<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 0-265520
California Independent Bancorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0349947
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1227 Bridge St., Suite C, Yuba City, California 95991
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(530) 674-6025
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class September 30, 2000
----- ------------------
Common stock, no par value 2,008,395 shares
This report contains 99 pages. The Exhibit Index is on pages 24 and 25.
1
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE-MONTHS 4
CONSOLIDATED STATEMENTS OF INCOME FOR NINE-MONTHS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-22
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
PART II- OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 24
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5
OTHER INFORMATION 24
ITEM 6
EXHIBITS AND REPORTS ON FORM 8K 24-25
SIGNATURES 26
2
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
<S> <C> <C> <C>
Assets
Cash and Due From Banks $ 13,392,673 $ 15,887,475 $ 21,438,797
Federal Funds Sold 1,100,000 22,000,000 --
-----------------------------------------------
Cash and Cash Equivalents 14,492,673 37,887,475 21,438,797
Investment securities:
Held-to-Maturity Securities, at amortized cost (fair value of
$5,346,321, $16,098,247 and $9,398,162, respectively) 5,381,349 16,178,653 9,434,194
Available-for-Sale Securities, at fair value 85,438,796 70,819,851 59,727,193
-----------------------------------------------
Total Investments 90,820,145 86,998,504 69,161,387
Loans and Leases 161,732,799 116,032,691 141,315,269
Loans and Leases Held-for-Sale 20,653,705 45,287,979 45,813,845
-----------------------------------------------
Gross Loans and Leases
182,386,504 161,320,670 187,129,114
Less: Allowance for Loan and Lease Losses (6,147,648) (6,770,523) (6,633,727)
-----------------------------------------------
Net Loans and Leases 176,238,856 154,550,147 180,495,387
Premises and Equipment, Net 7,032,861 7,342,659 7,470,704
Interest Receivable 3,399,975 3,282,957 3,341,518
Other Real Estate Owned 657,507 1,299,637 1,444,257
Cash Surrender Value of Insurance Policies 4,812,963 4,648,123 4,594,120
Deferred Taxes 2,558,374 3,650,310 3,686,412
Income Tax Receivable 950,697 324,738 66,800
Other Assets 1,759,372 375,912 978,347
Net Assets From Discontinued Operations 165,854 -- 405,886
-----------------------------------------------
Total Assets $ 302,889,277 $ 300,360,462 $ 293,083,615
===============================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest-Bearing $ 54,084,065 $ 60,483,798 $ 47,296,883
Interest-Bearing 206,416,537 212,975,320 212,464,835
-----------------------------------------------
Total Deposits 260,500,602 273,459,118 259,761,718
Interest Payable 1,732,522 1,533,539 1,390,681
Federal Agency and Other Borrowings 15,287,417 941,676 6,825,317
Other Liabilities 799,110 1,079,148 1,304,232
Net Liabilities From Discontinued Operations -- 112,134 --
-----------------------------------------------
Total Liabilities 278,319,651 277,125,615 269,281,948
Shareholders' Equity
Common stock, no par value- Authorized - 20,000,000. Shares issued and
outstanding-2,008,395 shares September 30, 2000, 1,904,618 shares
December 31, 1999 and 1,901,449 shares September 30, 1999 19,899,306 17,950,525 17,875,958
Retained Earnings 5,952,379 6,233,226 6,958,738
Debt Guarantee of ESOP (200,000) -- (40,000)
Accumulated Other Comprehensive Loss (1,082,059) (948,904) (993,029)
-----------------------------------------------
Total Shareholders' Equity 24,569,626 23,234,847 23,801,667
-----------------------------------------------
Total Liabilities and Shareholders' Equity $ 302,889,277 $ 300,360,462 $ 293,083,615
===============================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements
3
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three-months Three-months
ended ended
September 30, 2000 September 30, 1999
----------------------------------------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases $ 4,535,206 $ 4,801,369
Interest on Investments-
Taxable Interest Income 1,480,342 976,639
Nontaxable Interest Income 28,587 39,319
Interest on Federal Funds Sold and Other Interest Income 658 --
---------------------------------
Total Interest Income 6,044,793 5,817,327
---------------------------------
Interest Expense:
Interest on Deposits 2,258,170 2,105,734
Interest on Other Borrowings 262,288 138,570
---------------------------------
Total Interest Expense 2,520,458 2,244,304
---------------------------------
Net Interest Income 3,524,335 3,573,023
Provision for Loan and Lease Losses -- 50,000
---------------------------------
Net Interest Income After Provision for Loan and Lease Losses 3,524,335 3,523,023
---------------------------------
Noninterest Income:
Service Charges on Deposit Accounts 253,088 251,198
Servicing and Brokered Loan Fees 281,543 256,613
Alternative Investment Fee Income 54,278 76,578
Cash Surrender Value of Life Insurance Policies 65,641 38,100
Other 70,943 139,605
---------------------------------
Total Noninterest Income 725,493 762,094
---------------------------------
Noninterest Expense:
Salaries and Employee Benefits 1,675,141 1,620,159
Occupancy Expense 179,196 189,103
Furniture and Equipment Expense 289,998 326,714
Legal and Professional Fees 34,921 81,993
Other 755,582 1,243,600
---------------------------------
Total Noninterest Expense 2,934,838 3,461,569
---------------------------------
Income Before Provision for Income Taxes 1,314,990 823,548
Provision for Income Taxes 496,550 256,750
---------------------------------
Net Income From Continuing Operations 818,440 566,798
Loss on Discontinued Operations, net of tax effect (16,491) (175,047)
---------------------------------
Net Income $ 801,949 $ 391,751
=================================
Share Data:
Earnings Per Share:
Basic-From Continuing Operations $ 0.43 $ 0.31
Basic-After Discontinuance of Subsidiary 0.42 0.21
Diluted-From Continuing Operations 0.39 0.30
Diluted-After Discontinuance of Subsidiary 0.38 0.21
Shares Outstanding 2,008,395 1,901,449
Weighted Average Basic Shares 1,924,711 1,841,000
Weighted Average Diluted Shares 2,086,025 1,859,517
</TABLE>
The accompanying notes are an integral part of theses consolidated statements
4
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-months Nine-months
ended ended
September 30, 2000 September 30, 1999
------------------------------------------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans and Leases $ 12,526,952 $ 14,171,783
Interest on Investments-
Taxable Interest Income 4,389,011 2,844,201
Nontaxable Interest Income 91,397 125,622
Interest on Federal Funds Sold and Other Interest Income 536,927 241,974
------------------------------------
Total Interest Income 17,544,287 17,383,580
------------------------------------
Interest Expense:
Interest on Deposits 6,734,305 6,165,866
Interest on Other Borrowings 288,120 172,434
------------------------------------
Total Interest Expense 7,022,425 6,338,300
------------------------------------
Net Interest Income 10,521,862 11,045,280
Provision for Loan and Lease Losses 200,000 850,000
------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 10,321,862 10,195,280
------------------------------------
Noninterest Income:
Service Charges on Deposit Accounts 756,152 710,324
Servicing and Brokered Loan Fees 546,417 677,009
Alternative Investment Fee Income 158,462 168,703
Cash Surrender Value of Life Insurance Policies 193,375 108,135
Other 306,069 255,315
------------------------------------
Total Noninterest Income 1,960,475 1,919,486
------------------------------------
Noninterest Expense:
Salaries and Employee Benefits 4,835,140 4,808,533
Occupancy Expense 510,361 559,275
Furniture and Equipment Expense 883,893 1,023,516
Legal and Professional Fees 192,179 290,766
Other 2,358,700 3,307,598
------------------------------------
Total Noninterest Expense 8,780,273 9,989,688
------------------------------------
Income Before Provision for Income Taxes 3,502,064 2,125,078
Provision for Income Taxes 1,318,325 727,000
------------------------------------
Net Income From Continuing Operations 2,183,739 1,398,078
Income (loss) on Discontinued Operations, net of tax effect 3,870 (182,789)
------------------------------------
Net Income $ 2,187,609 $ 1,215,289
====================================
Share Data:
Earnings Per Share:
Basic-From Continuing Operations $ 1.14 $ 0.78
Basic-After Discontinuance of Subsidiary 1.14 0.68
Diluted-From Continuing Operations 1.05 0.77
Diluted-After Discontinuance of Subsidiary 1.06 0.67
Shares Outstanding 2,008,395 1,901,449
Weighted Average Basic Shares 1,911,787 1,793,978
Weighted Average Diluted Shares 2,073,101 1,812,495
</TABLE>
The accompanying notes are an integral part of theses consolidated statements
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Months ended September 30, 2000 and September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
-------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,187,609 $ 1,215,289
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 731,139 814,392
Provision for loan and lease losses 200,000 850,000
Write-down of other real estate owned (44,700) 0
Investment security (gains) losses, net 0 (14,141)
Proceeds from loan and lease sales 1,135,000 19,074,269
Gain on sale of premises and equipment 18,316 0
(Increase) decrease in assets-
Interest receivable (117,018) (486,844)
Other assets (973,378) (3,485,141)
Net Assets from Discontinued Operations of Subsidiary (277,988) (76,117)
Increase (decrease) in liabilities-
Interest payable 198,983 (231,978)
Fed Funds purchased, other borrowings and other liabilities 13,865,703 7,120,040
------------------------------
Net cash provided by operating activities 16,923,666 24,779,769
Cash Flows From Investing Activities
Net (increase) decrease in loans (20,297,324) (8,633,307)
Origination of loans and leases held-for-sale (2,726,385) (18,439,565)
Purchase of securities (16,302,982) (31,188,842)
Proceeds from maturity of HTM Securities 10,712,105 1,685,000
Proceeds from sales/maturity of AFS Securities 1,527,136 19,968,971
Proceeds from sales of other real estate owned 686,830 313,537
Purchases of premises and equipment (439,657) (527,196)
------------------------------
Net cash used for investing activities (26,840,277) (36,821,402)
Cash Flows From Financing Activities
Net (decrease) in noninterest bearing deposits (6,399,733) (18,500,216)
Net increase (decrease) in interest bearing deposits (6,558,783) 9,664,420
Cash dividends (628,859) (589,942)
Stock options exercised 118,906 557,553
Cash paid in lieu of fractional shares (9,722) (9,445)
------------------------------
Net cash provided by (used in) financing activities (13,478,191) (8,877,630)
------------------------------
NET INCREASE (DECREASE) (23,394,802) (20,919,263)
Cash and Cash Equivalents, Beginning of Year 37,887,475 42,358,060
------------------------------
Cash and Cash Equivalents, End of Period $ 14,492,673 $ 21,438,797
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated statements
6
<PAGE>
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC"). In the opinion of Management, the
unaudited consolidated financial statements contain all adjustments that
are necessary to present fairly the financial position of California
Independent Bancorp ("Company") and its subsidiaries at September 30,
2000, December 31, 1999, and September 30, 1999, and the results of its
operations for the three and nine-month periods ended September 30, 2000,
and September 30, 1999.
Certain information and footnote disclosures normally presented in annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted in accordance with SEC rules or
regulations. The results of operations for the periods ended September 30,
2000, are not necessarily indicative of the operating results for the full
year ending December 31, 2000. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
included in the Company's Annual Report for the year ended December 31,
1999.
Note 2 - Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiary, Feather River State Bank ("Bank") and its
wholly owned subsidiary, E.P.I. Leasing Company, Inc. ("EPI"). Significant
intercompany balances and transactions between the Company and the Bank
have been eliminated in consolidation.
Note 3 - Loans to Directors
In the ordinary course of business, the Company makes loans to directors
of the Company. Loans to directors amounted to approximately $3,215,428,
$3,362,874, and $5,380,000 at September 30, 2000, December 31, 1999,and
September 30, 1999, respectively.
Note 4 - Commitments and Contingent Liabilities
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend
credit and letters of credit, which are not reflected in the financial
statements. Management does not anticipate any material loss as a result
of these transactions.
Note 5 - Cash and Stock Dividends
In February, May, August, and November of 1999, and March, June, and
August of 2000, the Company paid an eleven-cent per share cash dividend.
On August 17, 1999, the Company's Board of Directors authorized and
declared a five-percent stock dividend for shareholders of record as of
August 31, 1999. The dividend was distributed on September 17, 1999, and
resulted in the issuance of 90,084 additional shares of common stock.
On August 15, 2000, the Company's Board of Directors authorized and
declared a five-percent stock dividend for shareholders of record as of
August 31, 2000. The dividend was distributed on September 15, 2000, and
resulted in the issuance of 94,881 additional shares of common stock.
7
<PAGE>
Note 6 - Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 establishes standards for computing and
presenting EPS. It replaced the presentation of primary EPS with a
presentation of basic EPS. It also required dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and required reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to the common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if options or other contracts to issue common stock were
exercised or converted into common stock, or resulted in the issuance of
common stock that then shared the earnings of the Company.
Note 7 - Financial Accounting Pronouncements
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and displaying 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 and changes in
the fair value of its available-for-sale investment securities. Total
comprehensive income for the nine-months ended September 30, 2000 and
September 30, 1999 was $1,105,548 and $222,260, respectively.
On January 1, 1998, the Company adopted SFAS No. 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. The Company has no segments
that meet the requirements of a reportable segment according to the
guidelines set forth in SFAS 131.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for fiscal years beginning after June 15,
2000. This statement established 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, 2001 and does not expect that it will have a
material impact on its financial position or results of operations.
On January 1, 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." This statement
amends SFAS 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 interest based on its ability
and intent to sell or hold those investments. SFAS 134 did not have an
impact on the Company's financial statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
California Independent Bancorp ("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 as a California state
chartered commercial bank. 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 this equipment leasing company as a subsidiary. As a part of the
Company and Bank's restructuring efforts, EPI is no longer originating leases.
It is anticipated that the business affairs of EPI will be dissolved and wound
up during the year 2000.
Certain statements in this Form 10-Q quarterly report include 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.
Such statements are subject to the "safe harbor" provisions 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; changes in the interest rate environment; general economic conditions,
either nationally or regionally, that are less favorable than expected,
resulting in, among other things, a deterioration in credit quality and an
increase in the provision for possible loan and lease 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. In addition, such risks
and uncertainties include mortgage banking activities, merchant card processing,
concentration of lending activities and the costs and steps necessary to address
the residual effects, if any, of the Year 2000 issues.
The following sections discuss significant changes and trends in the financial
condition, capital resources and liquidity of the Company from September 30,
1999 and December 31, 1999 to September 30, 2000. The sections also discuss
significant changes and trends in the Company's results of operations for the
three and nine-months ended September 30, 2000, compared to the same periods in
1999.
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
Total assets at September 30, 2000 were $302,889,277. This figure represents an
increase from $300,360,462 at December 31, 1999 and $293,083,615 at September
30, 1999.
Gross loans and leases were $182,386,504 at September 30, 2000, a 13.1% increase
from $161,320,670 at December 31, 1999, and a 2.5% decrease from $187,129,114 at
September 30, 1999. The decrease in gross loans and leases over the past
twelve-month period was primarily due to the collection of certain problem loans
and leases and the Bank's enhanced credit standards. The increase over
December's figure reflects the seasonal nature of the Company's loan portfolio
and the Bank's aggressive marketing efforts. Historically, the Company's total
loan balances decrease during the first and fourth quarters of each year as
payments are received from its agricultural borrowers. In contrast, during the
second and third quarters total loans rise in conjunction with the increased
demand for agricultural and construction loans.
Contributing to the decline in gross loans and leases at September 30, 2000 in
comparison to September 30, 1999 was a reduction in lease financing which is the
result of normal portfolio amortization.
The Company's investment portfolio at September 30, 2000 was $90,820,145,
compared to $86,998,504 at December 31, 1999 and $69,161,387 at September 30,
1999. Cash and cash equivalents, which consisted of cash and due from banks and
federal funds sold, were $14,492,673 at September 30, 2000, $37,887,475 at
December 31, 1999, and $21,438,797 as of September 30, 1999. The higher balance
at December 31,1999, is attributed to the Company's investment in overnight
federal funds.
9
<PAGE>
Total deposits of the Company remain strong at $260,500,602, $273,459,118 and
$259,761,718 as of September 30, 2000, December 31, 1999 and September 30, 1999,
respectively. The increase at December 31, 1999, compared to the other two
periods, is indicative of normal seasonal fluctuations in deposits.
The ratios of gross loans to deposits were 70.0%, 59.0% and 72.0% at September
30, 2000, December 31, 1999 and September 30, 1999, respectively.
LOANS AND LEASES
The Company lends primarily to small and medium sized businesses, small to large
sized farmers and consumers within its market area. The Company's market area is
comprised principally of Sutter, Yuba, Colusa, and Yolo counties; and
secondarily Placer, Sacramento, El Dorado, Butte and Glenn counties. Gross loans
and leases outstanding as of September 30, 2000 were $182,386,504. This
represents an increase of $21,065,834, or 13.1% since December 31, 1999 and a
decrease of $4,742,610, or 2.5% compared to September 30, 1999.
Consistent with Management's objectives, the composition of the Bank's loan
portfolio has changed in the past twelve months. Generally speaking,
agricultural loans and lease financing receivables have declined and loans
secured by real estate have increased to 57.2% of the Bank's loan portfolio.
This shift has occurred as part of a strategic effort by Bank management to
diversify credit risk and enhance earnings. Management believes that the
strategy has been successful. Based upon plans currently in place further
diversification is anticipated in the area of commercial and consumer lending.
Due to the loan portfolio's composition, the Company sustains moderate
variations in outstanding loan totals. More specifically, certain seasonal
variations are expected to occur in the agricultural and construction loan
portfolios. The table below sets forth the composition of the Company's loan
portfolio as of September 30, 2000, December 31, 1999, and September 30, 1999.
COMPOSITION OF THE LOAN PORTFOLIO
---------------------------------------------------------------------------
September 30, December 31, September 30,
Loan Category 2000 1999 1999
---------------------------------------------------------------------------
Commercial & Agricultural $51,838,235 $55,111,154 $81,457,717
Real Estate Construction 33,625,057 30,513,920 31,705,637
Other Real Estate Loans 70,774,629 46,003,764 44,858,787
Lease Financing 21,983,239 27,009,815 25,864,092
Consumer 4,109,855 2,523,695 3,182,257
Other 55,489 158,322 60,624
---------------------------------------------------------------------------
TOTAL $182,386,504 $161,320,670 $187,129,114
---------------------------------------------------------------------------
The principal changes in the loan portfolio between September 30, 1999 and
September 30, 2000 are discussed below:
1. Commercial and agricultural loans declined $29,619,482, or 36.4%. The
Company provides a wide range of loan products to agricultural,
commercial, retail and industrial businesses throughout its trade area.
The entire decline in loan volume in this category occurred in the Bank's
agricultural loan portfolio. Agricultural loans declined $33.6 million
between September 30, 1999 and September 30, 2000. Three primary factors
contributed to this event. First, the Bank closed its Madera Loan
Production office during the fourth quarter of 1999. As a result, most of
the agricultural loan borrowers serviced from that office have left the
Bank. Second, the Bank's enhanced credit standards have resulted in lower
agricultural loan production during the past twelve months. Third,
increased competition in the Bank's market area has resulted in some
agricultural borrowers leaving the Bank. In contrast, the total portfolio
of commercial and business loans at the Bank has increased $4.4 million,
or 20.9%, between September 30, 1999 and September 30, 2000. The increase
is attributed to a strategically focused marketing effort in this area.
10
<PAGE>
2. Other Real Estate Loans include those loans secured by residential (single
family and multi-family), commercial and agricultural real property.
Between September 30, 1999 and September 30, 2000, Other Real Estate loans
increased by $25,915,842. Commercial real estate loans account for $23.3
million, or 89.0%, of the Other Real Estate Loan growth. The increase is
due to successful business development efforts and the Company's
intensified focus on the core real estate markets in its served geographic
area.
3. Lease financing receivables declined $3,880,853, or 15.0%, between
September 30, 1999 and September 30, 2000. The Company's March 2000
announcement that EPI would cease lease origination activities resulted in
the discontinuance of leases purchased from EPI. Consequently, the Company
expects an ongoing, steady reduction in its lease financing receivables.
4. A modest increase of $1,919,420 occurred in Real Estate Construction loans
between September 30, 1999 and September 30, 2000. The Company extends
construction loans primarily to individual borrowers and real estate
developers for the construction of single family residences. The increase
is attributable to successful business development efforts with local
homebuilders.
5. A modest increase of $927,598 occurred in Consumer loans between September
30, 1999 and September 30, 2000. Consumer and installment loans are made
for household, family and other personal expenditures. These loans are
made on both a secured and unsecured basis. The increase in this loan
category was due to the Bank's enhanced focus on retail banking products.
During the third quarter of 2000, there were no significant changes in the
Company's loan management, lending philosophy or credit delivery procedures.
LOAN AND LEASE QUALITY
The Company places loans on nonaccrual status when either principal or interest
has been past due for 90 days or more. Exceptions to this policy can be made if
the loan is well secured and in the process of collection. The Company also
places loans on nonaccrual when payment in full of principal or interest is not
expected or the financial condition of the borrower has significantly
deteriorated.
The following table summarizes the composition of nonperforming loans and leases
that consists of "Accruing Loans and Leases Past Due 90 Days or More" and
"Nonaccrual Loans and Leases" as of September 30, 2000, December 31, 1999 and
September 30, 1999 as well as the changes between the periods.
11
<PAGE>
Composition of Nonperforming
Loans and Leases
($ in 000's)
--------------------------------------------------------------------------------
Accruing Loans Past Due $ Amt. Change $ Amt. Change $ Amt.
90 Days or More 9/30/00 From 9/99 12/31/99 From 9/99 9/30/99
-----------------------------------------------------
Commercial $ 0 N/A $ 0 N/A $ 0
Agricultural 0 N/A 0 N/A 0
Real Estate 661 N/A 0 N/A 0
Leases 0 N/A 0 N/A 0
Consumer 1 N/A 0 N/A 0
TOTAL $ 662 N/A $ 0 N/A $ 0
Nonaccrual Loans
Commercial $ 2,421 90.33% $ 868 -31.76% 1,272
Agricultural 3,720 -18.10% 3,851 -15.21% 4,542
Real Estate 236 -87.64% 1,237 -35.24% 1,910
Leases 0 -100.00% 51 -37.04% 81
Consumer 134 N/A 0 N/A 0
TOTAL $ 6,511 -16.58% $ 6,007 -23.04% $ 7,805
--------------------------------------------------------------------------------
Total Nonperforming $ 7,173 -8.10% $ 6,007 -23.04% $ 7,805
--------------------------------------------------------------------------------
Total nonperforming loans and leases at September 30, 2000 were $7,172,985, an
increase of $1,166,037, or 19.4%, from December 31, 1999. In comparison to
September 30, 1999, nonperforming loans and leases at September 30, 2000 have
decreased $631,811, or 8.1%. Total nonperforming loans and leases comprised 4.2%
of the portfolio on September 30, 1999, and decreased to 3.7% of the portfolio
on December 31, 1999. Nonperforming loans and leases at September 30, 2000, or
3.9% of total loans and leases. While comparisons to the December 31, 1999
figure show a significant increase, since June 30, 2000 the Company's total
nonperforming loans and leases have decreased by $1,545,207. As Of June 30,
2000, total nonperforming loans were $8,718,192, or 5.1% of gross loans and
leases.
The Company had no loans and leases in the "Accruing Loans Past Due 90 Days or
More" category as of September 30, 1999 and December 31, 1999. The increased
level at September 30, 2000 of $662,059 in this category reflects the addition
of three agriculture and residential real estate related loans. These loans are
believed to be adequately secured and are in the process of collection.
Nonaccrual loans and leases were $6,510,926 at September 30, 2000, an increase
of $503,980, or 8.4%, in comparison to December 31, 1999 and a decrease of
$1,293,870 or 16.6% in comparison to September 30, 1999. The increase since
December 31, 1999 was centered in the Bank's agriculture portfolio and the
agriculture related portion of its commercial portfolio. The rise was primarily
the result of the impact of adverse weather conditions on crop production and
lower commodity pricing due to rising crop supply.
The Company's nonaccrual loans and leases are concentrated in four credit
relationships that comprise 90.8% of the total at September 30, 2000. The
remaining 9.2% of the nonperforming loans are distributed among the commercial,
agricultural, real estate, and lease portfolios.
The largest relationship comprises 43.0% of the total nonaccrual classification.
This borrower sustained financial difficulty stemming from a combination of
adverse weather, labor issues and uncollectable receivables. The Company is
adequately collateralized and no loss is presently expected.
12
<PAGE>
The second largest relationship represents 20.0% of the total nonaccrual loans.
This borrower is negotiating takeout funding and the Bank has recently entered
into a written workout agreement with the borrower. The borrower is actively
trying to liquidate real property to retire the debt. The Company's loan
position is adequately secured by real property and full collection is expected.
The third largest nonaccrual loan, representing 14.0% of the total nonaccrual
classification, is a commercial loan to a contractor that has experienced cash
flow shortages. The loan balance has been charged down to a level of anticipated
collection. The borrower is restructuring his operation and a formal workout
agreement is expected prior to December 31, 2000.
The fourth largest nonaccrual loan comprises 13.0% of the total nonaccrual
loans. This loan is an agricultural related loan. The supporting collateral has
been reappraised. As a result, this loan was partially charged down to the level
supported by the fair value appraisal. No payment default has been experienced
to date. Recovery of the reduced principal and all interest is expected at this
time.
An additional factor that has impacted the level of nonperforming loans and
leases is the Company's objective to substantially reduce the level of all
classified loans and leases during the year 2000. The Bank established a Special
Asset Department in November 1999 that focuses on the prompt identification and
resolution of classified loans and leases. Workout plans are in place for each
classified loan and lease and adjustments are taken immediately if full recovery
is not expected. These intensified collection actions have contributed to the
increased levels of nonperforming loans and leases. The actions are intended to
accelerate collection and include the following: 1) loan restructuring, 2)
potential takeout funding, 3) foreclosure action, and 4) formalizing the workout
agreement with the borrower before renewal of the existing loan position is
allowed. This aggressive collection approach tends to temporarily increase the
category of accruing loans past due 90 days or more.
The Company's practice with regard to all nonperforming loans and leases is to
reassess the value of the collateral underlying the loan and, if necessary,
write the loan or lease down to the level supported by the collateral valuation.
Additionally, workout plans are in place for each nonperforming loan and lease
and, at this time, current analysis does not indicate any further loss content.
All of the nonperforming loans listed in the previous table are in the process
of collection. In terms of specific resolution plans, 11.0% of the nonperforming
loans based on dollars (approximately $0.8 million) are in the process of
collateral liquidation, 76.0% of the loans (approximately $5.4 million) are
currently in a workout arrangement, and 13.0% of the loans (approximately $0.9
million) are in the process of formal workout negotiations. Management projects
additional progress toward the resolution of these troubled loans during the
fourth quarter of 2000. However, due to particular factors surrounding specific
nonperforming loans, management projects that some of these credits will require
several additional quarters to resolve.
The Company's allowance for loan and lease losses ("ALLL") totaled $6,147,648,
or 3.4% of gross loans and leases, as of September 30, 2000. This amount
compares to $6,770,523, or 4.2%, of gross loans and leases as of December 31,
1999. The Company uses the allowance method in providing for possible loan and
lease losses. Loan and lease losses are charged against the ALLL and recoveries
are credited to it. Management believes that the total ALLL is adequate to cover
potential losses in the loan and lease portfolios. While Management uses all
available information to provide for loan and lease losses, future additions to
ALLL may be necessary based on changes in economic conditions and other factors.
Additions to the ALLL are made by provisions for possible losses. The provision
for possible loan and lease losses is charged to operating expense and is based
upon past loss experience and estimates of potential losses which, in
Management's judgment and in accordance with generally accepted accounting
principles, deserves current recognition. Other factors considered by Management
include growth, composition and overall quality of the loan and lease portfolio,
review of specific problem loans and leases, and current economic conditions
that may affect the customer's ability to repay the obligation. Actual losses
may vary from current estimates. The estimates are reviewed regularly and
adjustments, as necessary, are charged to operations in the period in which they
become known.
13
<PAGE>
Contributions to the ALLL totaled $200,000 and $850,000 for the nine-months
ended September 30, 2000 and September 30, 1999, respectively, and $0 and
$250,000 for the three-months ended September 30, 2000 and September 30, 1999,
respectively. Total contributions to the ALLL for year ending December 31, 1999
equaled $1,000,000. Loan and lease charge-offs for the nine-months ended
September 30, 2000 totaled $1,244,486 as compared to $998,651 for the
nine-months ended September 30, 1999. Loan recoveries were $421,611 for the
nine-months ended September 30, 2000 compared to $758,267 for the nine-months
ended September 30, 1999. The Company has no foreign loans and therefore none of
the allowance is for foreign loans.
INVESTMENTS
The Company's investment portfolio was $90,820,145 at September 30, 2000, as
compared to $69,161,387 at September 30, 1999. The increase in 2000 over 1999 is
consistent with the year-over-year decrease in the Company's loan portfolio, a
relatively stable deposit base, and the Company's objective to most effectively
utilize its excess seasonal funds flow.
As of September 30, 2000, the Company's "available-for-sale" category market
valuation allowance reflected a net unrealized loss of $1,082,059 net of taxes.
The approximate market value of the Company's entire investment portfolio at
September 30, 2000 was $90,785,117. As of September 30, 1999, the Company's
"available-for-sale" category adjustment reflected a net unrealized loss of
$993,029 net of taxes, and the approximate market value of the Company's entire
investment portfolio was $69,125,355. The $88,971 increase between the two
periods in the net unrealized loss on the Company's available for sale
securities is primarily the result of increasing interest rates and, to a lesser
extent, volatility in the bond markets.
14
<PAGE>
RESULTS OF OPERATIONS
Three and Nine-months Ended September 30, 2000
Compared with
Three and Nine-months Ended September 30, 1999
The Company recognized net income for the first nine months of 2000 of
$2,187,609 resulting in diluted earnings per share of $1.06. Net income for the
three-month period ending September 30, 2000, was $801,949 resulting in diluted
earnings of $0.38 per share. The net income for the three and nine-month periods
ending September 30, 2000 was substantially higher than the comparable 1999
periods. The Company reported net income of $391,751 or $0.21 per share on a
diluted basis for the three-month period of 1999 and $1,215,289 or $0.67 per
share on a diluted basis for the nine-month period of 1999, respectively. The
increase in 2000 net income over the same period for 1999 was due to several
factors as discussed in this section.
One of the primary factors contributing to the increase in net income was a
76.5% decline in the provision for loan and lease losses for the two comparative
nine-month periods ended September 30th. The provision for loan and lease loss
also declined substantially between the two comparative three-month periods.
These declines were primarily due to lower than anticipated charge-offs, higher
than anticipated recoveries on previously charged-off loans and leases, and the
successful resolution of certain problem credits; all of which mitigated the
need to further build reserves via provisions charged to income.
Additionally, total noninterest expense declined $1,209,415, or 12.1%, from the
nine-month period ending September 30, 2000 versus September 30, 1999.
Noninterest expense declined $526,731, or 15.2%, for the three-month period
ending September 30, 2000 over September 30, 1999. These declines are discussed
in more detail later in this section.
Net interest income declined for the nine-month period ending September 30, 2000
to $10,521,862 from $11,045,280 for the same nine-month period in 1999, a
decrease of $523,418 or 4.7%. Net interest income also declined for the
three-month period ending September 30, 2000 to $3,524,335, or 1.4%, from the
September 30, 1999 amount of $3,523,023. These decreases reflect the combined
effect of a variety of factors affecting interest income and interest expense as
described below.
The Company's primary source of income is interest and fees on loans and leases.
The table below depicts average loans and leases and yields for the three and
nine-month periods ended September 30, 2000 and 1999.
--------------------------------------------------------------------------------
Three-months Three-months Nine-months Nine-months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------
Average loans and $180,666,159 $193,855,528 $163,586,430 $184,063,912
leases outstanding
Average yields 10.04% 9.91% 10.21% 10.27%
Interest & fees $ 4,535,206 $ 4,801,369 $ 12,526,952 $ 14,171,783
earned
Average prime rate 9.50% 8.10% 9.14% 8.03%
--------------------------------------------------------------------------------
The three and nine-month average outstanding loans and leases at September 30,
2000, were down $13,189,369, or 6.8%, and $20,477,482, or 11.1%, respectively,
from the same three and nine-month periods in 1999. This decline has adversely
impacted the fees and interest earned on loans and leases. The decline in
average outstanding loans and leases is reflective of the increasing interest
rate environment, tightening of the Bank's underwriting standards, and
increasing competitive pressures. Narrower margins are in part the result of
15
<PAGE>
obtaining business under a more stringent credit underwriting process. This has
a direct trade off in risk that is not reflected in the yield calculation. Both
volume and rate are further impacted as a result of competitive pressure to
acquire and retain quality customers for the Company.
As an offset to the decline in interest income and fees on loans and leases, the
Company experienced an increase in its investment income, including interest on
fed funds sold of $493,629, or 48.6%, for the three-month periods and
$1,805,538, or 56.2%, for the nine-month periods ending September 30, 2000 over
September 30, 1999, respectively. These increases are primarily the result of a
rise in total investments outstanding between the two periods reported and
higher yielding investments.
The Company has experienced an increase in total interest expense on deposits of
7.2%, or $152,436, for the three-month period and 9.2%, or $568,439, for the
nine-month period ending September 30, 2000 over 1999. This is primarily
attributed to rising interest rates and a change in the mix of deposits. Average
rates paid on deposits increased from 3.1% at September 30, 1999 to 3.4% at
September 30, 2000. Interest-bearing deposits consisted of 79.2% of total
deposits at September 30, 2000 as compared to 81.8% at September 30, 1999.
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three and nine-month periods ended September 30, 2000, compared
to the same periods in 1999, are set forth in the following table:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Three-months Three-months Nine-months Nine-months
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average deposits outstanding $256,649,271 $260,007,340 $265,204,160 $260,787,716
Average rates paid 3.52% 3.24% 3.39% 3.15%
Amount of interest paid or accrued $ 2,258,170 $ 2,105,734 $ 6,734,305 $ 6,165,866
------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company experienced a slight decrease in total noninterest income of $36,601
or 4.8% for the three-month period ending September 30, 2000 over the same
period in 1999. Total noninterest income increased $40,989 or 2.1% for the
nine-month period ended September 30, 2000 compared to the same 1999 period.
Total noninterest income consists primarily of service charges on deposit
accounts, servicing and brokered loan fees and other noninterest income.
Service charge income on deposit accounts, one of the primary components in
noninterest income, showed an increase between the nine-month periods of 2000
over 1999. Income derived from service charges on deposit accounts was $756,152
and $710,324 for the nine-month periods ending September 30, 2000 and 1999,
respectively.
Income from servicing and brokered loan fees for the three-months ended
September 30, 2000, increased by $24,930, or 9.7%, in comparison to the same
three-month period of 1999. Alternatively, these fees declined by $130,592, or
19.3%, during the nine-month period ended September 30, 2000 in comparison to
the nine-month period ended September 30, 1999. The decrease in servicing and
brokered loan fee income between the two nine-month periods can in part be
traced to the Company's decision, during the first half of 1999, to hold
selected real estate loans in its portfolio instead of selling those loans into
secondary markets. The intent of this strategy was to diversify the Company's
loan portfolio and benefit from the long-term, higher yielding interest income
stream created by the real estate loans, instead of the one-time brokerage fee
earned from the loans' sale. Additionally, income generated from brokered loan
fees has been adversely impacted by a general slowing in the home refinance
market which has accompanied the increase in general market interest rates and,
to a lesser extent, staff reductions implemented at the Company's real estate
loan production offices as a result of the slowing market.
16
<PAGE>
All other noninterest income decreased 24.9% for the three-month period from
$254,283 at September 30, 1999 to $190,862 at September 30, 2000. For the
nine-month period ending September 30, 2000, all other noninterest income
increased by 23.6% to $657,906 over $532,153 at September 30, 1999. The primary
source of this rise was an increase in the cash surrender value recognized on
life insurance policies owned by the Bank.
The Company experienced a decrease of $526,731, or 15.2%, and $1,209,415, or
12.1%, in total noninterest expense during the three and nine-month periods
ending September 30, 2000, over the same periods in 1999, respectively. Total
noninterest expense stood at $2,934,838 and $3,461,569 for the three-month
periods and $8,780,273 and $9,989,688 for the nine-month periods ending
September 30, 2000 and 1999, respectively. Noninterest expenses consist of
salaries and employee benefits, occupancy and furniture and equipment expense,
legal and professional fees, and other general and administrative operating
expenses.
Salaries and employee benefits increased slightly during the nine-month period
of 2000 over 1999. This net increase is primarily due to the Company's
conversion in 2000 to a common review date for annual salary increases and other
personnel activity, which was substantially offset by staff reductions related
to the Company's restructuring efforts.
Collectively, occupancy and furniture and equipment expenses decreased by 9.0%
and 11.9% for the three and nine-month periods, respectively. These two
categories stood jointly at $1,394,254 and $1,582,791 for the nine-months ended
September 30, 2000 and 1999, respectively. This decrease is in large part due to
the closures, during the later part of 1999 of the Bank's loan production
offices in Madera and Chico, California. Additionally, during 1999, the Company
had nonrecurring expenses associated with Year 2000 equipment upgrades.
Legal and professional fees declined 33.9% to $192,179 for the nine-months ended
September 30, 2000 from $290,766 at September 30, 1999. This decrease is
associated with continued progress towards the resolution of problem loans and
leases, and resultant reduction in legal fees associated with the collection of
such loans and leases.
Other noninterest general and administrative operating expenses decreased by
$488,018, or 39.2%, for the three-month period and $948,898, or 28.7%, for the
nine-month period ending September 30, 2000 versus September 30, 1999. These
decreases are primarily associated with a variety of non-recurring expenses
recognized during the first nine-months of 1999, including $281,060 incurred
under the Company's 1989 Stock Option Plan. Furthermore, the Company incurred
expenses of approximately $504,222 during the first nine-months of 1999
associated with the recruitment and hiring of its new president and chief
executive officer, along with a severance and consulting agreement entered into
with its former president and chief executive officer. Promotional expenses also
declined by $160,027 between the nine-month periods. Additionally, other
operating efficiencies were recognized that contributed to the overall net
decline in this category during the three and nine-month periods ending
September 30, 2000 over the same periods in 1999. These net decreases were
partially offset by an increase of $70,483 in FDIC assessments.
Applicable income taxes from continuing operations for the three and nine-month
periods ended September 30, 2000, were $496,550 and $1,318,325, respectively.
This is compared to $256,750 and $727,000 for the three and nine-month periods,
respectively, ended September 30, 1999. The increase in 2000 over 1999 is
reflective of the increase in pre-tax income between the two periods. The
Company's effective tax rate was 37.8% and 37.6% for the three and nine-month
periods in 2000 and 31.2% and 34.2% for the three and nine-month periods,
respectively, in 1999.
17
<PAGE>
LIQUIDITY
Historically, during the first two quarters of each year the Bank experiences
excess liquidity. The Bank's seasonal agricultural loan demand, which occurs
each year during the second and third quarters, tends to absorb excess liquidity
and frequently results in a net borrowed position during that timeframe. The
Bank's short-term liquid assets consist of cash and due from banks, federal
funds sold and investment securities with maturities of one year or less
(exclusive of pledged securities). Irrespective of maturity, U.S. Government and
Agency securities qualify as collateral for borrowings at the Federal Home Loan
Bank and with broker-dealers.
In order to fund its liquidity needs, 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 also entered an agreement to borrow
funds from the Federal Home Loan Bank of San Francisco. Additionally, the Bank
has an agreement with Lehman Brothers for a standby short-term loan secured by
U.S. Government and Agency Obligations contained in the Bank's investment
portfolio. As of September 30, 2000, December 31, 1999, and September 30 1999,
the Bank had $14,000,000, $0, and $5,770,000 outstanding on these lines,
respectively.
The Bank monitors its credit facility availability and unencumbered qualifying
collateral in conjunction with its asset/liability management process. Policy
limits are established and monitored for maximum borrowings and minimum
contingency liquidity levels.
Management believes the Company maintains adequate amounts of liquidity to meet
its needs.
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The on-going monitoring and management of the
risk is an important component of the Company's asset/liability management
process, which is governed by policies established by its Board of Directors
that are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to
Management. In this capacity, Management develops guidelines and strategies
impacting the Company's asset/liability management related activities based upon
estimated market risk sensitivity, policy limits and overall market interest
rate levels and trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Bank's
earnings. Management utilizes the results of a detailed and dynamic simulation
model to quantify the estimated exposure of NII to sustained interest rate
changes. The Company believes, individually and in the aggregate, the many
assumptions incorporated in the simulation model are reasonable. However, the
complexity of the simulation modeling process is only expected to produce
reasonable estimates, not an absolutely precise calculation of exposure.
This sensitivity analysis is compared to the Company's policy limits which
specify a maximum tolerance level for NII exposure over a one year horizon,
assuming no balance sheet growth, given both a 200 basis point ("bp") upward and
downward shift in interest rates. A parallel and pro rata shift in rates over a
12-month period is assumed.
The Bank's assessment of interest rate risk reflects an exposure of NII to a
sustained falling interest rate environment. The Bank has been operating within
the Board approved policy limit of 10.0%.
Additionally, Management monitors NII sensitivity over a two-year horizon and
utilizes additional tools to monitor potential longer-term interest rate risk.
18
<PAGE>
The composition of the Company's statement of condition is planned and monitored
by Management of the Bank. The results of the interest rate sensitivity analysis
are utilized by Management to develop and initiate strategies for managing
interest rate risk.
CAPITAL RESOURCES
The Company and the Bank, respectively, are subject to the capital adequacy
requirements of the Federal Reserve Board and Federal Deposit Insurance
Corporation ("FDIC"). These guidelines are intended to reflect the degree of
risk associated with financial institution's 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 September 30, 2000, increased by $1,334,779 to
$24,569,626 over December 31, 1999, total shareholders' equity of $23,234,847.
During the nine-month period from January 1, 2000 through September 30, 2000,
shareholders' equity was increased by net income of $2,187,609 and stock options
exercised of $118,906. These increases were offset by the Bank's guaranty of its
Employee Stock Ownership Plan debt of $200,000, the payment of cash dividends of
$638,581, and an increase in the net unrealized loss related to the Company's
available-for-sale securities of $133,155, net of taxes.
As can be seen by the following tables, the Company and Bank exceeded all
regulatory capital ratios on September 30, 2000, and December 31, 1999.
Risk Based Capital Ratio
As of September 30, 2000
------------------------------------------------------------------------------
Company Bank
-------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
------------------------------------------------------------------------------
Tier 1 Risk-Based Capital $ 25,652 11.31% $ 24,859 10.95%
Tier 1 Capital Minimum
Requirement 9,072 4.00% 9,081 4.00%
-------------------------------------------------
Excess $ 16,580 7.31% $ 15,778 6.95%
=================================================
Total Risk-Based Capital 28,528 12.58% 27,738 12.22%
Total Capital Minimum
Requirement 18,144 8.00% 18,162 8.00%
-------------------------------------------------
Excess $ 10,384 4.58% $ 9,576 4.22%
-------------------------------------------------
Net Risk-Weighted Assets $226,799 $227,019
=================================================
Leverage Capital Ratio
Tier 1 Capital to total
assets $ 25,652 8.52% $ 24,859 8.26%
Minimum leverage requirement 12,040 4.00% 12,033 4.00%
-------------------------------------------------
Excess $ 13,612 4.52% $ 12,826 4.26%
=================================================
Average total assets $301,000 $300,833
================ ============
------------------------------------------------------------------------------
19
<PAGE>
Risk Based Capital Ratio
As of December 31, 1999
------------------------------------------------------------------------------
Company Bank
-------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
------------------------------------------------------------------------------
Tier 1 Risk-Based Capital $ 24,184 10.56% $ 24,058 10.51%
Tier 1 Capital Minimum
Requirement 9,158 4.00% 8,676 4.00%
-------------------------------------------------
Excess $ 15,026 6.56% $ 15,382 6.51%
=================================================
Total Risk-Based Capital $ 27,046 11.81% $ 26,918 11.76%
Total Capital Minimum
Requirement 18,316 8.00% 18,306 8.00%
-------------------------------------------------
Excess $ 8,730 3.81% $ 8,612 3.76%
-------------------------------------------------
Net Risk-Weighted Assets $228,955 $228,828
=================================================
Leverage Capital Ratio
Tier 1 Capital to Quarterly
Tier 1 Capital to total
assets $ 24,184 7.97% $ 24,058 7.94%
Minimum leverage requirement 12,134 4.00% 11,660 4.00%
-------------------------------------------------
Excess $ 12,050 3.97% $ 12,398 3.94%
=================================================
Average total assets $303,345 $303,133
================ ============
------------------------------------------------------------------------------
SUPERVISION AND REGULATION
As a result of the Company's and Bank's 1999 financial performance, the final
results of the FDIC and California Department of Financial Institutions' ("DFI")
most recent examination of the Bank, and continued concerns regarding the
quality of the Bank's loan portfolio, the Bank's Board of Directors passed a
resolution to address the concerns. The resolution requires the Bank to: (1)
maintain management acceptable to the FDIC and DFI, (2) to seek approval of the
agencies prior to appointing any individual as a director or senior officer, (3)
continue with the diligent implementation of a previously adopted plan to reduce
the level of nonperforming and problem loans and leases, (4) maintain an
adequate reserve for loan and lease losses, and (5) seek prior approval of the
FDIC and DFI before the payment of any cash dividends. Additionally, the Board
passed a resolution in 1998 requiring the Bank to maintain a minimum Tier 1
Leverage ratio of 7% which remains in effect. It is anticipated that during the
fourth quarter of 2000 the Board will pass an updated resolution re-affirming
its existing resolution and, in addition, requiring the Bank to maintain a Tier
1 Leverage ratio of at least 7.5%.
Furthermore, the FDIC and Federal Reserve Bank of San Francisco have notified
the Bank and Company, respectively, that the condition of the Bank and Company
are such that prior approval of the regulatory agency 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.
20
<PAGE>
APPROVAL FOR THE OPENING OF A NEW LINCOLN, CALIFORNIA BRANCH
On July 21, 2000, Feather River State Bank received approval from the FDIC to
establish a branch in Lincoln, California. Approval was also granted by the DFI
on July 3, 2000. It is anticipated that the new branch will open during the
first quarter of 2001.
DIVIDENDS
Federal and State banking and corporate laws could limit the Bank's ability to
pay dividends to the Company. The Federal Reserve Board 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 holding 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 1999 financial performance
and continued concerns regarding the quality of the Bank's loan portfolio, the
Bank's Board of Directors has passed a resolution which requires the Bank to
seek the prior approval of the FDIC and DFI for the payment of any cash
dividends. Thus far, all such requests have been approved as submitted.
SEGMENT REPORTING
SFAS No. 131 establishes standards for public business enterprises' reporting of
information about operating segments in annual financial statements. The
Statement requires that the enterprise 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 the
Company operates only in one segment, the commercial banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of computer
systems, software, and other equipment utilizing microprocessors to distinguish
the year 1900 from the year 2000. The Year 2000 issues posed significant risks
for all businesses, households, and governments and could have resulted in
system failures and miscalculations causing disruptions in normal business and
governmental operations if actions were not taken to fix the problem before the
year 2000 arrived.
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As a result of the Company's persistent commitment to its Year 2000 compliance
efforts, it was able to roll into the new millennium without interruption. The
Company will continue to manage its Year 2000 compliance efforts to assure
rollover of other key dates in the Year 2000. Additionally, the Bank continues
to carry reserves for loan and lease losses that could arise with its borrowers
that may experience any Year 2000 related problems.
There were minimal expenses associated with the Year 2000 compliance efforts
during the first three-quarters of 2000.
NEW ACCOUNTING PRONOUNCEMENTS
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 No. 130
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. The Company has adopted SFAS No. 130, and does not expect the
statement to have a material impact on its financial statements.
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 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. As issued, SFAS No. 133 was to be
effective for the Company beginning January 1, 2000. However, in July 1999, the
FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133."
Statement 137 amended the required effective date of Statement 133, requiring
adoption of Statement 133 in years beginning after June 15, 2000. The
Corporation expects to adopt Statement 133 effective January 1, 2001. 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 adoption of the applicable provisions of SFAS No. 134 did not have
a material effect on the Company.
End to Pooling-of-Interests Accounting for Business Combinations
In April 1999, FASB announced its tentative decision to no longer deem the
pooling-of-interests method of accounting as an acceptable method to account for
business combinations between independent parties. The FASB expects a final
standard will be issued and become effective during 2001. A portion of the
Company's business strategy is to pursue appropriate acquisition opportunities
to expand its market presence. A change in the accounting for business
combinations could have a negative impact on the Company's ability to realize
those business strategies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion, the Company's market risk and interest rate risk
profiles are within reasonable tolerances at this time. (See Item 2. Management
Discussion and Analysis of Financial Condition and Results of Operations,
sections discussing "Liquidity", "Market Risk" and "Interest Rate Risk" at pages
18-19). No significant changes to the market risk or interest rate risk of the
Company have occurred since December 31, 1999.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None reported
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.
No changes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None reported
ITEM 5. OTHER INFORMATION.
None reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.
(a) Exhibits.
Exhibit No.
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 Secretary's Compiled, Amended and Restated Articles of Incorporation
for California Independent Bancorp as of April 26, 1999. Filed as
Exhibit 3.1 to the Company's Quarterly Report filed on Form 10Q for
the period ended March 31, 1999.*
3.2 Secretary's Compiled, Amended and Restated Bylaws of California
Independent Bancorp as of September 30, 1999. Filed as Exhibit 3.2
to the Company's Quarterly Report filed on Form 10Q for the period
ended September 30, 1999.*
10.22 California Independent Bancorp Revised 2000 Equity Incentive Plan.
10.23 California Independent Bancorp 2000 Equity Incentive Plan Form
Nonqualifying Stock Option Agreement.
10.24 California Independent Bancorp 2000 Equity Incentive Plan Form
Nonqualifying Stock Option Exercise Agreement.
10.25 California Independent Bancorp 2000 Equity Incentive Plan Form
Incentive Stock Option Agreement.
10.26 California Independent Bancorp 2000 Equity Incentive Plan Form
Incentive Stock Option Exercise Agreement.
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10.27 Severance Agreement and Release of Claims dated August 11, 2000
between Feather River State Bank and Annette Bertolini.
10.28 Consulting Agreement dated July 5, 2000 between Feather River State
Bank and Annette Bertolini.
10.29 Lease by and between Eureka Corporate Plaza, Ltd., L.P. and Feather
River State Bank, for the premises at 1552 Eureka Road, Roseville,
California
10.30 Pursuant to the 2000 Equity Incentive Plan as referenced in Exhibit
10.22, Nonqualifying Stock Options amounting to 825 shares at $20.75
per share, were granted to non-employee directors on September 19,
2000. The options vest 20% after twelve months and 20% each year
thereafter. Such options terminate September 19, 2010. The following
Directors were granted shares under these terms: John Dowdell,
Harold Eastridge, William Gilbert, John Jelavich, Don Livingstone,
Alfred Montna, David Offutt, William Retzer, Ross Scott and Michael
Wheeler . Each Director has entered into Nonqualifying Stock Option
Agreements with the Company in the form attached as Exhibit 10.23.
10.31 Pursuant to the 2000 Equity Incentive Plan as referenced in Exhibit
10.22, Nonqualifying Stock Options amounting to 10,000 shares were
granted at $22.62 per share on July 18, 2000, to Robert Lampert,
Executive Vice President/Chief Operating Officer of the Bank. The
options vest 20% after twelve months and 20% each year thereafter.
Such options terminate July 18, 2010. Mr. Lampert has entered into a
Nonqualifying Stock Option Agreement with the Company in the form
attached as Exhibit 10.23.
10.32 Pursuant to the 2000 Equity Incentive Plan as referenced in Exhibit
10.25, Incentive Stock Options were granted to the following
executive and senior officers of the Bank. The options were granted
on September 19, 2000 at $20.75 per share. The options vest 20%
after twelve months and 20% each year thereafter. Such options
terminate September 19, 2010. Each officer has entered into an
Incentive Stock Option Agreement with the Company in the form
attached as Exhibit 10.25.
Larry Hartwig, President/CEO 15,000 shares
Robert Lampert, Chief Operating Officer 5,000 shares
Blaine Lauhon, Chief Lending Officer 4,000 shares
Kenneth Anderson, Marketing & Branch Services Officer 4,000 shares
Douglas Marr, Chief Credit Officer 5,000 shares
Don McDonel, Senior Loan Officer 5,000 shares
27 Financial Data Schedule
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*Document incorporated herein by reference.
(b) Reports on Form 8K.
No reports on Form 8K were filed during the period.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Independent Bancorp
Date: November 8, 2000 /S/ Larry D. Hartwig
---------------- --------------------
Larry D. Hartwig
President/Chief Executive Officer
Date: November 8, 2000 /S/ Robert J. Lampert
---------------- ---------------------
Robert J. Lampert
Executive Vice President/Chief Operating Officer
(Principal Financial and Accounting Officer)
26
