --
Comprehensive income -- -- --
5% stock dividend with cash
paid in lieu of fractional shares 72,050 1,513,050 (1,523,842)
Reduction of ESOP debt -- -- --
Options exercised 28,253 60,218 --
Shares surrendered from exercise of options (1,159) (25,208) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 236,289 --
Cash dividends -- -- (647,941)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1,546,032 $ 11,088,190 $ 10,935,806
Comprehensive income:
Net loss -- -- (161,430)
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income, net of tax:- -- -- --
Comprehensive income (loss) -- -- --
5% stock dividend with cash paid in
lieu of fractional shares 77,304 2,203,164 (2,218,649)
Reduction of ESOP debt -- -- --
Options exercised 29,857 41,175 --
Shares surrendered from exercise of options (2,062) (57,957) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 312,847 --
Cash dividends -- -- (691,630)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 1,651,131 $ 13,587,419 $ 7,864,097
Comprehensive income:
Net income -- -- 2,880,476
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income, net of tax:- -- -- --
Comprehensive income -- -- --
5% stock dividend with cash paid in lieu
of fractional shares 82,433 1,895,959 (1,908,005)
Reduction of ESOP debt -- -- --
Options exercised 20,190 55,837 --
Shares surrendered from exercise of options (9,174) (121,307) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 143,859 --
Cash dividends -- -- (737,094)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 1,744,580 $ 15,561,767 $ 8,099,474
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
<CAPTION>
DEBT
GUARANTEE
OF EMPLOYEE ACCUMULATED
STOCK OTHER
OWNERSHIP COMPREHENSIVE
PLAN INCOME TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $ (160,000) $ 24,990 $ 18,875,369
Comprehensive income:
Net income -- -- 3,401,051
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- (39,336)
Less: reclassification adjustments for
gains included in net income -- -- (3,470)
------------
Other comprehensive income (loss), net of tax: -- (42,806) (42,806)
------------
Comprehensive income -- -- 3,358,245
------------
------------
5% stock dividend with cash
paid in lieu of fractional shares -- -- (10,792)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 60,218
Shares surrendered from exercise of options -- -- (25,208)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 236,289
Cash dividends -- -- (647,941)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ (120,000) $ (17,816) $ 21,886,180
Comprehensive income:
Net loss -- -- (161,430)
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- 62,864
Less: reclassification adjustments for
gains included in net income -- -- (46,250)
------------
Other comprehensive income, net of tax: -- 16,614 16,614
------------
Comprehensive income (loss) -- -- (144,816)
------------
------------
5% stock dividend with cash paid in
lieu of fractional shares -- -- (15,485)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 41,175
Shares surrendered from exercise of options -- -- (57,957)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 312,847
Cash dividends -- -- (691,630)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ (80,000) $ (1,202) $ 21,370,314
Comprehensive income:
Net income -- -- 2,880,476
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- 35,132
Less: reclassification adjustments for
gains included in net income -- -- --
------------
Other comprehensive income, net of tax:- -- 35,132 35,132
------------
Comprehensive income -- -- 2,915,608
------------
------------
5% stock dividend with cash paid in lieu
of fractional shares -- -- (12,046)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 55,837
Shares surrendered from exercise of options -- -- (121,307)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 143,859
Cash dividends -- -- (737,094)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $ (40,000) $ 33,930 $ 23,655,171
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
25
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,880,476 $ (161,430) $ 3,401,051
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,132,251 975,178 776,561
Provision for losses on other real estate owned 54,153 80,389 97,823
Provision for loan losses 2,246,145 6,153,000 385,000
Provision for deferred taxes 20,330 (1,067,925) (103,192)
Investment security (gains) losses, net 0 46,250 (3,470)
Purchase of loans and leases held-for-sale (26,920,053) (28,445,574) (16,469,131)
Proceeds from loan and lease sales 65,795,347 66,953,000 45,533,048
(Gain) loss on sale of real estate properties, net 0 (11,363) (240,358)
(Increase) decrease in assets-
Interest receivable (183,741) (457,850) (942,215)
Other assets 537,003 749,828 376,548
Increase (decrease) in liabilities-
Interest payable (191,538) 408,166 75,954
Other liabilities (147,897) 36,375 383,667
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 45,222,476 45,258,044 33,271,286
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in loans 3,299,527 7,202,650 (6,956,353)
Origination of loans held-for-sale (57,512,441) (67,234,000) (45,669,103)
Purchase of securities held-to-maturity (4,994,679) (15,440,977) (11,841,055)
Purchase of securities available-for-sale (39,119,032) (30,986,075) (7,760,490)
Proceeds from maturity of securities held-to-maturity 14,993,880 19,538,000 10,326,530
Proceeds from sales and maturities of securities available-for-sale 25,713,672 4,325,006 2,000,000
Proceeds from sales of other real estate owned 968,692 239,569 489,246
Purchases of premises and equipment (803,250) (1,732,591) (1,803,261)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (57,453,631) (84,088,418) (61,214,486)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 3,783,679 7,107,120 11,290,397
Net increase (decrease) in interest-bearing deposits (1,906,093) 21,931,470 33,305,414
Cash dividends (737,094) (691,630) (647,941)
Stock options exercised 78,389 296,065 271,299
Cash paid in lieu of fractional shares (12,046) (15,485) (10,792)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,206,835 28,627,540 44,208,377
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (11,024,320) (10,202,834) 16,265,177
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 54,025,047 64,227,881 47,962,704
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 43,000,727 $54,025,047 $64,227,881
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for-
Interest expense $ 9,480,232 $ 8,969,709 $ 7,352,690
Income taxes 1,740,000 988,234 1,889,000
- --------------------------------------------------------------------------------------------------------------------
CONTINUED ON NEXT PAGE
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING ACTIVITIES
Debt guarantee of ESOP $ (40,000) $ (40,000) $ (40,000)
Net unrealized gain (loss) on securities held as available-for-sale
(net of taxes) 35,132 16,614 (42,806)
Tax benefit arising from exercise of nonqualified stock options and
disqualifying dispositions 143,859 312,847 236,289
Stock dividends 1,895,959 2,203,164 1,513,050
Increase (decrease) in other real estate owned as a result of foreclosure (206,324) 144,510 463,196
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of California Independent Bancorp and
Subsidiaries (the Company) conform with generally accepted accounting principles
and general practice within the banking industry. The more significant of these
policies applied in the preparation of the accompanying financial statements are
discussed below.
PRINCIPLES OF CONSOLIDATION-
The accompanying financial statements include the accounts of California
Independent Bancorp (CIB) and its wholly-owned subsidiary, Feather River State
Bank (the Bank) and its wholly-owned subsidiary, EPI Leasing Company, Inc.
(EPI). Significant intercompany transactions and balances have been eliminated
in consolidation.
NATURE OF OPERATIONS-
CIB is a California Corporation and the bank holding company for the Bank,
located in Yuba City, California. The Bank was incorporated as a California
state banking corporation on December 1, 1976, and commenced operations on April
6, 1977. The Company was incorporated on October 28, 1994, and became the
holding company for the Bank on May 2, 1995. The Bank engages in a broad range
of financial services activities, and its primary market is located in the
northern Sacramento Valley, with a total of seven branches. In addition, the
Bank operates three loan production offices, emphasizing residential mortgage
and agricultural lending and one lease production office through EPI Leasing
Company, Inc. The primary source of income for the Bank is from lending
activities, including commercial, agricultural, real estate and
consumer/installment loans and leases.
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 income and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS-
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
INVESTMENT SECURITIES-
The Bank classifies its investments as either "held-to-maturity" or
"available-for-sale." Securities that the Bank has the positive intent and
ability to hold to maturity are classified as "held-to-maturity" and accounted
for at amortized cost in the Consolidated Balance Sheets.
Other securities for which the Bank does not have the positive intent or ability
to hold to maturity are classified under the balance sheet caption
"available-for-sale" and are reported at their fair values, with unrealized
gains and losses reported on a net-of-tax basis as a separate component of
shareholders' equity. Fair values are based on quoted market prices or broker or
dealer price quotations on a specific identification basis. Certain economic
factors could cause the Bank to sell some of these securities prior to maturity.
Such factors include significant movements in interest rates and significant
changes in liquidity demands. Gains or losses on sale of investment securities
are computed using the specific identification method.
LOANS-
Loans are stated at the principal amount outstanding less applicable unearned
interest income.
A loan is impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is impaired, the recorded
amount of the loan in the balance sheets is based on the present value of
expected future cash flows discounted at
27
<PAGE>
the loan's effective interest rate, or on the observable or estimated market
price of the loan, or the fair value of the collateral if the loan is collateral
dependent. Income on impaired loans is recognized in accordance with the Bank's
accounting for loans placed on a nonaccrual status. Cash payments are first
applied as a reduction of the principal balance until collectibility of the
remaining principal and interest can be reasonably assured. Thereafter, interest
income is recognized as it is collected in cash.
LOANS AND LEASES HELD-FOR-SALE-
The Bank originates mortgage loans on residential and farm properties that it
sells into the secondary market to divest itself of the interest rate risk
associated with these primarily fixed-interest rate products. The Bank accounts
for these loans at the lower of cost or net realizable value.
As of January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers of Financial Assets and
Extinguishment of Liabilities." This statement requires, under certain
circumstances, entities to recognize as a separate asset an amount related to
the right to service mortgage loans. The adoption of this statement had an
immaterial impact on the Company's financial position and results of operations.
SALES AND SERVICING OF SBA LOANS-
The Bank originates loans to customers under the Small Business Administration
(SBA) program that generally provides for SBA guarantees of 70% to 90% of each
loan. The Bank generally maintains these loans in its portfolio, but
occasionally sells the guaranteed portion of each loan to a third party and
retains the unguaranteed portion in its own portfolio. The Bank may be required
to refund a portion of the sales premium received, if the borrower defaults or
the loan prepays within 90 days of the settlement date. At December 31, 1998,
the Bank had received no premiums subject to such recourse. A gain is recognized
on the sale of SBA loans through collection on sale of a premium over the
adjusted carrying value, through retention of an ongoing rate differential less
a normal service fee (excess servicing fee) between the rate paid by the
borrower to the buyer and the rate paid by the Bank to the purchaser, or both.
To calculate the gain (or loss) on the sale, the Bank's investment in an SBA
loan is allocated among the retained portion of the loan, the servicing retained
and the sold portion of the loan, based on the relative fair value of each
portion. The gain (or loss) on the sold portion of the loan is recognized at the
time of sale based on the difference between the sale proceeds and the allocated
investment. As a result of the relative fair value allocation, the carrying
value of the retained portion is discounted, with the discount accreted to
interest income over the life of the loan. The servicing fees are reflected as
an asset that is amortized over an estimated life using a method approximating
the level yield method; in the event future prepayments exceed Management's
estimates and future expected cash flows are inadequate to cover the unamortized
excess servicing asset, additional amortization would be recognized. In its
calculation of the relative fair value of servicing fees, the Bank is required
to estimate adequate compensation for servicing. The Bank uses the contractual
rate of 100 basis points as its estimate of adequate compensation for servicing.
ALLOWANCE FOR LOAN AND LEASE LOSSES-
The Allowance for Loan and Lease Losses ("Allowance") is maintained at a level
considered adequate by Management to provide for losses that can be reasonably
anticipated. Accordingly, loan losses are charged to the Allowance and
recoveries are credited to it. The provision for loan losses charged to
operating expense is based upon past loan loss experience, loan impairment and
estimates of potential losses which, in Management's judgment, deserve current
recognition. Other factors considered by Management include growth, composition
and overall quality of the loan portfolio, reviews of specific problem loans,
and current economic conditions that may affect the borrowers' ability to pay.
This evaluation process requires the use of current estimates that may vary from
the ultimate losses experienced in the future. The estimates are reviewed
periodically, and adjustments, as they become necessary, are charged to
operations in the period in which they become known.
OTHER REAL ESTATE OWNED-
Other real estate owned consists of properties acquired by the Bank through
foreclosure and is carried at the lower of cost or fair value, less estimated
costs to sell. At the time the property is acquired, if the estimated fair value
is less than the amount outstanding on the loan, the difference is charged
against the Allowance. Subsequent declines, if any, in estimated fair value are
charged to expense.
INTEREST AND FEES ON LOANS AND LEASES-
Origination fees and commitment fees, offset by certain direct loan origination
costs, are deferred and recognized over the contractual life of the loan as
yield adjustment. Interest income on loans and direct lease financing is accrued
monthly as earned on all credits not classified as nonaccrual. Unearned income
on loans, where applicable, is recognized as income using the effective interest
method over the term of the loan.
Loans are generally placed on nonaccrual status when they are 90 days past due
as to either interest or principal or are otherwise determined to be impaired.
At that time, any accrued but uncollected interest is reversed, and additional
income is recorded on a cash basis as payments are received. However, loans that
are well-secured and in the process of collection may not be placed on
nonaccrual status, at the discretion of Management. A nonaccrual loan may be
restored to an accrual basis when interest and principal payments are current
and prospects for future payments are no longer in doubt.
DEPRECIATION AND AMORTIZATION-
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises, furniture, fixtures and equipment is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 31.5 years. Leasehold improvements are amortized using the
straight-line method
28
<PAGE>
over the asset's useful life or the term of the lease, whichever is shorter.
Expenditures for major renewals and improvements of bank premises and equipment
are capitalized, and those for maintenance and repairs are charged to expense as
incurred.
INCOME TAXES-
Income taxes reported in the financial statements are computed at current tax
rates, including deferred taxes resulting from temporary differences in the
recognition of items for tax and financial reporting purposes.
The Bank records income taxes for financial statement purposes using the
liability or balance sheet method, under which the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various balance sheet assets and liabilities. Under
this method, the computation of the net deferred tax asset or liability gives
current recognition to changes in tax laws and rates.
FINANCIAL ACCOUNTING PRONOUNCEMENTS-
On January 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income refers to revenues,
expenses, gains, and losses that generally accepted accounting principles
recognize as changes in value to an enterprise but are excluded from net income.
For the Company, comprehensive income includes net income (loss) and changes in
the fair value of its available-for-sale investment securities.
On January 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information". This statement establishes standards for reporting
enterprise segments of a company in the footnotes to the financial statements.
For the Company, only commercial banking and the leasing enterprise meet the
requirements of a reportable segment according to the guidelines set forth in
SFAS 131.
RECLASSIFICATIONS-
Certain reclassifications have been made to amounts previously reported to
conform with current presentation methods. Such reclassifications have no effect
on net income or shareholders' equity previously reported.
(2) INVESTMENT SECURITIES:
As of December 31, 1998, 1997, and 1996, the Bank's equity capital reflected a
net unrealized gain (loss), net of applicable taxes, of $33,930, $(1,202), and
$(17,816), respectively.
The amortized cost and approximate fair value of investments in debt securities
and other investments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $301,007 $2,181 $0 $303,188
Obligations of states and political subdivisions 4,062,556 41,186 (900) 4,102,842
Corporate obligations and other securities 4,742,466 59,380 (5,096) 4,796,750
- ------------------------------------------------------------------------------------------------------------------------
Total $ 9,106,029 $102,747 $ (5,996) $ 9,202,780
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 10,751,994 49,638 (1,050) 10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 0 7,012,911
Corporate obligations and other securities 1,424,875 6,765 0 1,431,640
- ------------------------------------------------------------------------------------------------------------------------
Total $19,156,186 $ 89,997 $ (1,050) $19,245,133
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The following table shows the amortized cost and estimated fair value of
investment securities by contractual maturity at December 31, 1998 and 1997.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
--------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COSTS VALUE COSTS VALUE
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Within one year $ 1,701,575 $ 1,704,283 $ 9,009,275 $ 9,009,328
After one but within five years 7,099,454 7,182,822 39,462,340 39,505,777
After five but within ten years 305,000 315,675 3,000,000 3,018,200
- ------------------------------------------------------------------------------------------------
Total $ 9,106,029 $ 9,202,780 $51,471,615 $51,533,305
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
Net gains (losses) from sales of "available-for-sale" investment securities
during 1998, 1997, and 1996 were $0, $46,250 and $3,470, respectively. Gross
gains of $0, $46,250 and $3,470, and gross losses of $0, $0 and $0, were
realized on those sales in 1998, 1997, and 1996, respectively.
Investment securities pledged as collateral for certain deposits amounted to
$18,765,780 and $11,651,809 at December 31, 1998 and 1997, respectively.
(3) LOANS:
Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Commercial and
agricultural $ 81,112,377 $ 79,384,520
Real estate construction 37,382,839 23,927,538
Real estate mortgage 36,538,047 28,032,552
Consumer 2,443,283 1,956,254
Lease financing 23,313,399 33,465,023
Other 392,570 1,021,665
- ------------------------------------------------------------------------------
Totals $181,182,515 $167,787,552
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
Loans on which the accrual of interest has been discontinued or reduced amounted
to approximately $5,644,000 and $7,585,000 December 31, 1998 and 1997,
respectively. This represents the total recorded investment in impaired loans.
The allowance for loan losses that was allocated to these impaired loans totaled
$1,137,457 and $1,907,950 as of December 31, 1998 and 1997, respectively. For
income reporting purposes, impaired loans are placed on a nonaccrual status.
This is more fully discussed in Note 1. The average balance of impaired loans
during 1998 and 1997 was $7,659,329 and $5,665,437, respectively. Interest
income recorded on those loans during 1998 and 1997 was $343,812 and $642,230,
respectively. Foregone interest on loans placed on nonaccrual status was
$1,431,874 and $982,125 as of December 31, 1998 and 1997, respectively.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Balance,
beginning of year $ 5,514,299 $ 4,052,783 $3,910,970
Provision 2,246,145 6,153,000 385,000
Loans charged-off (2,333,268) (4,718,424) (327,357)
Recoveries on loans
previously charged-off 596,935 26,940 84,170
- ------------------------------------------------------------------------------
Balance, end of year $ 6,024,111 $ 5,514,299 $4,052,783
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(4) PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Land $ 1,432,957 $ 1,432,957
Bank premises
and improvements 6,015,264 5,868,922
Furniture, fixtures and equipment 6,397,114 5,785,116
----------- -----------
13,845,335 13,086,995
Less accumulated depreciation
and amortization (5,996,536) (4,909,195)
- ------------------------------------------------------------------------------
$ 7,848,799 $ 8,177,800
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Depreciation and amortization charged to expense was $1,132,251, $975,178 and
$776,561, in 1998, 1997 and 1996, respectively.
(5) DEPOSITS:
A summary of deposit balances follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
Demand $ 66,008,000 $ 62,224,350
Interest-bearing
transaction accounts 66,012,253 40,133,001
Savings deposits 39,963,668 68,789,994
Time deposits 96,824,523 95,783,513
- ------------------------------------------------------------------------------
Total deposits $268,808,444 $266,930,858
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
Certificates of deposit of $100,000 or more, including public time deposits,
amounted to approximately $42,540,013 and $40,761,778 at December 31, 1998 and
1997, respectively.
Interest expense on certificates of deposit of $100,000 or more, including
public time deposits, amounted to approximately $2,123,535 and $2,186,861, in
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of all Certificates of Deposits
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31, 1998
---------------------
<S> <C>
Three months or less $39,689,011
Over three through twelve months 39,001,842
Over one through three years 11,313,514
Over three years 6,820,156
- ------------------------------------------------------------------------------
Total $96,824,523
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(6) OTHER NONINTEREST INCOME AND EXPENSE:
The components of other operating income and expense were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Servicing fees on loans $ 507 $ 572 $ 487
Gains on sale of OREO 41 11 240
Gains on sales of leases 192 0 0
Other 666 766 664
- ------------------------------------------------------------------------------
Total other
noninterest income $1,406 $1,349 $1,391
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Advertising and promotion $ 302 $ 370 $ 342
Telephone expense 349 395 236
Attorney Fees 799 345 209
Directors' Fees 216 219 391
Other 2,343 2,457 2,008
- ------------------------------------------------------------------------------
Total other
noninterest expense $4,009 $3,786 $3,186
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(7) INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Current-
Federal $1,204,494 $ 592,054 $1,697,811
State 489,476 62,971 612,159
- ------------------------------------------------------------------------------
1,693,970 655,025 2,309,970
- ------------------------------------------------------------------------------
Deferred-
Federal 69,891 (907,736) (85,574)
State (49,561) (160,189) (17,618)
- ------------------------------------------------------------------------------
20,330 (1,067,925) (103,192)
- ------------------------------------------------------------------------------
$1,714,300 $ (412,900) $2,206,778
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------- ---------
<S> <C> <C> <C>
Federal statutory
income tax rate 34.0% (34.0)% 34.0%
State franchise taxes,
net of Federal income
tax benefit 7.2 (7.2) 7.4
Tax-exempt interest (3.0) (21.9) (2.1)
Corporate dividends received (1.6) (15.7) 0
Tax reserve adjustment 0 6.5 0
Other 0.7 0.4 0.1
- ------------------------------------------------------------------------------
37.3% (71.9)% 39.4%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax asset of the Bank, recorded in other
assets, as of December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1998 1997
---------- -------------
<S> <C> <C>
Deferred tax assets-
Loan losses $2,000,524 $2,509,072
California franchise tax 166,422 29,640
Other real estate owned 58,383 131,669
Unrealized loss on
available-for-sale securities 0 985
Nonaccrual loans 376,629 170,857
Other 231,475 143,392
- ------------------------------------------------------------------------------
Total deferred tax assets $2,833,433 $2,985,615
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
CONTINUED ON NEXT PAGE
31
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Deferred tax liabilities-
Depreciation $ 220,549 $ 250,578
Accretion 0 100,838
Unrealized gain on
available-for-sale securities 27,760 0
- ------------------------------------------------------------------------------
Total deferred tax liabilities 248,309 351,416
- ------------------------------------------------------------------------------
Net deferred tax asset $2,585,124 $2,634,199
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The components of the deferred income tax provisions are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Provisions for
loan and lease losses $ 508,548 $(1,019,549) $ (62,802)
Interest on
non-accrual loans (205,772) 157,633 6,287
Tax depreciation methods (30,029) (6,360) (7,589)
California franchise tax (136,782) (175,715) (53,570)
Other real estate owned 73,286 (15,228) (54,179)
Accretion (100,838) 15,602 17,661
Other (88,083) (24,308) 51,000
- ------------------------------------------------------------------------------
$ 20,330 $(1,067,925) $ (103,192)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(8) SHAREHOLDERS' EQUITY:
At December 31, 1998, CIB was authorized to issue 20,000,000 shares of no par
common stock. Of this amount, 1,744,580 and 1,651,131 shares of common stock
were issued and outstanding at December 31, 1998 and 1997, respectively.
One of the principal sources of cash for the Company will be dividends from its
subsidiary bank. Banking regulations limit the amount of dividends that may be
paid without prior approval of the Company's regulatory agencies to the lesser
of retained earnings or the net income of the Company for its last three fiscal
years, less any distributions during such period, subject to capital adequacy
requirements.
At December 31, 1998, the Company had approximately $4,005,109 available for
payments of dividends, which would not require the prior approval of the banking
regulators under this limitation.
The Bank adopted SFAS No. 128, "Earnings per Share," effective December 15,
1998. As a result, the Bank's earnings per share for all prior periods have been
restated. The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1998 FOR THE YEAR ENDED 1997
---------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Basic EPS income
available to common
stockholders $2,880,476 1,679,436 $ 1.7 $ (161,430) 1,656,111 $ (0.10)
Effect of dilutive securities:
Employee Stock Options 0 99,946 0 0 82,727 0
Diluted EPS income
available to common
stockholders $2,880,476 1,779,382 $ 1.6 $ (161,430) 1,738,838 $ (0.09)
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1996
-------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS income
available to common
stockholders $3,401,051 1,626,550 $ 2.09
Effect of dilutive securities:
Employee Stock Options 0 91,115 0
Diluted EPS income
available to common
stockholders $3,401,051 1,717,665 $ 1.98
- --------------------------------------------------------------------------------------------------------
</TABLE>
In August 1998, the Board of Directors authorized a five percent stock dividend
that was distributed on September 18, 1998. The dividend was declared on August
18, 1998, to holders of record on August 31, 1998. The dividend resulted in the
issuance of 82,433 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
In August 1997, the Board of Directors authorized a five percent stock dividend
that was distributed on September 12, 1997. The dividend was declared on August
12, 1997, to holders of record on August 29, 1997. The dividend resulted in the
issuance of 77,304 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
In August 1996, the Board of Directors authorized a five percent stock dividend
that was distributed on September 20, 1996. The dividend was declared on August
13, 1996, to holders of record on August 30, 1996. The dividend resulted in the
issuance of 72,050 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
32
<PAGE>
(9) DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS-
For these short-term instruments, the carrying value is a reasonable estimate of
fair value.
INVESTMENTS-
For securities held-for-investment purposes, fair values are based on quoted
market prices or dealer quotes. See Note 2 for further discussion.
LOANS-
The fair value of loans is estimated by discounting the future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit ratings for same remaining maturities. The fair value of nonperforming
loans is estimated based on allocating specific and general reserves to the
various nonperforming loan classifications.
DEPOSIT LIABILITIES-
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
OTHER LIABILITIES-
Other liabilities represent short-term instruments. The carrying amount is a
reasonable estimate of fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-
The fair value of amounts for fees arising from commitments to extend credit,
standby letters of credit and financial guarantees written are not material.
The estimated fair values of the Bank's financial instruments at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 43,000,727 $ 43,000,727 $ 54,025,047 $ 54,025,047
Investments 60,639,334 60,736,085 57,198,043 57,286,990
Loans (net) 175,158,404 177,947,899 162,273,253 164,503,476
FINANCIAL LIABILITIES:
Deposits $268,808,444 $269,168,792 $266,930,858 $267,297,159
Interest payable and other liabilities 2,848,990 2,848,990 3,228,424 3,228,424
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(10) STOCK OPTIONS:
During 1989, the Bank adopted the Feather River State Bank 1989 Amended and
Restated Stock Option Plan. The plan is nonqualified and provides that
nonemployee directors and key employees may be granted options to purchase the
Company's stock at the fair value of the shares as determined by the Board of
Directors. As of May 1995, all previously granted options to purchase the Bank's
stock had been retired and exchanged for options to purchase the Company's
stock, on a one-for-one option basis. All granted options must be exercised
within the earlier of ten years of the date of grant, or within 30 days of
termination of employment, or status as a director. Vesting is determined at the
time of grant by the Board of Directors. Current participants vest over five
years from date of employment.
During 1996, the Company adopted the California Independent Bancorp 1996 Stock
Option Plan (1996 Plan), which sets aside 149,052 shares of no par value common
stock of the Company for which options may be granted to key, full-time salaried
employees and officers of the Company, as well as non-employee directors of the
Company. The exercise price of all options to be granted under the 1996 Plan
must be at least 100% of the fair market value of the Company's common stock on
the granting date and be paid in full at the time the option is exercised in
cash, shares of the Company's common stock with a fair value equal to the
purchase price or a combination thereof. Under the 1996 Plan, all options expire
no more than ten years after the date of grant.
33
<PAGE>
Federal income tax benefits relating to options exercised under both plans have
been credited to shareholder's equity. The Company accounts for these plans
under APB Opinion No. 25, under which no compensation cost is recognized upon
issuance of options. Had compensation cost for these plans been determined
consistent with FASB No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
---------- --------- -----------
<S> <C> <C> <C> <C>
NET INCOME: As reported $2,880,476 $(161,430) $3,401,051
Pro Forma 2,619,110 (420,522) 3,208,455
PRIMARY EPS: As reported 1.72 (0.10) 2.20
Pro Forma 1.56 (0.27) 2.07
FULLY DILUTED EPS: As reported 1.62 (0.10) 2.07
Pro Forma 1.47 (0.27) 1.96
- -----------------------------------------------------------------------------------------------------
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's two stock option plans at December 31,
1998, 1997 and 1996, and changes during the years then ended is presented in the
table and narrative below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Outstanding at beginning of year 223,171 225,813 221,190
Granted 42,638 39,359 39,291
Exercised (22,306) (39,912) (34,668)
Expired 0 (2,089) 0
Forfeited (500) 0 0
Outstanding at end of year 243,003 223,171 225,813
Exercisable at end of year 240,798 222,106 225,318
Weighted average fair value of options granted 9.03 9.35 7.04
- -----------------------------------------------------------------------------------------------------
</TABLE>
The options outstanding at December 31, 1998 have exercise prices between $4.92
and $25.85 and remaining contractual lives between 0.5 years and 9.75 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: weighted
average risk-free interest rates of 5.48, 6.43 and 5.67 percent; weighted
average expected dividend yields of 1.77%, 1.80% and 2.19%. For all three years,
the expected life used was seven years and the expected volatility used was 31%.
(11) PROFIT SHARING PLAN AND EMPLOYEE
STOCK OWNERSHIP PLAN:
The Bank formed a 401(k) Qualified Savings Plan (the Plan) effective August 1,
1993. All full-time employees who have reached the age of 21 are eligible to
participate beginning on January 1st or July 1st following six months of
employment. All eligible employees are 100% vested in their own contributions,
which may be any whole percentage of pay between 2% and 12% inclusive. Beginning
January 1, 1995, the Bank made annual matching contributions, which were equal
to 20% of each employee's elective contributions not exceeding 6% of pay.
Contributions are invested with Lincoln National Life Insurance Company under
employee directed investment options. The Bank's matching contribution amounted
to approximately $40,000 in 1998, $35,000 in 1997 and $31,912 in 1996.
The Bank formed an Employee Stock Ownership Plan (the ESOP) effective January
1, 1988. Effective January 1, 1995, the ESOP was amended to recognize CIB and
all of its employees as participants. All employees who have completed six
months of service and have reached the age of 21 are eligible to participate
in the ESOP. The ESOP provides for annual contributions at the discretion of
the Board of Directors. The contributions are allocated based on the
participants' compensation for the year. Employees vest ratably in the ESOP
over six years. The ESOP borrowed $200,000 from a nonprofit corporation to
acquire 9,762 shares of CIB common stock in August 1995. The borrowing is
payable in five equal annual installments with interest at prime minus 1/2
percent. The rate was 7.25% at December 31, 1998. The Bank made contributions
to the ESOP of approximately $40,000 in each of the years 1998, 1997 and 1996.
34
<PAGE>
(12) FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK:
The Bank makes commitments to extend credit in the normal course of business to
meet the financing needs of its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of nonperformance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on Management's credit evaluation of the borrower. Collateral held varies
but may include certificates of deposit, accounts receivable, inventory,
property and equipment, and real property.
The Bank also issues standby letters of credit, which are unconditional
commitments to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support construction bonds, private borrowing
arrangements, and similar transactions. Most of these guarantees are short-term
commitments expiring in 1998 and are not expected to be drawn upon. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds collateral as
deemed necessary, as described above.
The contract amount of commitments not reflected on the balance sheet at
December 31, 1998, were as follows:
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
Loan commitments $66,088,227
Standby letters of credit $ 133,000
- --------------------------------------------------------------------------------
</TABLE>
The Bank is obligated under a number of noncancellable operating leases for
premises and equipment used for banking purposes. Minimum future rental
commitments under noncancellable operating leases as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEASE COMMITMENTS
-----------------
<S> <C>
1999 $139,145
2000 52,621
2001 33,564
2002 33,564
2003 33,564
Thereafter 145,444
--------
$437,902
--------
--------
- --------------------------------------------------------------------------------
</TABLE>
Rent under operating leases was approximately $180,944, $149,713 and $52,487 in
1998, 1997 and 1996, respectively.
(13) RELATED PARTY TRANSACTIONS:
The Bank has had loan and deposit transactions and has contracted for services
with certain officers and directors and the companies with which they are
associated. In the opinion of Management and the Board of Directors, all such
loans, commitments to lend, and contracts for services were made under terms
that are consistent with the Bank's normal policies. Loan transactions with
these officers and directors for the years ended December 31, 1998 and 1997,
respectively, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Loan balances -
Beginning of year $8,215,744 $8,070,014
Additions 4,992,154 8,996,935
Collections (8,832,602) (8,851,205)
---------- -----------
End of year $4,375,296 $8,215,744
---------- -----------
---------- -----------
- -----------------------------------------------------------------------
</TABLE>
The Bank had loans outstanding to a director of the Bank and his associates in
excess of 5 percent of shareholders' equity. The total principal balance of the
loans to this director was approximately $3,298,977 and $3,914,374 at December
31, 1998 and 1997, respectively.
Remodeling work on branches and offices of the Bank was done by directors of the
Bank. The Bank paid approximately $9,711, $442,168, and $320,901 for this work
in 1998, 1997 and 1996, respectively.
35
<PAGE>
(14) CALIFORNIA INDEPENDENT BANCORP FINANCIAL STATEMENTS (PARENT ONLY):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------------
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET-
ASSETS:
Cash and due from banks $ 54 $ 2
Investment in subsidiaries 23,499 21,260
Other assets 102 108
- ------------------------------------------------------------------------------------------------
Total assets $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Shareholders' equity
Total shareholders' equity $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME-
Administrative expense $ 81 $ 116
Other expense 97 82
- ------------------------------------------------------------------------------------------------
Loss before equity in net income of subsidiaries $ 178 $ 198
Equity in net income of subsidiaries:
Distributed 899 707
Undistributed 2,086 (750)
Income tax benefit 73 80
- ------------------------------------------------------------------------------------------------
Net income $ 2,880 $ (161)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss) $ 2,880 $ (161)
Adjustments to reconcile net income to net cash
provided by operating activities-
Undistributed equity in net income of subsidiaries (2,086) 750
Deferred income taxes 0 0
Decrease in other operating assets 7 57
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 801 $ 646
- ------------------------------------------------------------------------------------------------
Investing activities:
Net cash provided by investing activities - -
Financing activities:
Dividends paid (749) (707)
- ------------------------------------------------------------------------------------------------
Net cash used in:
Financing activities (749) (707)
- ------------------------------------------------------------------------------------------------
(Increase) decrease in cash and cash equivalents $ 52 $ (61)
Cash and cash equivalents, beginning of year 2 63
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 54 $ 2
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(15) QUARTERLY STATEMENTS OF OPERATIONS:
The following information is unaudited. However, in the opinion of Management,
all adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for such periods, are reflected.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further explanation of quarterly
results of operations.
36
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
1998 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $5,966 $6,340 $6,558 $5,964
Interest expense 2,172 2,191 2,368 2,101
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,794 4,149 4,190 3,863
Provision for loan and lease losses 396 290 754 806
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 3,398 3,859 3,436 3,057
Noninterest income 1,349 1,403 1,558 1,291
Noninterest expense 3,456 3,892 3,909 3,500
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,291 1,370 1,085 848
Provision for income taxes 480 520 405 309
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 811 $ 850 $ 680 $ 539
Basic earnings per share $ 0.49 $ 0.51 $ 0.41 $ 0.31
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.46 $ 0.49 $ 0.38 $ 0.29
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,651,131 1,653,139 1,669,367 1,742,943
<CAPTION>
1997 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $5,473 $ 5,904 $6,162 $ 5,854
Interest expense 2,210 2,360 2,407 2,312
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,263 3,544 3,755 3,542
Provision for loan losses (40) (3,296) 0 (2,817)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,223 248 3,755 725
Noninterest income 1,062 1,094 1,453 1,448
Noninterest expense 2,958 3,385 3,569 3,670
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,327 (2,043) 1,639 (1,497)
Provision (benefit) for income taxes 510 (850) 651 (724)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 817 $(1,193) $ 988 $ (773)
Basic earnings per share $ 0.53 $ (0.76) $ 0.63 $ (0.50)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.51 $ (0.73) $0.60 $(0.48)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,546,032 1,552,808 1,571,498 1,637,712
<CAPTION>
1996 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income $4,823 $ 4,867 $ 5,311 $5,574
Interest expense 1,746 1,743 1,884 2,076
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,077 3,124 3,427 3,498
Provision for loan losses 60 40 80 205
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,017 3,084 3,347 3,293
Noninterest income 638 589 677 1,232
Noninterest expense 2,346 2,360 2,583 2,980
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,309 1,313 1,441 1,545
Provision for income taxes 522 526 537 622
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 787 $ 787 $ 904 $ 923
Basic earnings per share $ 0.48 $ 0.49 $ 0.56 $ 0.56
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.46 $ 0.46 $ 0.53 $ 0.53
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,612,219 1,612,222 1,615,649 1,638,997
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
(16) REGULATORY MATTERS:
The Company and Bank are subject to various regulatory capital requirements
administered by 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 Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total capital (Total Risk-Based), and Tier 1 capital
(Tier 1 Risk-Based) (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (Tier 1 Leverage Ratio) (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company and Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum Total Risk-Based, Tier 1 Risk-Based, Tier 1 Leverage Ratios as set forth
in the table. There are no conditions or events since that notification that
Management believes have changed the institution's category.
The Company's and Bank's actual capital amounts and ratios are also presented in
the table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ---------- -------- ---------- ---------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Risk-Based Capital:
California Independent Bancorp $26,660 10.38% > $20,540 > 8.00% > $25,675 > 10.00%
- - - -
Feather River State Bank $26,502 10.33% > $20,528 > 8.00% > $25,660 > 10.00%
- - - -
Tier I Risk-Based Capital:
California Independent Bancorp $23,416 9.12% > $10,270 > 4.00% > $15,405 > 6.00%
- - - -
Feather River State Bank $23,260 9.06% > $10,264 > 4.00% > $15,396 > 6.00%
- - - -
Tier I Leverage Ratio:
California Independent Bancorp $23,416 8.20% > $11,427 > 4.00% > $14,284 > 5.00%
- - - -
Feather River State Bank $23,260 8.14% > $11,419 > 4.00% > $14,283 > 5.00%
- - - -
AS OF DECEMBER 31, 1997:
Total Risk-Based Capital:
California Independent Bancorp $24,124 10.25% > $18,826 > 8.00% > $23,533 > 10.00%
- - - -
Feather River State Bank $24,006 10.23% > $18,780 > 8.00% > $23,475 > 10.00%
- - - -
Tier I Risk-Based Capital:
California Independent Bancorp $21,151 8.99% > $ 9,413 > 4.00% > $14,120 > 6.00%
- - - -
Feather River State Bank $21,040 8.96% > $ 9,390 > 4.00% > $14,085 > 6.00%
- - - -
Tier I Leverage Ratio:
California Independent Bancorp $21,151 7.43% > $11,384 > 4.00% > $14,230 > 5.00%
- - - -
Feather River State Bank $21,040 7.40% > $11,377 > 4.00% > $14,221 > 5.00%
- - - -
- --------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
(17) FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
will adopt this statement on January 1, 1999, and does not expect that it will
have a material impact on its financial position or results of operations.
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which is effective for the
first quarter beginning after December 15, 1998. This statement amends Statement
of Financial Accounting Standards No. 65 "Accounting for Certain Mortgage
Banking Activities" to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. The Company will adopt
this statement on January 1, 1999, and does not expect that it will have a
material impact on its financial position or results of operations.
39
<PAGE>
ARTHUR ANDERSEN LLP
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 333-09813 and 333-09823.
Arthur Andersen LLP
Sacramento, California
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,901
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,533
<INVESTMENTS-CARRYING> 9,106
<INVESTMENTS-MARKET> 9,203
<LOANS> 181,183
<ALLOWANCE> 6,024
<TOTAL-ASSETS> 295,313
<DEPOSITS> 268,808
<SHORT-TERM> 443
<LIABILITIES-OTHER> 2,407
<LONG-TERM> 0
0
0
<COMMON> 15,562
<OTHER-SE> 8,093
<TOTAL-LIABILITIES-AND-EQUITY> 295,313
<INTEREST-LOAN> 20,779
<INTEREST-INVEST> 3,511
<INTEREST-OTHER> 536
<INTEREST-TOTAL> 24,827
<INTEREST-DEPOSIT> 8,402
<INTEREST-EXPENSE> 8,831
<INTEREST-INCOME-NET> 15,996
<LOAN-LOSSES> 2,246
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,756
<INCOME-PRETAX> 4,595
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,880
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 9.61
<LOANS-NON> 5,644
<LOANS-PAST> 854
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 11,573
<ALLOWANCE-OPEN> 5,514
<CHARGE-OFFS> 2,333
<RECOVERIES> 597
<ALLOWANCE-CLOSE> 6,024
<ALLOWANCE-DOMESTIC> 6,024
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
