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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, 1999
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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
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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, 2000 was $24,684,797
The number of outstanding shares of common stock as of February 28, 2000 was
1,904,816.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2000 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 39 PAGES
EXHIBIT INDEX IS ON PAGE 36
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I N D E X
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DESCRIPTION PAGE NO.
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 30
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. . . . . . . . . . . . . . . . . . . 33
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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. As a
part of the Company and Bank's restructuring efforts, it is anticipated that
the business affairs of EPI will be dissolved and wound up during the year
2000. On June 25, 1984, the Bank formed Yuba-Sutter Financial Services
Corporation ("Yuba-Sutter") as a wholly-owned subsidiary. This subsidiary is
inactive.
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At December 31, 1999, the Company had two employees, both of which
serve as executive officers of the Bank. The Bank at December 31, 1999
employed 142 persons, including 6 part-time employees, 5 executive officers
and 45 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, 1999, the Company had consolidated assets
of $300,360,462, deposits of $273,459,118, loans and leases of $161,320,670,
and shareholders' equity of $23,234,847.
GENERAL BANKING SERVICES
The Bank engages in a broad range of financial services activities.
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. These branches are located in areas that are in the
periphery of housing for those individuals who work in the growing Sacramento
area.
In addition, the Bank operates one loan production office ("LPO")
which is located in Citrus Heights, California, in Sacramento County. This
LPO emphasizes residential mortgage and construction. The total population
base in the five 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 water for irrigation and
quality soils result in excellent agricultural diversification.
The Bank currently has no applications pending to open additional
branch offices or LPOs. The Bank may increase the number of its banking
facilities in the its 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
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that all or any part of the Bank's expansion program can be accomplished
without the Bank being required to raise additional capital.
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 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, Visa debit cards, and other customary banking services. The Bank makes
available to its customers home banking services, whereby the customers can
make transfers between accounts, pay bills, receive balance inquiries and
statements via their personal computer or telephone. The Bank does not
provide 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 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 commercial, agricultural, real estate and consumer loans.
Additionally, the Bank purchases leases through outside sources, including
its subsidiary EPI.
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. The
Bank generally requires a repayment margin of 25% for permanent plantings
(i.e., tree and vine crops) and 20% for row crops. The Bank participates in
the Farm Service Agency ("FSA" an agency of the U.S. Department of
Agriculture) guaranteed loan program. The program allows the Bank to obtain
loan note
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guarantees on agricultural loans of up to 90% of the loan amount for eligible
farmers. As of December 31, 1999, the Bank had agricultural production loans
outstanding of $35,646,000, which represented 22.1% of the Bank's loan
portfolio. The FSA guarantees approximately 5.0% of these loans.
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 Federal Agricultural Mortgage
Corporation ("Farmer Mac"), Travelers Realty Investment Company 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 the secondary market and retains the servicing of these loans.
The Bank is one of the largest Farmer Mac loan 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 to four 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.
The maximum loan-to-value ratio for these loans is 90%. Loans secured by
agricultural property include mortgages, loans for farm residences and other
improvement loans and are secured by a first lien on real estate. The maximum
loan-to-value ratio for farmland is 70%. Commercial real estate loans are
made primarily to owner occupied businesses for such purposes as offices,
warehouses, professional buildings, retail and storage facilities. The
maximum loan-to-value ratio for commercial properties is 75%. As of December
31, 1999, these types of real estate secured loans totaled $46,004,000 or
28.5% 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
secured by a first deed of trust and have maximum loan to value ratios
ranging from 60% to 90%. As of December 31, 1999, the Bank had construction
and development loans of $30,514,000 representing 18.9% of the Bank's loan
portfolio.
The Bank also originates mortgage loans on residential and farm
properties, which it sells into the secondary market in order to divest
itself of the interest rate risk associated with these mostly fixed interest
rate products. The underwriting criteria for residential and agricultural
mortgage loans sold in
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the secondary market are established by the purchasers of the loans. 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." These loans are sold without recourse. As
of December 31, 1999, 1998, and 1997, total loans serviced by the Bank were
$131,991,682, $146,025,594 and $151,619,000 respectively. For the years ended
December 31, 1999, 1998, and 1997, total loans sold by the Bank were
$21,968,279, $65,795,000 and 66,953,000.
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. Loan to value ratios vary but generally do not exceed
75%. As of December 31, 1999, the Bank had loans for these purposes of
$19,465,000 representing 12.1% 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.
Furthermore, the Bank offers Business and Industry guaranteed loans
through the Rural Development Agency ("RDA"). These loans are designated for
businesses that create jobs in rural areas. RDA loans are in amounts up to
$10 million and are 80%-90% guaranteed by the RDA. The Bank generally sells
the guaranteed portion of its SBA and RDA loans in the secondary market.
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 31,1999 the Bank had a total of $2,524,000 in
consumer and installment loans and or 1.6% of its loan portfolio.
The Bank originates commercial and industrial equipment leases
through its subsidiary EPI. Leases are made to a wide variety of businesses
including professional, agricultural, industrial and construction. Total
lease financing receivables as of December 31, 1999 was $27,010,000 or 16.7% of
the Bank's portfolio. Although it has been determined that the business
affairs of EPI will
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be wound down during the year 2000, it is anticipated that the Bank may
continue to originate equipment leases.
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").
COMPETITION
The Bank's primary service area consists of Colusa, Sutter, Yolo,
and Yuba Counties. It is estimated that this service area contains 56
competitive banking and savings and loan offices, of which eighteen (18)
offices are owned by other independent banks. Based upon total bank deposits
as of June 30, 1999 (the last period for which data is available), the Bank
is second in market share in Sutter County, third in Colusa County, third in
Yuba County, and ninth in Yolo County.
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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 other financial institutions or institutional
lenders. In this manner, the Bank is able to close the loan while selling a
portion of the credit to a participant.
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 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 1998 financial
performance and continued concerns regarding the quality of the Bank's loan
portfolio, the Bank's Board of Directors passed a resolution to remedy the
concerns. The resolution requires the Bank to: have Management acceptable to
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the FDIC and DFI; continue with the diligent implementation of a previously
adopted plan to reduce the level of non-performing and problem loans,
continue with the diligent implementation of revised lending and collection
policies and procedures; ensure that the Bank maintains an adequate reserve
for loan losses; and seek prior approval of the FDIC and DFI before the
payment of any cash dividends.
In March 2000, the FDIC and DFI completed an examination of the
Bank. The final results of this examination have not been reported to the
Bank. Management believes that the Bank will continue to operate under the
resolution addressing the issues discussed above, and that the Bank can
comply with all regulatory requirements without any material impact on its
operations.
Additionally, the FDIC and Federal Reserve Bank of San Francisco
("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.
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
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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 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
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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.
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.
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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
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
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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.
The following tables present the capital ratios for the Company and
the Bank as of December 31, 1999:
RISK BASED CAPITAL RATIOS AS OF DECEMBER 31, 1999
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COMPANY BANK
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
Tier 1 Capital $24,184 10.56% $24,058 10.51%
Tier 1 Capital minimum
requirement 9,158 4.00% 9,153 4.00%
------- ------ ------- -------
Excess $15,026 6.56% $14,905 6.51%
======= ====== ======= =======
Total 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%
======== ====== ======= =======
14
<PAGE>
Risk-adjusted assets $228,955 $228,828
======== ========
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly
average total assets $24,184 7.97% $24,058 7.94%
Minimum leverage
requirement 12,134 4.00% 12,125 4.00%
------- ------ ------- -------
Excess $12,050 3.97% $11,933 3.94%
======= ====== ======= =======
Total Quarterly average assets $303,345 $303,133
======== ========
</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, 1999, the
Bank and the Company exceeded all the required ratios for classification as
"well capitalized."
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
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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 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
16
<PAGE>
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 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.
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<PAGE>
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. As previously stated, due to the Bank's disappointing 1998 financial
performance and continued concerns regarding the quality of the Bank's loan
portfolio, the Bank's Board of Directors passed a resolution which requires
the Bank to seek the prior approval of the FDIC and DFI before the payment of
any cash dividends.
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 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
18
<PAGE>
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 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.
19
<PAGE>
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.
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
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<PAGE>
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 the
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 second quarter of 1999,
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 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, 1999, 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 1.2 basis points per $100 of insured deposits toward the
retirement
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<PAGE>
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 5.8 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.
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 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
22
<PAGE>
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.
FINANCIAL MODERNIZATION ACT
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999
(the "Financial Modernization Act") on November 12, 1999. The Financial
Modernization Act generally accomplishes the following:
(1) Facilitates the affiliation of commercial banks
with security firms, insurance companies and other financial
service providers by: repealing restrictions on affiliation
contained in the Glass-Steagall Act; expressly preempting any
state law restrictions on affilliation; and by eliminating the
BHC Act's prohibition on insurance underwriting activities.
(2) Substantially modifies and expands the BHC Act to
permit bank holding companies to engage in a full range of
"financial activities" through a new entity known as a
"Financial Holding Company". "Financial activities" is broadly
defined to include not only banking, insurance, and securities
activities, but also merchant banking, real estate development
and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to
be financial in nature, incidental to financial activities, or
complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the
financial system.
(3) Sets forth a systematic structure for the
functional regulation of banks, savings institutions, holding
companies and their activities.
(4) Provides enhanced protections for the privacy
rights of consumer information
(5) Adopts a provisions to modernize the Federal Home
Loan Bank system including provisions relating to the
capitalization, membership and corporate governance.
(6) Revises the laws which implement CRA.
(7) Amends the Federal Deposit Insurance Act
regarding the governance of subsidiaries of state banks that
engage in "activities as principal that would only be
permissible" for a national bank to conduct in a
23
<PAGE>
financial subsidiary. The amendment expressly preserves a
state bank's ability to retain all existing subsidiaries. And
(8) Addresses a wide range of other legal and
regulatory issues affecting financial institutions operations
and activities.
The regulatory agencies are in the process of proposing regulations
to carry forth the Financial Modernization Act's mandates. It is anticipated
that final regulations will be adopted later this year.
The Company has not determined whether it will seek an election to
become a Financial Holding Company. The Board and Management are evaluating
the benefits to determine whether the Company desires to utilize any of the
Financial Modernization Act's expanded powers. Since California permits state
chartered commercial banks to engage in any activity permissible for national
banks, the Bank should be allowed to form subsidiaries to engage in the
activities authorized by the Financial Modernization Act, to the same extent
as a national bank.
The Company does not believe that the Financial Modernization Act
will have a material adverse effect on its operations in the near future.
However, some commentators have projected that in the long term the Financial
Modernization Act's enactment may result in further consolidation of and
increased competition in the financial services industry.
PROPOSED LEGISLATION
Periodically, legislation is enacted and regulations are promulgated
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance
between banks and other financial services providers. It is likely that
additional legislation will be introduced in Congress or in state
legislatures in the future which may impact the Company's business. It cannot
be predicted whether or in what form any of these proposals will be taken or
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
24
<PAGE>
earnings and growth of banks are subject to the influence of economic
conditions 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
25
<PAGE>
provides guidance as to the presentation and display of comprehensive income
and 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 recognition of all derivatives as either assets or liabilities in
the statement of
26
<PAGE>
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, and was 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 the
statement has not had a material impact on its financial statements.
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 in the fourth
quarter of 2000. A portion of the Company's business strategy is to pursue
appropriate acquisition opportunities so as 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.
YEAR 2000 COMPLIANCE
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The Company's systems responded successfully to the century date change.
The Company will continue to monitor its systems and those of its vendors and
suppliers over the coming months. (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.")
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 one loan production office
("LPO"). Additionally, the Bank's subsidiary, EPI, operates from a separate
location. Rental expense for all premises leased totaled $179,201 for the
year ended December 31, 1999. It is estimated that rental expense for leased
premises will be approximately $50,123 for 2000.
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. This building houses the Bank's note department.
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
headquarters for the Company, and the Bank's Data Center, Agricultural Real
Estate Department, administrative services and financial consulting services
are located in these building.
28
<PAGE>
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.
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 2, 1996, the Bank purchased a former bank branch located at
995 Tharp Road in Yuba City, California. The Bank's Residential Real Estate
Department and Special Assets Department are located at this facility.
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
August 31, 2001, at a monthly rent of $6,611 for the first year and will
increase in the second year to $6,743.
29
<PAGE>
In August 1999, the Bank entered into an agreement to lease an office
building at 7040 N. Marks, Suite 101 in Fresno California, in order to move
its real estate loan production office from Madera, California to Fresno.
After the new lease in Fresno had been entered into, the Bank made the
decision to streamline its residential lending operations and eliminate its
Madera loan production office. In September 1999, the Bank subleased this
office to the Rural Community Insurance Agency for the remaining term of the
lease commencing January 1, 2000, and ending on November 30, 2004
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to the ordinary course of the
Company and Bank's business, neither entity is a party to any material legal
proceedings nor is any of their property the subject of any such proceeding.
The Company believes that the ultimate disposition of all currently pending
matters will not have a material adverse effect on the Company's financial
condition or the results of its operations.
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.
30
<PAGE>
<TABLE>
<CAPTION>
SALE PRICE OF COMMON STOCK
--------------------------
PERIOD ENDED 1999 BID ASK
--- ---
<S> <C> <C>
March 31 $20.25 $21.00
June 30 20.38 20.88
September 30 18.25 19.00
December 31 16.00 18.00
PERIOD ENDED 1998 BID ASK
--- ---
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>
Cash dividends paid on the Company's common stock were $.42 per
share for the year ending December 31, 1999, and $.40 per share for the year
ending December 31, 1998. These figures have been adjusted for the 5% stock
dividend paid in 1998 and in 1999.
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 the 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.
Due to the Bank's disappointing 1998 financial performance and
continued concerns regarding the quality of the Bank's loan portfolio, the
Bank's Board of
31
<PAGE>
Directors passed a resolution which requires the Bank to seek the prior
approval of the FDIC and DFI before the payment of any cash dividends.
As of February 28, 1999, there were 1,059 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
For the "Selected Financial Data," see page 3 of the Company's 1999
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 8-22 of the Company's 1999 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
19-20 of the Company's 1999 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 23-39 of
the Company's 1999 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 2000 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.
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.
33
<PAGE>
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, 1999.
34
<PAGE>
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 21, 2000
By: /s/ Larry D. Hartwig
- -----------------------------
Larry D. Hartwig, President
and Chief Executive Officer
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 Bertolini Senior Vice President March 21, 2000
- -------------------------- and Chief Financial Officer
ANNETTE BERTOLINI (Principal Financial and
Accounting Officer)
/s/ John L. Dowdell Director March 21, 2000
- -------------------------
JOHN L. DOWDELL
/s/ Harold M. Eastridge Director March 21, 2000
- -------------------------
HAROLD M. EASTRIDGE
/s/ William H. Gilbert
- -------------------------- Director March 21, 2000
WILLIAM H. GILBERT
35
<PAGE>
/s/ Larry D. Hartwig
- -------------------------- President, Chief March 21, 2000
LARRY D. HARTWIG Executive Officer and
Director
/s/ John J. Jelavich
- -------------------------- Director March 21, 2000
JOHN J. JELAVICH
/s/ Donald H. Livingstone
- -------------------------- Director March 21, 2000
DONALD H. LIVINGSTONE
/s/ Alfred G. Montna
- -------------------------- Director March 21, 2000
ALFRED G. MONTNA
/s/ David A. Offutt
- -------------------------- Chairman of the Board March 21, 2000
DAVID A. OFFUTT of Directors, and Director
/s/William K. Retzer
- -------------------------- Director March 21, 2000
WILLIAM K. RETZER
/s/Ross D. Scott
- -------------------------- Director March 21, 2000
ROSS D. SCOTT
/s/ Michael C. Wheeler
- -------------------------- Director March 21, 2000
MICHAEL C. WHEELER
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2.1 Plan of Reorganization and Merger Agreement dated January 30,
1995 by and between Feather River State Bank, FRSB Merger
Company and
36
<PAGE>
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.*
10.1 Salary Continuation Agreement dated April 28, 1993 with
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 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).*
10.3 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).*
10.4 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).*
10.5 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).*
10.6 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).*
10.7 Bank Affiliate Agreement between Feather River State Bank and
Select Advisors, Inc. Filed as Exhibit 10.8 to the Company's
General Form for Registration of Securities on Form 10 (File
No. 0-26552).*
37
<PAGE>
10.8 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.*
10.9 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.*
10.10 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.*
10.11 Lease by and between Raj J. Sharma and Feather River State
Bank for 114 D Street, Wheatland, California. Filed as Exhibit
10.16 to the Company's Form 10-K for December 31, 1998.*
10.12 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. Filed as
Exhibit 10.17 to the Company's Form 10-K for December 31,
1998.*
10.13 Consulting Agreement between Feather River State Bank and
Robert J. Mulder dated June 23, 1999. Filed as Exhibit 10.18
to the Company's Form 10-Q for June 30, 1999.*
10.14 Severance Agreement between California Independent Bancorp,
Feather River State Bank and Robert J. Mulder dated May 25,
1999. Filed as Exhibit 10.19 to the Company's Form 10-Q for
June 30, 1999.*
10.15 Director Deferred Fee Agreement between Feather River State
Bank and David A. Offutt dated April 1, 1999. Filed as Exhibit
10.20 to the Company's Form 10-Q for September 30, 1999.*
10.16 Employment Agreement between California Independent Bancorp,
Feather River State Bank and Larry D. Hartwig dated July 19,
1999. Filed as Exhibit 10.21 to the Company's Form 10-Q for
September 30, 1999.*
38
<PAGE>
10.17 Nonqualified Stock Option Agreement between California
Independent Bancorp and Larry D. Hartwig dated July 19, 1999.
Filed as Exhibit 10.22 to the Company's Form 10-Q for
September 30, 1999.*
10.18 Executive Salary Continuation Agreement between Feather River
State Bank and Blaine C. Lauhon dated May 7, 1999. Filed as
Exhibit 10.23 to the Company's Form 10-Q for September 30,
1999.*
10.19 Executive Salary Continuation Agreement between Feather River
State Bank and Larry D. Hartwig dated October 27, 1999.
10.20 Sublease by and between the Rural Community Insurance Agency
and Feather River State Bank for Fresno, California office
space dated September 11, 1999.
13 California Independent Bancorp's 1999 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, 1999.
27 Financial Data Schedule
</TABLE>
- ---------------
* Document incorporated herein by reference.
39
<PAGE>
Exhibit 10.19
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS EXECUTIVE SALARY CONTINUATION AGREEMENT ("Agreement") is made
and entered into this 27th day of OCTOBER, 1999 by and between FEATHER RIVER
STATE BANK, a California banking corporation ("Bank"), and LARRY D. HARTWIG
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is employed by the Bank as its PRESIDENT; and
CEO;
WHEREAS, the experience of the Executive, his knowledge of the
affairs of the Bank, and his reputation and contacts in the banking industry
are so valuable that assurance of his continued service is essential for the
future growth and profitability of the Bank and it is in the best interests
of the Bank to arrange terms of continued employment for the Executive so as
to reasonably assure his remaining in the Bank's employment during his
lifetime or until the age of retirement; and
WHEREAS, it is the desire of the Bank that the Executive's services
be retained as herein provided; and
WHEREAS, the Executive is willing to continue in the employ of the
Bank provided the Bank agrees to pay the Executive or his beneficiaries
certain benefits in accordance with the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the services to be performed in
the future as well as the mutual promises and covenants herein contained, it
is hereby agreed as follows:
ARTICLE 1.
1.1. BENEFICIARY. The term Beneficiary shall mean the
person or persons whom the Executive shall designate in writing to receive
the benefits provided hereunder.
1.2. DISABILITY. The term disability shall mean the inability of the
Executive to perform the duties and responsibilities of his position with the
Bank in a normal and regular manner, due to mental or physical illness or
injury, for a period of ninety (90) consecutive days, or for fifty percent
(50%) or more of the normal working days during a period of one hundred
eighty (180) consecutive days. Determination of the Executive's disability
shall be made by the Bank's Board of Directors, which determination shall be
made in its sole discretion and shall be final and conclusive on all parties
hereto. In the event Executive is also a director of the Bank, the Executive
shall be ineligible to participate in such
<PAGE>
disability determination. Executive shall, if requested by the Bank's Board
of Directors, submit to a mental or physical examination to assist the Board
of Directors in making its determination of disability hereunder.
1.3. NAMED FIDUCIARY AND PLAN ADMINISTRATOR. The Bank Fiduciary and
Plan Administrator of this plan shall be the Bank.
1.4. CHANGE OF CONTROL. A "Change of Control" shall be deemed to
have occurred if (i) a tender offer shall be made and consummated for the
ownership of 25% or more of the outstanding voting securities of the Bank;
(ii) the Bank shall be merged or consolidated with another bank or
corporation and as a result of such merger or consolidation less than 75%, of
the outstanding voting securities of the surviving or resulting bank or
corporation shall be owned in the aggregate by the former shareholders of the
Bank, other than affiliates (within the meaning of the Securities Exchange
Act of 1934) of any party to such merger or consolidation, as the same shall
have existed immediately prior to such merger or consolidation; (iii) the
Bank shall sell substantially all of its assets to another bank or
corporation which is not a wholly-owned subsidiary; or (iv) a person, within
the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the
date hereof) of the Securities Exchange Act of 1934, shall require 25% or
more of the outstanding voting securities of the Bank (whether directly,
indirectly, beneficially or of record). For purposes hereof, ownership of
voting securities shall take into account and shall include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on
the date hereof) pursuant to the Securities Exchange Act of 1934.
ARTICLE 2.
2.1. EMPLOYMENT. The Bank agrees to employ the Executive in such
capacity as the Bank may determine from time to time. The Executive shall
continue in the employ of the Bank in such capacity and with such duties and
responsibilities as may be assigned to him, and with such compensation as may
be determined from time to time by the Board of Directors of the Bank.
2.2. FULL EFFORTS. Executive shall devote his full business time and
efforts to the business and affairs of the Bank or the successor to the Bank
by which Executive is then employed pursuant to this Agreement; provided,
however, this provision shall not preclude Executive, with prior approval of
the Bank, from serving as a director or member of a committee of any other
organization involving no conflict of interests with the interests of the
Bank, from engaging in charitable and community activities, and from managing
his personal investments, provided that such activities do not interfere with
the regular performance of his duties and responsibilities to the Bank.
2.3. FRINGE BENEFITS. The salary continuation benefits provided by
this Agreement are granted by the Bank as a fringe benefit to the Executive
and are not part of any salary reduction plan or any arrangement deferring a
bonus or a salary
<PAGE>
increase. The Executive has no option to take any current
payment or bonus in lieu of these salary continuation benefits.
ARTICLE 3.
3.1. RETIREMENT. If the Executive shall continue in the employment
of the Bank until he attains the age of SIXTY-FIVE he may retire from active
daily employment as of the first day of the month next following attainment
of age SIXTY-FIVE or upon such later date as may be mutually agreed upon by
the Executive and the Bank ("Retirement Date").
3.2 PAYMENT. The Bank agrees that upon such Retirement Date it will
pay to the Executive the annual sum of SEVENTY-FIVE THOUSAND Dollars
($75,000.00) payable monthly on the first day of each month following such
Retirement Date for a period of one hundred eighty (180) months; subject to
the conditions and limitations set forth in this Agreement. The SEVENTY-FIVE
THOUSAND Dollars ($75,000.00 annual payment amount may be adjusted as of the
first year in which it is to be paid to reflect changes in the federally
determined cost-of-living index and may be adjusted annually for each payment
year thereafter to reflect further changes in said federally determined
cost-of-living index. However, the Bank is not obligated hereunder to make
any such adjustment.
3.3. DEATH AFTER RETIREMENT. The Bank agrees that if the Executive
dies after the Retirement Date but shall die before receiving the full amount
of monthly payments to which he is entitled under this Agreement, the Bank
will continue to make such monthly payments to the Executive's designated
Beneficiary for the remaining period. If a valid Beneficiary Designation is
not in effect, the payments shall be made to the Executive's surviving spouse
or, if none, said payments shall be made to the duly qualified personal
representative, executor or administrator of Executive's estate.
ARTICLE 4.
4.1. DEATH PRIOR TO RETIREMENT. In the event the Executive should
die while employed by the Bank at any time after the date of this Agreement
but prior to his Retirement Date, the Bank shall pay a sum equal to the Net
Insurance Coverage for the appropriate Plan Year set forth in Schedule A
(Participant Balance Sheet and Policy Data) to the Executive's designated
Beneficiary in equal monthly installments for a period of one hundred eighty
(180) months. If a valid Beneficiary Designation is not in effect, the
payments shall be made to the Executive's surviving spouse or, if none, said
payments shall be made to the duly qualified personal representative,
executor or administrator of Executive's estate. The said monthly payments
shall begin the first day of the month following the month of the death of
the Executive. Provided, however, that anything hereinabove to the contrary
notwithstanding, no death benefit shall be payable hereunder if it is
determined that the Executive's death was caused by suicide.
4.2. DISABILITY PRIOR TO RETIREMENT. In the event the Executive
should become disabled while actively employed by the Bank at any time after
the date of this Agreement
<PAGE>
but prior to his Retirement Date, the Executive shall be considered to be one
hundred percent (100%) vested in the amount set forth in Schedule A attached
hereto and made a part hereof, under Accrued Salary Continuation Liability
for the appropriate Plan Year. Said amount shall be paid to the Executive in
a lump sum within three (3) months of the determination of disability. Said
payment shall be in lieu of any other retirement or death benefit under this
Agreement.
ARTICLE 5.
5.1. TERMINATION OF EMPLOYMENT. The Bank reserves the right to
terminate the employment of the Executive at any time prior to retirement. In
the event that the employment of the Executive shall terminate prior to the
Executive I s Retirement Date, other than by reasons of Executive"s
disability. or death, then this Agreement shall terminate upon the date of
such termination-of, employment. P rovided, however, that the Executive shall
be entitled to the benefits described below under the following circumstances:
a. SALARY CONTINUATION. The Company and Executive shall
enter into a Salary Continuation Agreement which shall provide that if
Executive continues to be employed by the Company at least until he reaches
age 65, upon retirement the Executive will receive an annual payment of
$75,000 per year for 15 years following such retirement. The Executive will
be vested for the accrual amount each year and will become vested in the
amount of each additional year's accrual until he becomes 100% vested. The
Executive shall be entitled to the entire amount vested upon the termination
of this Agreement. In the event of a Change of Control, Executive will become
fully vested and, if the Agreement is terminated within 12 months of Change
of Control the Executive will be entitled to the full amount of the Salary
Continuation Agreement.
b. Anything hereinabove to the contrary notwithstanding, if
the Executive is not fully vested in the amount set forth in Schedule A under
Accrued Salary Continuation Liability, he will become fully vested in said
amount in the event of a Change of Control of the Bank and Executive shall be
entitled to the full amount set forth in Schedule A, for the appropriate Plan
Year, upon the terms and conditions hereof, if termination of employment
thereafter occurs under this Section 5.1.
ARTICLE 6.
6.1. TERMINATION OF AGREEMENT BY REASON OF CHANGE IN LAW. The Bank
is entering into this Agreement upon the assumption that certain existing tax
laws will continue in effect in substantially their current form. In the
event of any changes in such federal laws which materially affect this
Agreement, the Bank shall have an option to terminate or modify this
Agreement. Provided, however, that the Executive shall be entitled to at
least the same amount as he would have been entitled to under Section 4.2.
relating to disability. The payment of said amount shall be made upon such
terms and conditions and at such time as the Corporation shall determine, but
in no event commencing later than the Executive's Retirement Date.
<PAGE>
ARTICLE 7.
7.1. NONASSIGNABLE. Neither the Executive, his spouse, nor any other
beneficiary under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate, mortgage, commute, modify, or otherwise
encumber in advance any of the benefits payable hereunder, nor shall any of
said benefits be subject to seizure for the payment of any debts, judgments,
alimony or separate maintenance, owed by the Executive or his beneficiary or
any of them, or be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise.
ARTICLE 8.
8.1. CLAIMS PROCEDURE. The Bank shall make all determinations as
to rights to benefits under this Agreement. Any decision by the Bank denying
a claim by the Executive or his beneficiary for benefits under this Agreement
shall be stated in writing and delivered or mailed to the Executive or such
beneficiary. Such decision shall set forth the specific reasons for the
denial, written to the best of the Bank's ability in a manner-calculated to
be understood without legal or actuarial counsel. In addition, the Bank shall
provide a reasonable opportunity to the Executive or such beneficiary for
full and fair review of the decision denying such claim.
ARTICLE 9.
9.l. UNSECURED GENERAL CREDITOR. The Executive's rights are limited
to the right to receive payments as provided in this Agreement and the
Executive's position with respect thereto is that of a general unsecured
creditor of the Bank.
ARTICLE 10.
10.1. REORGANIZATION. The Bank shall not voluntarily engage in a
Change of Control of the Bank unless and until such succeeding or continuing
corporation, firm or person agrees to assume and discharge the obligations of
the Bank under this Agreement. Upon the occurrence of such event, the term
"Bank" as used in this Agreement shall be deemed to refer to such successor
or survivor corporation, firm or person.
ARTICLE 11.
11.1. NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Bank to discharge the
Executive, or restrict the right of the Executive to terminate his employment.
ARTICLE 12.
<PAGE>
12.1. LIQUIDATED DAMAGES. The parties hereto, before entering into
this Agreement, have been concerned with the fact that substantial damages
will be suffered by Executive in the event that the Bank shall fail to
perform according to this Agreement. In the event of nonperformance by the
Bank, Executive shall be entitled to liquidated damages of $5,000.00 for each
payment due hereunder which is not made by the Bank within thirty (30) days
of the date such payment was scheduled to have been made. This provision
shall not be applicable in the event that such nonpayment is the result of
prohibition of such payment by law, regulation or order of a banking
regulatory agency.
ARTICLE 13.
13.1. SUCCESSORS AND ASSIGNS; ASSIGNMENT. The rights and obligations
of this Agreement shall be binding upon and inure to the benefit of the
successors, assigns, heirs and personal representatives of the parties
hereto. Executive may not assign this Agreement or any of Executive's rights
hereunder except with the prior written consent of the Bank.
13.2. SEVERABILITY. If any provision of this Agreement, as applied
to either party or to any circumstances, is judged by a court to be void or
unenforceable, in whole or in part, the same shall in no way affect any other
provision of this Agreement, the application of such provision in any other
circumstances, or the validity or enforceability of this Agreement.
13.3. APPLICABLE LAW; JURISDICTION AND VENUE. This Agreement and all
matters or issues collateral hereto shall be governed by the laws of the
State of California applicable to contracts performed entirely therein.
Executive and Bank each consent to the jurisdiction of, and any action
concerning this Agreement shall be brought and tried in, the United States
District Court for the Eastern District of California or the Superior or
Municipal Court for the County of Sutter.
13.4. WAIVER. A waiver by either party of any of the terms or
conditions of this Agreement in any one instance shall not be deemed or
construed to be a waiver of such terms or conditions for the future, or of
any subsequent breach thereof. All remedies, rights, undertakings,
obligations, and agreements contained in this Agreement shall be cumulative,
and none of them shall be in limitation of any other remedy, right,
undertaking, obligation or agreement of either party.
13.5. ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to
which it or they may be entitled.
13.6. HEADINGS. The headings in this Agreement are for convenience
only and shall not in any manner affect the interpretation or construction of
the Agreement or any of its provisions.
<PAGE>
13.7. NOTICE. Any notice or other communication to be given under
this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if personally served, or if mailed, upon deposit
in the United States mail, first class postage prepaid, express or certified,
return receipt requested, and properly addressed to the parties as follows:
if to Executive at his last address shown in the Bank's records; if to Bank:
Feather River State Bank
P.O. Box 929002
Yuba City, CA 95992
Attention: President
Either party may designate a new address for purpose of this Section 13.7. by
giving the other notice of the new address as provided herein.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly
executed by its proper officer and the Executive has hereunto set his hand at
Yuba City, California, the day and year first above written.
FEATHER RIVER STATE BANK
BY: /s/
------------------------
ANNETTE BERTOLINI
ITS: SENIOR VICE PRESIDENT
EXECUTIVE:
By: /s/
------------------------
LARRY D. HARTWIG
PRESIDENT/CEO
BENEFICIARY DESIGNATION NOTICE
To the Plan Administrator of the Feather River State Bank Executive
Salary Continuation Agreement:
Pursuant to the Provisions of my Executive Salary Continuation
Agreement with the Bank permitting the designation of a beneficiary or
beneficiaries by a participant, I hereby designate the following
persons and entities as primary and secondary beneficiaries of any
benefit under said Agreement payable by reason of my death:
Primary Beneficiary:
<PAGE>
<TABLE>
<CAPTION>
Name Address Relationship
<S> <C> <C>
Mary C. Hartwig Wife
Secondary (Contingent) Beneficiary:
Name Address Relationship
<S> <C> <C>
Hartwig Family Trust Family Trust
</TABLE>
THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION IS HEREBY
RESERVED. ALL PRIOR DESIGNATIONS, IF ANY, OF BENEFICIARIES AND
SECONDARY BENEFICIARIES ARE HEREBY REVOKED.
The Plan Administrator shall pay all sums payable under the Agreement
by reason of my death to the Primary Beneficiary, if he or she survives
me, and if no Primary Beneficiary shall survive me, then to the
Secondary Beneficiary, and if no named beneficiary survives me, then
the Plan Administrator I shall pay all amounts in accordance with the
terms of the Executive Salary Continuation Agreement. In the event that
a named beneficiary survives me and dies prior to receiving the entire
benefit payable under said Agreement, then and in that event the
remaining unpaid benefit, payable according to the terms of the
Agreement, shall be payable to the personal representatives of the
estate of said deceased beneficiary, who survive me, but die prior to
receiving the total benefit.
---------------------------------
Date of Designation
<PAGE>
SCHEDULE A (LARRY HARTWIG)
PARTICIPANT'S BALANCE SHEET AND POLICY DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
END OF PLAN YEAR ACCRUED SALARY CONTINUATION PERCENT VESTING NET INSURANCE
LIABILITY COVERAGE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 $84,705 100% IN THE ACCRUAL AMOUNT $1,824,841
2 $176,898 100% IN THE ACCRUAL AMOUNT $1,817,699
3 $277,240 100% IN THE ACCRUAL AMOUNT $1,809,591
4 $386,451 100% IN THE ACCRUAL AMOUNT $1,800,575
5 $505,315 100% IN THE ACCRUAL AMOUNT $1,790,928
6 $634,686 100% IN THE ACCRUAL AMOUNT $1,780,324
</TABLE>
<PAGE>
Exhibit 10.20
SUBLEASE
1. PARTIES
This Sublease is entered into by and between FEATHER RIVER STATE
BANK, A CALIFORNIA CORPORATION, Sublessor, and RURAL COMMUNITY INSURANCE
AGENCY, A MINNESOTA CORPORATION, Sublessee, as a Sublease under the Master
Lease dated SEPTEMBER 11, 1999, entered into by MCJ INVESTMENTS as lessor,
and Sublessor under Sublease as Lessee; a copy of the Master Lease is
attached hereto as Exhibit "A".
2. PROVISIONS CONSTITUTING SUBLEASE
(a) This Sublease is subject to all of the terms and conditions of
the Master Lease in Exhibit"A" and Sublessee shall assume and perform the
obligations of Sublessor and Lessee in said Master Lease, to the extent said
terms and conditions are applicable to the Premises subleased pursuant to
this Sublease. Sublessee shall not commit or permit to be committed on the
Premises any act or omission which shall violate any term or condition of the
Master Lease. In the event of the termination of Sublessor's Interest as
Lessee under the Master Lease for any reason, then this Sublease shall
terminate coincidentally therewith without any liability of Sublessor to
Sublessee.
(b) All of the terms and conditions contained in the Exhibit "A"
Master Lease are incorporated herein as terms and conditions of this Sublease
(with each reference therein to Lessor and Lessee to be deemed to refer to
Sublessor and Sublessee) shall be the complete terms and conditions of this
Sublease.
(c) Sublessee shall receive two (2) months of rent credit, months 2,3
(d) Sublessee shall pay the first months rent equal to $4,176.20
upon execution of the sublease.
(e) Sublessee shall pay a Security Deposit to Sublessor of $4,593.82
upon
<PAGE>
execution of the sublease.
(f) Exhibit "A2" attached hereto and apart of this Sublease
Agreement Sublessor will not exercise their right to cancel this lease so
long as the Sublessee is not in default of the Sublease or the Master Lease.
3. PREMISES
Sublessor leases to Sublessee and Sublessee hires from Sublessor the
following described Premises together with the appurtenances, situated at
7040 N. Marks Suite 101 in the City of Fresno, County of Fresno, State of
California.
4. TERM
(a) The term of this Sublease shall be for a period of 59 MONTHS
commencing on JANUARY 1, 2000, and ending on November 30, 2004.
(b) In the event Sublessor is unable to deliver possession of the
Premises at the commencement of the term, Sublessor shall not be liable for
any damage caused thereby, nor shall this Sublease be void or voidable but
Sublessee shall not be liable for rent until such time as Sublessor offers to
deliver possession of the Premises to Sublessee, but the term hereof shall
not be extended by such delay. If Sublessee, with Sublessor's consent, takes
possession prior to the commencement of the term, Sublessee shall do so
subject to all of the covenants and conditions hereof and shall pay no base
rent until the commencement of the term begins.
5. USE
Sublessee shall use the Premises for GENERAL OFFICES and for no
other purpose without the prior written consent of Sublessor. Sublessee's
business shall be established and conducted throughout the term hereof in a
first class manner. Sublessee shall not use the Premises for, or carry on, or
permit to be carried on, any offensive, noisy or dangerous trade, business,
manufacture or occupation nor permit any auction sale to be held or conducted
on or about the Premises. Sublessee shall not do or suffer anything to be
done upon the Premises which will cause structural injury to the Premises or
the building of which, the Premises form a part. The Premises shall not be
overloaded and no machinery, apparatus or other appliance shall be used or
operated in or upon the Premises which will in any manner injure, vibrate or
shake the Premises or the building of which it is a part. No use shall be
made of the Premises which will in any way impair the efficient operation of
the sprinkler system (if any) within the building containing the Premises.
Sublessee shall not leave the Premises unoccupied or vacant during the term.
No musical instrument of any sort, or any noise making device will be
operated or allowed upon the Premises for the purpose of attracting trade or
otherwise. Sublessee shall not use or permit the use of the Premises or any
part thereof for any purpose which will increase the existing rate of
insurance upon the building in which the Premises are located, or cause a
cancellation of any insurance policy covering the building or any part
<PAGE>
thereof. If any act on the part of Sublessee or use of the Premises by
Sublessee shall cause, directly or indirectly, any increase of Sublessor's
insurance expense, said additional expense shall be paid by Sublessee to
Sublessor upon demand. No such payment by Sublessee shall limit Sublessor in
the exercise of any other rights or remedies, or constitute a waiver of
Sublessor's right to require Sublessee to discontinue such act or use.
6. NOTICES
All notices or demands of any kind required or desired to be
given by Sublessor or Sublessee hereunder shall be in writing and shall be
deemed delivered forty-eight (48) hours after depositing the notice or demand
in the United States mail, certified or registered, postage prepaid,
addressed to the Landlord or Tenant respectively at the addresses set forth
after their signatures at the end of this Sublease. All rent and other
payments due under this Sublease or the Master Lease shall be made by
Sublessee to Landlord at the same address.
DATED: _________________, 19_____
SUBLESSOR: FEATHER RIVER STATE BANK SUBLESSEE: RURAL COMMUNITY INSURANCE
AGENCY, A MINNESOTA
CORPORATION
By: By
----------------------------- ----------------------------------
Tim Verbrugge
Chief Financial Officer
Address P.O. Box 929002 Address 3501 Thurston Avenue
---------------- -----------------------------
City: Yuba City State: CA ,95992 City: Anika State: MN 55303
----------- --------- --------- --------------
Telephone (530) 674-4545 Telephone (612) 323-2299
-------------- ---------------------------
The undersigned, Lessor under the Master Lease attached as Exhibit"A", hereby
consents to the subletting of the Premises described herein on the terms and
conditions contained in this Sublease. This consent shall apply only to this
Sublease and shall not be deemed to be a consent to any other Sublease.
DATED: , 19
---------------------- -----------------
LESSOR: MCJ Investments
---------------------------------------
By
--------------------------------------------
Michael Thomason
Address 7090 N. Marks
---------------------------------------
City Fresno State CA
------------ ---------------
Telephone (559) 432-1600
------------------------------
<PAGE>
EXHIBIT "A2"
The purpose of this Exhibit is to supplement, modify, and clarify,
as applicable, the terms and provisions of the Sublease to which it is
attached. Capitalized terms or terms otherwise defined in the Sublease shall
have the same meaning as in the Master Lease unless otherwise specified
herein. The Sublease and this Exhibit are to be construed together; however,
if there is a conflict between the two, then this Exhibit shall govern.
1. CONSENT OF LANDLORD. This Sublease shall not be effective until Landlord
has signed and delivered to Sublessor and Sublessee its Consent to Sublease.
Consent to Sublease is deemed approved upon Landlord's signature on the
Sublease Agreement.
2. EFFECT OF SUBLEASE AND LANDLORD'S CONSENT. Notwithstanding this Sublease
and any consent of Landlord to this Sublease:
a) Such consent to this Sublease will not release Sublessor of its
obligations or alter the primary liability of Sublessor to pay the rent and
perform and comply with all of the obligations of Sublessor to be performed
under the Master Lease;
b) The acceptance of rent or any other sums by Landlord from Sublessee
and/or anyone else liable under the Sublease shall not be deemed a waiver by
Landlord of any provisions of the Master Lease;
c) Landlord's consent to this Sublease shall not constitute a consent to
any subsequent subletting or assignment;
d) In the event of any default of Sublessor under the Master Lease,
Landlord may proceed directly against Sublessor or anyone else liable under
the Master Lease without first exhausting Landlord's remedies against any
other person or entity liable thereon to Landlord;
e) Landlord does not agree to attorn to Sublessee upon a termination of
the Master Lease. In the event Landlord succeeds to Sublessor's interest
under the Master Lease, whether as a result of a default under the Master
Lease and in termination thereof or otherwise, then Landlord, at its option
and without being obligated to do so, may require Sublessee to attorn to
Landlord. In such event (but not otherwise) Landlord shall undertake the
obligations of Sublessor under this Sublease from the time of the exercise of
said option to terminate this Sublease but Landlord shall not be liable for
any prepaid rents or any security deposit paid by Sublessee, nor shall
Landlord be liable for any other defaults of Sublessor under this Sublease.
In the event of termination of the Master Lease and if Landlord does not
require Sublessee to attorn to Landlord, Sublessee shall have no
<PAGE>
further right to possession of the Premises; and
f) No amendments, changes or modifications shall be made to this
Sublease without prior written consent of Landlord.
SUBLESSOR: SUBLESSEE:
FEATHER RIVER STATE BANK RURAL COMMUNITY INSURANCE AGENCY,
A MINNESOTA CORPORATION
By: By:
-------------------------------- --------------------------------
Tim Verbrugge
Chief Financial Officer
Dated Dated
-------------------------------- ------------------------------
LESSOR:
MCJ INVESTMENTS
By
-----------------------------------
Michael Thomason
<PAGE>
CALIFORNIA
[LOGO] INDEPENDENT
BANCORP
1999 Annual Report
[GRAPHIC]
Structuring for growth to meet the
challenges of a changing region.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Stockholder Information .............................................. 2
Financial Highlights ................................................. 3
Letter to the Shareholders ........................................... 4
Structuring for Growth to Meet the Challenges of a Changing Region ... 6
Management's Discussion and Analysis ................................. 8
Report of Independent Public Accountants ............................. 23
Consolidated Financial Statements .................................... 24
Notes to Financial Statements ........................................ 28
CIB, FRSB & Subsidiary Directors and Management Team ................. 40
</TABLE>
<PAGE>
CORPORATE PROFILE
California Independent Bancorp ("Company") is structuring for growth to meet the
challenges of a changing region. While looking to the future, California
Independent Bancorp, the holding company for Feather River State Bank ("Bank"),
is positioning the Company for future growth.
Feather River State Bank is a growing community bank that has not only been a
financial leader in the communities we have served since 1977, but an integral
member of these communities, too. Feather River State Bank's seven retail
branches span the Central Sacramento Valley and are located in Yuba, Sutter,
Colusa and Yolo counties. In addition to our retail branches, Feather River
State Bank boasts a business and consumer lending center as well as agricultural
and residential real estate departments. At year-end 1999, Feather River State
Bank's assets were $300 million.
Feather River State Bank's professionalism and attention to client needs has
contributed to our long-standing relationships and growing reputation as the
premier community bank in the Central Sacramento Valley. Responsive,
relationship banking with experienced officers and staff is the foundation upon
which California Independent Bancorp and Feather River State Bank prepare for
the future.
Feather River State Bank's full range of traditional banking products fits the
banking needs of business, consumer, commercial, agri-business and real estate
customers. The Bank is a member of the Federal Deposit Insurance Corporation,
guaranteeing each depositor's accounts are insured up to $100,000.
Feather River State Bank continues to offer alternative investment financial
services through Select Advisors, Inc., a registered investment adviser, and
Select Capital Corporation, a registered broker/dealer. These alternative
investments are not insured by the FDIC, are not Bank deposits or other
obligations of the Bank and are not guaranteed by the Bank.
As we look to the future, California Independent Bancorp and Feather River State
Bank anticipate a year of growth. It is with great excitement that we embrace
the new millennium and the opportunities it will bring to our region. We feel
the Company is strategically placed to meet the financial needs of the growing
Central California Valley and we have the financial tools to expand our depth
into the business, consumer, real estate and agricultural banking arenas,
ensuring Feather River State Bank's status as the premier community bank in the
region.
1
<PAGE>
STOCKHOLDER INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded 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.
The prices indicated below may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
SALE PRICE OF COMMON STOCK
--------------------------
QUARTER ENDED 1999 BID ASK
--- ---
<S> <C> <C>
December 31 $ 16.00 $ 18.00
September 30 18.25 19.00
June 30 20.38 20.88
March 31 20.25 21.00
<CAPTION>
QUARTER ENDED 1998 BID ASK
--- ---
<S> <C> <C>
December 31 $ 20.00 $ 20.12
September 30 22.50 24.50
June 30 25.00 27.50
March 31 24.50 26.25
</TABLE>
CASH DIVIDEND INFORMATION
Cash dividends paid on the Company's Common Stock were $.42 per share for the
year ending December 31, 1999, and $.40 per share for the year ending December
31, 1998, adjusted to reflect 5% stock dividends in 1999 and 1998.
The Company has paid cash dividends on its Common Stock since 1980, and has paid
thirty-six consecutive quarterly cash dividends since 1991. It is currently the
intention of the Board of Directors of California Independent Bancorp to
continue the payment of 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. As of December 31, 1999, the Company had $1,057,833
available for payment of dividends to its shareholders without any restrictions.
The number of shares issued and outstanding as of December 31, 1999, was
1,904,618. Call your stockbroker or one of our market makers for stock
information:
First Union Securities 888-383-3112
Ryan, Beck & Co. 800-342-2325
First Security Van Kasper 800-652-1747
First Union Securities now offers Dividend Reinvestment Plans. These plans allow
conversion of cash dividends into whole or fractional shares of CIBN stock. This
service is offered free of fee or commission charges.
SHAREHOLDER INFORMATION
Shareholders wishing more detailed information about California Independent
Bancorp may obtain a copy of the Company's Form 10-K, The California Independent
Quarterly Newsletter or CIB Stock Marketing Packages upon request from:
California Independent Bancorp
Investor Relations Department
Annette Bertolini
P.O. Box 929002
Yuba City, California 95992
(530) 674-4444
STOCKHOLDER ACCOUNT INFORMATION
If you have questions concerning your stockholder account, please call our
transfer agent:
U.S. Stock Transfer Corporation
1745 Gardena Avenue
Glendale, California 91204
(800) 835-8778
ANNUAL MEETING
The annual shareholders' meeting of California Independent Bancorp will be held
May 17, 2000, 6:00 P.M., at our Colusa Avenue Branch located at 777 Colusa
Avenue in Yuba City.
2
<PAGE>
Financial Highlights
California Independent Bancorp and Subsidiaries for the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 23,279,582 $ 24,799,713 $ 23,386,677 $ 20,574,110 $ 19,002,834
Interest Expense 8,573,383 8,830,774 9,288,694 7,448,898 6,316,594
------------ ------------ ------------ ------------ ------------
Net Interest Income $ 14,706,199 $ 15,968,939 $ 14,097,983 $ 13,125,212 $ 12,686,240
Provision for Loan Losses 1,000,000 2,246,145 6,153,000 385,000 875,000
------------ ------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses $ 13,706,199 $ 13,722,794 $ 7,944,983 $ 12,740,212 $ 11,811,240
Noninterest Income 2,564,447 3,454,179 3,142,139 2,812,030 2,226,967
Noninterest Expense 13,810,491 12,850,678 11,900,255 9,981,827 8,936,485
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Provision
for Income Taxes $ 2,460,155 $ 4,326,295 $ (813,133) $ 5,570,415 $ 5,101,722
Provision (Benefit) for Income Taxes 865,000 1,603,600 (511,350) 2,201,000 2,036,000
------------ ------------ ------------ ------------ ------------
Net Income (Loss) From Continuing
Operations $ 1,595,155 $ 2,722,695 $ (301,783) $ 3,369,415 $ 3,065,722
------------ ------------ ------------ ------------ ------------
Loss on Disposal of Subsidiary $ (713,772) $ - $ - $ - -
Income (Loss) on Discontinued
Operations (277,685) 157,781 140,353 31,636 -
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ 603,698 $ 2,880,476 $ (161,430) $ 3,401,051 $ 3,065,722
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER COMMON SHARE DATA
Basic Earnings Per Share From
Continuing Operations $ 0.88 $ 1.54 $ (0.17) $ 1.97 $ 1.71
Cash Dividends $ 0.42 $ 0.40 $ 0.38 $ 0.36 $ 0.35
Book Value $ 12.20 $ 12.99 $ 11.65 $ 12.29 $ 10.73
Dividend Payout Ratio 47.73% 25.97% n/a 18.27% 20.47%
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC 1,821,549 1,763,408 1,738,917 1,707,878 1,796,495
FINANCIAL RATIOS FROM
CONTINUING OPERATIONS
Return on Average Assets 0.54% 0.95% (0.11)% 1.51% 1.56%
Return on Average Common
Shareholders' Equity 6.70% 11.82% (1.33)% 16.56% 17.54%
Net Interest Margin 4.84% 5.40% 4.92% 5.64% 5.45%
Net Charge-Offs to
Average Loans and Leases, Net 0.14% 0.91% 2.70% 0.16% 0.19%
Allowance for Loan and Lease Loss
as a Percent of Net Loans and Leases 4.20% 3.33% 3.29% 2.68% 3.05%
Efficiency Ratio 79.96% 66.16% 69.03% 62.63% 59.92%
</TABLE>
[CHART] [CHART] [CHART]
3
<PAGE>
[PHOTO]
(left to right) David Offutt, Chairman of the Board, Larry Hartwig,
President/CEO
MISSION STATEMENT
"To maximize shareholder value, corporate image and reputation in the community
on a consistent basis, while creating an environment for our employees to have
the opportunity for personal growth and achievement."
We don't want
to be the biggest...
just the best.
4
<PAGE>
LETTER TO THE SHAREHOLDERS:
In 1999, California Independent Bancorp's ("CIB") wholly-owned subsidiary
Feather River State Bank ("Bank") completed its 23rd year in business. The last
half of 1999 was spent on strategically repositioning CIB and the Bank to gain
efficiency, firmly establish a strong credit culture, and develop excellence in
our sales and service.
From an operating standpoint, CIB's net income from continuing operations for
1999 was $1,595,155 or $0.88 per share, as compared to $2,722,695 or $1.54 per
share for fiscal 1998. CIB's net interest margin remained strong at 4.84% for
1999, compared to 5.40% for 1998. Our allowance for loan and lease losses were
$6,770,523 for 1999 versus $6,024,111 for 1998. Our allowance for loan and lease
losses as a percentage of total loans was 4.20% and 3.33% for 1999 and 1998,
respectively. Also, for the first time, CIB closed the year with total assets in
excess of $300 million.
CIB's consolidated capital position remains strong, with all ratios well in
excess of regulatory requirements. At December 31, 1999, CIB reported a total
risk-based capital ratio of 11.8%, a tier 1 risk-based capital ratio of 10.6%,
and a leverage capital ratio of 8.0%.
Our earnings have been held back by the high cost of managing problem loans and
higher than normal non-interest expenses. Much work has been done in both areas
to align CIB with its peer group competitors. The containment of both these
expenses will take more time, but we are well down the road to success in these
areas.
As change in our industry accelerates, we are faced with both challenges and
opportunities. The primary challenges are associated with the intensely
competitive market for full-range banking and financial services. The continuing
consolidation of Northern California independent banks offers a major
opportunity for CIB to expand its services into new market segments for
diversity and into neighboring communities for growth.
During this year, your Board of Directors and Senior Management have carefully
evaluated the re-engineering options necessary to assure CIB's future success.
In July, the Board of Directors selected a new president and chief executive
officer, Larry Hartwig, and the following strategic steps were taken to improve
asset quality and operating efficiencies:
- - Streamlining the branch delivery system to improve operating efficiency and
closing two underperforming loan production offices;
- - Reducing non-interest expense, including trimming the equivalent of 16
full-time staff;
- - Introducing automated credit scoring technology and new business and consumer
products that deliver real value to the customer;
- - Intensifying our focus on proactive relationship banking which builds customer
loyalty and service satisfaction while enhancing profitability;
- - Enhancing the effectiveness of our professional banking staff through
training, incentive programs, and a strong emphasis on customer sales and
quality service;
- - Building a strong, motivated management team through training, focusing on
performance comparisons with peer group banks, and gaining momentum in
improving credit quality;
- - Deciding that "application only" leases do not fit the Bank's future strategy
and electing to exit by the orderly closure of EPI Leasing Company; and
- - Improving consumer and business products and services to promote
diversification of our loan portfolio.
We will continue to strive for improvements in operating efficiencies and
expense reductions while focusing on profitable growth in loans, deposits, and
revenues. This, along with California's continued bright economic outlook,
points toward a good year in 2000.
We will continue to refocus our efforts toward the needs and expectations of our
customers and our commitment to relationship banking. Because we know that
customers value responsiveness and convenience, we are now setting goals and
challenging our bankers to better respond to customer requests. We thrive on
differentiating ourselves from big bank competitors through flexible, personal
service. We do not want to be the biggest . . . just the best.
We wish to thank all of our shareholders, customers, and employees for their
continuing support in helping us build on our strengths as a premier provider of
financial services and a leading Northern California community bank. We know
that it is energy, commitment, and hard work that will allow us to prosper.
/S/ David A. Offutt
David A. Offutt
CHAIRMAN OF THE BOARD
/S/ Larry Hartwig
Larry Hartwig
PRESIDENT/CEO
5
<PAGE>
STRUCTURING FOR GROWTH TO MEET THE CHALLENGES OF A CHANGING REGION.
Twenty-three years and still growing, California Independent Bancorp laid the
groundwork in 1999 for future growth for Feather River State Bank. Everywhere we
look there are new opportunities to satisfy more of our customers' financial
needs, to attract new customers and to customize our services to reflect the
needs of each customer.
Our Board of Directors and Senior Management have outlined the agenda for
diversifying the Company's portfolio. As we move into a sales and service
culture, we are laying the foundation for a stronger company. Just as we have
for the last 23 years, our focus on providing solutions for our customers and
creating value for our shareholders remains steadfast.
During 1999, a dedicated team of employees, officers and directors worked to
build a strong foundation for future growth and profitability. In July, Larry D.
Hartwig agreed to join the Company and the Bank as president, chief executive
officer and director. Mr. Hartwig is a veteran community banker and a strong
supporter of relationship banking.
With plans to grow our marketshare in the Northern California region over the
next 4 to 5 years, the selection of the president and chief executive officer
was critical. Mr. Hartwig fit the profile the Board was looking for in a leader
for the Company and Bank. His experience and management skills will direct our
future strategy. His employee, stockholder and community dedication will lead us
into the next century.
In addition to a new president and CEO, two new directors were added to the
Boards of both California Independent Bancorp and Feather River State Bank in
1999. The new directors bring with them energy and vision, as well as solid
business backgrounds and outstanding judgement. The new directors were carefully
selected for their expertise in the arenas of agriculture and lending. Alfred
Montna and John Dowdell are welcome additions to the Boards.
Feather River State Bank crossed a new threshold in 1999 when we celebrated
becoming a $300 million dollar bank. As we continue to strive to reach our full
potential, we have developed deep roots in the Central Sacramento Valley. These
roots are the basis upon which we will branch out and diversify our portfolio.
6
<PAGE>
LOOKING FORWARD TO GROWTH IN BUSINESS BANKING. Feather River State Bank is a
community-owned bank. Decisions are made right here in Yuba, Sutter, Colusa and
Yolo counties. Because we know the demanding needs of our business community,
Feather River State Bank offers full service banking products and services
tailored to meet the needs of today's business.
LOOKING FORWARD TO GROWTH IN CONSUMER LENDING. In 1999, we strengthened our
Consumer Lending segment of the Bank. Realizing the potential needs that could
be met in this area of lending, the Bank became more competitive and streamlined
its application process. As we enter the new millennium we look forward to
future growth in the Consumer Lending Department.
LOOKING FORWARD TO GROWTH IN AGRICULTURAL LENDING. Feather River State Bank
continues to establish strong, solid relationships and continued growth in both
agricultural and agricultural real estate lending. Feather River State Bank is
proud of its tradition of service to area farmers. By providing financial
products to agri-businesses, we assist hundreds of farm families, help fund a
critical component of our economy and in turn realize an economic benefit for
the Bank and its customers.
LOOKING FORWARD TO GROWTH IN OUR COMMUNITY INVOLVEMENT. Contributions to our
communities continue to be the cornerstone of our Bank. The commitment of our
employees in promoting Feather River State Bank shows in the thousands of
volunteer hours accumulated over the past year. From the Prune Festival and
Yuba-Sutter Free Health Fair to the Colusa Livestock Auction and a variety of
civic organizations, the employees of the Bank show that banking is not just a 9
to 5 job.
LOOKING FORWARD TO GROWTH IN STOCKHOLDER RELATIONS. Maintaining stockholder
trust and confidence as we build growing relationships for the new millennium is
top priority for the Company. Many of our shareholders take advantage of the
special banking privileges that accompany shareholder status at Feather River
State Bank. We encourage all shareholders to develop a banking relationship with
the Bank as we continue to enhance shareholder relations.
LOOKING FORWARD TO OUR FUTURE... THE ABC'S OF COMMUNITY BANKING. When looking
towards the future, it is hard to overlook the local schools. Feather River
State Bank continues to support education by helping to put learning
opportunities at the fingertips of local kindergartners. The Bank joined forces
with a local school district and the federal government forming a unique
partnership to create the "Literacy Academy" for kindergarten and early primary
students in the Marysville Joint Unified School District. The School District
identified a need for an enhanced reading program that could break down the
barriers that hindered children's ability to learn to read. The $2.1 million
program was made possible by a zero-interest bond financed by the Bank using the
Qualified Zone Academy Bonds. Tax credits are offered in lieu of charging
interest to the school district. Feather River State Bank is proud to make this
investment in our community.
In 1999, we all became very familiar with the term, Y2K. Feather River State
Bank's preparations for the Year 2000 were initiated in 1997 by a dedicated team
of employee experts. At the stroke of midnight on January 1, Feather River State
Bank welcomed the Year 2000 with uninterrupted service. Feather River State Bank
was committed to meeting the Year 2000 challenge, while looking ahead to protect
the integrity of our customer's deposits and ensure the safety and soundness of
our institution. Throughout 1999 regular public forums were held at the Bank. We
also reached out into our service communities, addressing senior citizen groups
and non-profit agencies. Educational forums encouraged customers and citizens to
make informed decisions regarding how to prepare for the Year 2000. Feather
River State Bank collaborated with other public officials to report not only on
the Bank's level of preparedness, but the status of public services, utilities
and our area hospitals.
The challenge for the future is to utilize existing and new technology to
enhance the delivery of our services through our experienced financial service
representatives, while reducing costs. Our products and services, customers,
shareholders and communities will continue to be our guiding principles as
California Independent Bancorp structures for growth to meet the challenges of a
changing region.
7
<PAGE>
CIB/MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
CALIFORNIA INDEPENDENT BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998
Certain statements in the annual report, Form 10-K and in this Management's
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 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; changes in the securities
markets; and the cost and steps necessary to address the residual effects, if
any, of Year 2000 issues.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to California
Independent Bancorp and Feather River State 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 has operated it as a subsidiary.
On March 21, 2000, the Board of Directors of the Bank, voting as the sole
shareholder of EPI, approved the dissolution and winding up of EPI's affairs.
The provision for the loss on discontinued operations reflected in the
consolidated statement of operations includes the write-down of the assets of
EPI to estimated net realizable values and the estimated costs of disposing of
these operations, less the expected tax benefits applicable thereto. The loss
associated with the 1999 operation and disposal of EPI is $991,457, net of
income tax benefits. This amount includes write-off of the Bank's original
investment in its subsidiary and the goodwill associated with it.
This annual report, the Form 10-K, and the following Management's Discussion and
Analysis along with the accompanying financial statements, tables and charts
have been written to exclude the effects of EPI for the periods stated.
In 1999, the Company recognized a slight increase in total assets of 1.9% from
$294,875,041 in 1998 to $300,360,462 at December 31, 1999. Cash and cash
equivalents decreased
8
<PAGE>
to $37,887,475 in 1999 from $42,358,060 in 1998, while total investments
increased to $86,998,504 at December 31, 1999 from $60,639,334 in 1998. The
increase in total investments represents a shifting in the allocation of
assets from loans coupled with an increase in deposits. Net loans and leases
decreased 11.6% from $174,847,943 in 1998 to $154,550,147 at December 31,
1999. Total deposits rose 1.9% over the same period. The Company's
shareholders' equity decreased $566,133 or 2.4% after the effect of the
discontinuance of EPI.
During 1999, the Company recognized net income from continuing operations of
$1,595,155, a decrease of $1,127,540 over 1998. Net income after disposal and
discontinuance of EPI was $603,698 and $2,880,476, for the years ended December
31, 1999 and 1998, respectively. The decline in net income was attributable to
several factors including high costs associated with managing problem loans and
higher than normal noninterest expenses. Another factor was a decline in
noninterest income of $889,732 or 25.8%, primarily the result of a significant
reduction in real estate brokered loan fee income during 1999 over 1998. These
factors were mitigated by a decrease in the allowance for loan and lease losses.
Each of these factors is discussed further in the loan section of this report.
In 1997, the Company suffered an operating loss from continuing operations of
$301,783 and a loss of $161,430 net of the discontinued operations of EPI. 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 sizable loans in the
Bank's portfolio.
Net interest income, the difference in interest earning assets and interest paid
on liabilities, declined to $14,706,199 in 1999 from a 1998 net interest income
figure of $15,968,939. This 7.9% decrease is primarily attributable to a decline
of $8,726,079 in average loan and lease balances, which are the primary sources
of the interest earning assets held by the Company. Interest earning assets
consist of overnight federal funds sold, investment securities and loans and
leases. In total, these assets averaged $263,069,549, $257,864,723 and
$243,619,122 in 1999, 1998 and 1997, respectively. Average loans and leases were
$181,165,760, $189,891,839 and $173,905,665 in 1999, 1998 and 1997,
respectively, representing a decrease of 4.6% in 1999 over 1998 and a 9.2%
increase in 1998 over 1997.
The decrease in interest income on loans in 1999 was partially offset by an
increase in interest earned on Investment Securities. Average investment
securities in 1999, 1998 and 1997, respectively, were $70,179,271, $57,776,867
and $40,522,132. Interest income on the investment securities for the same
periods were $4,062,096, $3,510,629 and $2,588,233, respectively. The increase
in average investment securities of $12,402,404 or 21.5% in 1999 was the result
of the Company's strategy to apply the liquidity from the decline in loans and
leases into securities. The increase in interest income on investments was 15.7%
or $551,467 in 1999 over 1998. Interest income on investments rose $922,396 or
35.6% in 1998 over 1997 primarily due to the Company's shifting of funds from
lower yielding federal funds to longer-term, higher yielding investments. Net
interest income increased in 1998 over 1997 reflecting an increase in the volume
of interest earning assets.
Average interest-bearing liabilities, consisting of interest paid on
interest-bearing deposits and other borrowed money, increased to $213,732,624 in
1999 from $209,492,335 in 1998, and $198,616,007 in 1997. The average rate paid
on interest-bearing liabilities was 4.0%, 4.2% and 4.7%, respectively. The
primary component of interest bearing liabilities is interest bearing deposits
which stood at $212,975,320, $202,800,415 and $204,706,508 in 1999, 1998 and
1997, respectively.
The Company recognized a decrease of $3,894,572 or 49.2% in average other
borrowed money, which consists primarily of borrowings on the Bank's Federal
Reserve Bank Seasonal borrowing line. Typically during its peak lending season,
the second and third quarters of the year, the Bank borrows on this line. The
average balance of other borrowed funds was $4,028,291, $7,922,863 and $621,054,
in 1999, 1998 and 1997, respectively. Due to the decline in loan volume the
Bank's liquidity position did not require the levels of borrowing in 1999 that
it did in 1998. The Company recognized a substantial increase in other borrowed
money in 1998 over 1997. The increase in 1998 was due to the Bank's need to
borrow funds from its seasonal credit line with the Federal Reserve Bank, in
order to fund increased loan demand during peak lending periods.
Average noninterest-bearing demand deposits, consisting primarily of business
checking accounts, increased to $54,675,233 in 1999 from $52,364,097 in 1998 and
$49,283,416 in 1997. The continued increase in these deposits from 1997 to 1999
reflects the successful marketing efforts of the Bank and the influx of deposits
resulting from large financial institution branch consolidations and closings in
the Company's market area.
Earnings per share from continuing operations in 1999 were $0.88, a decrease
over 1998 earning per share from continuing operations of $1.54. Both years were
more than 1997, which stood at a loss from continuing operations of ($0.17) per
share. The loss in 1997 was primarily due to the need to provide for and
replenish the reserve for loan and lease losses.
The Company paid cash dividends of $0.42 per share in 1999, $0.40 per share in
1998 and $0.38 in 1997. Additionally, the Company provided 5% stock dividends in
1997, 1998 and 1999. Earnings per share have been adjusted retroactively to
reflect the stock dividends.
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.
The following table depicts the Average Balance Sheets for the years ended 1999,
1998 and 1997. This table shows the composition of average earning assets and
average interest-bearing liabilities, average yields and rates, and the
Company's net interest margin for years 1997 through 1999.
9
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS
1999 1998
---------------------------------------------- ----------------------------------------
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 $ 11,724,518 5.06% $ 593,197 $ 10,196,017 5.26% $ 536,411
- ---------------------------------------------------------------------------------------------------------------------
Investment Securities:
Taxable 66,143,534 5.90% 3,900,332 51,637,291 6.23% 3,219,517
Non-Taxable 4,035,737 4.01% 161,764 6,139,576 4.74% 291,112
- ---------------------------------------------------------------------------------------------------------------------
Total 70,179,271 5.79% 4,062,096 57,776,867 6.08% 3,510,629
Loans 181,165,760 10.28% 18,624,289 189,891,839 10.93% 20,752,673
- ---------------------------------------------------------------------------------------------------------------------
Total Earning Assets 263,069,549 8.85% 23,279,582 257,864,723 9.62% 24,799,713
Allowance for Possible
Loan and Lease Losses (6,515,380) (5,622,159)
Non Earning Assets:
Cash and Due From Banks 17,858,822 16,453,103
Premises and Equipment,
Net 7,626,073 7,951,201
Other 11,949,985 10,377,232
Net Assets From
Discontinued Operations 434,413 420,043
------- -------
Total Non Earning Assets 37,869,293 35,201,579
---------- ----------
Total Assets $ 294,423,462 $ 287,444,143
------------- -------------
------------- -------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $ 112,541,448 3.09% $ 3,473,386 $ 107,440,206 3.00% $ 3,225,520
Time Certificates 97,162,885 5.06% 4,917,252 94,129,266 5.50% 5,176,284
Other Interest-
Bearing Liabilities 4,028,291 4.54% 182,745 7,922,863 5.41% 428,970
- ---------------------------------------------------------------------------------------------------------------------
Total 213,732,624 4.01% 8,573,383 209,492,335 4.22% 8,830,774
- ---------------------------------------------------------------------------------------------------------------------
Noninterest-Bearing
Deposits and Other
Liabilities:
Demand, Noninterest-
Bearing 54,675,233 52,364,097
Other Liabilities 2,203,717 2,553,772
--------- ---------
Total 56,878,950 54,917,869
---------- ----------
Shareholders' Equity 23,811,888 23,033,939
---------- ----------
Total Liabilities and
Shareholders' Equity $ 294,423,462 $ 287,444,143
------------- -------------
------------- -------------
Net Interest Income $ 14,706,199 $ 15,968,939
------------- -------------
------------- -------------
Net Interest Margin 4.84% 5.40%
---- ----
---- ----
<CAPTION>
AVERAGE BALANCE SHEETS
1997
-------------------------------------
AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT
-------------------------------------
<S> <C> <C> <C>
ASSETS
Earning Assets:
Short-Term Investments:
Federal Funds Sold $ 29,191,325 5.39% $ 1,573,312
- ---------------------------------------------------------------------------
Investment Securities:
Taxable 35,319,174 6.55% 2,313,612
Non-Taxable 5,202,958 5.28% 274,620
- ---------------------------------------------------------------------------
Total 40,522,132 6.39% 2,588,232
Loans 173,905,665 11.05% 19,225,133
- ---------------------------------------------------------------------------
Total Earning Assets 243,619,122 9.60% 23,386,677
Allowance for Possible
Loan and Lease Losses (4,137,285)
Non Earning Assets:
Cash and Due From Banks 16,193,569
Premises and Equipment,
Net 7,860,329
Other 9,633,965
Net Assets From
Discontinued Operations 228,652
-------
Total Non Earning Assets 33,916,515
----------
Total Assets $ 273,398,352
-------------
-------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $ 104,673,000 3.73% $ 3,904,111
Time Certificates 93,321,953 5.74% 5,360,741
Other Interest-
Bearing Liabilities 621,054 3.84% 23,842
- ---------------------------------------------------------------------------
Total 198,616,007 4.68% 9,288,694
- ---------------------------------------------------------------------------
Noninterest-Bearing
Deposits and Other
Liabilities:
Demand, Noninterest-
Bearing 49,283,416
Other Liabilities 2,807,123
---------
Total 52,090,539
----------
Shareholders' Equity 22,691,806
----------
Total Liabilities and
Shareholders' Equity $ 273,398,352
-------------
-------------
Net Interest Income $ 14,097,983
-------------
-------------
Net Interest Margin 4.92%
----
----
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INTEREST INCOME
Interest income decreased 6.1% in 1999 to $23,279,582 from $24,799,713 in 1998
and was $23,386,677 in 1997. The yield on interest earning assets was 8.9%, 9.6%
and 9.6% in 1999, 1998 and 1997, respectively.
10
<PAGE>
The average interest rate earned on loans was 10.3% in 1999, compared to 10.9%
in 1998 and 11.1% in 1997. The Company's loan portfolio closely follows interest
rate trends as it is comprised primarily of loans that reprice immediately with
changes in the Bank's reference rate. The 0.6% decrease in loan and lease yields
from 1998 to 1999 is the result of several factors: increased nonperforming
loans and leases (discussed further in the section of this analysis titled
nonperforming loans); the requirement to obtain higher quality loans; intense
competition in the loan marketplace; and a change in the portfolio's mix with a
decreased emphasis on higher yielding agricultural loans replaced with lower
yielding real estate and consumer loans.
Average federal funds sold were $11,724,518 in 1999, $10,196,017 in 1998, and
$29,191,325 in 1997 representing an increase of 15.0% in 1999 over 1998 and a
significant decrease of 65.1% in 1998 over 1997. The decrease in 1998 and 1999
over 1997 was primarily due to the Company's shifting of funds into longer term,
higher yielding investments. The yield on federal funds sold was 5.1%, 5.3% and
5.4% at 1999, 1998 and 1997, respectively.
Total interest expense decreased 2.9% to $8,573,383 in 1999 from $8,830,774 in
1998 and decreased 4.9% in 1998 from $9,288,694 in 1997. The decrease in
interest expense from 1997 to 1999 is reflective of the Company's decision to
adjust rates it pays on deposits to levels consistent with the market it serves,
thereby resulting in a lower average interest rate paid on deposits.
CHANGES IN INTEREST RATES AND THE VOLUME OF INTEREST SENSITIVE ASSETS AND
LIABILITIES
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 1999 and 1998 is shown in the following table.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CHANGES IN VOLUME/RATE
1999 COMPARED TO 1998 1998 COMPARED TO 1997
-------------------------------------- -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- -------- ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold $ 80 $ (23) $ 57 $(1,024) $ (13) $(1,037)
Investment Securities:
Taxable 904 (223) 681 1,069 (163) 906
Non-Taxable (100) (29) (129) 49 (33) 16
Loans (954) (1,174) (2,128) 1,766 (238) 1,528
- --------------------------------------------------------------------------------------------------------------------------
Total $ (70) $(1,449) $(1,519) $ 1,860 $(447) $ 1,413
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Demand, Savings and
Money Market $ 153 $ 95 $ 248 $ 103 $(782) $ (679)
Time Certificates 167 (426) (259) 46 (230) (184)
Other (211) (35) (246) 280 125 405
- --------------------------------------------------------------------------------------------------------------------------
Total $ 109 $ (366) $ (257) $ 429 $(887) $ (458)
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net
Interest Income $ (179) $(1,083) $(1,262) $ 1,431 $ 440 $ 1,871
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS
Outstanding total loans averaged $181,165,760 in 1999, as compared to
$189,891,839 in 1998 and $173,905,665 in 1997. This represents a decrease of
$8,726,079 or 4.6% in 1999, compared to an increase of $15,986,174 or 9.2% in
1998.
The decrease in average total loans during 1999 is attributable to decreases in
three loan categories: commercial loans, leases and agricultural loans. Average
commercial loans outstanding decreased 19.5% or $5,000,000 during 1999 while
leases decreased 16.7% or $4,900,000 and agricultural loans decreased $2,100,000
or 3.7%. The declines in commercial and agricultural loans realized were due to
the collection of certain problem loans and the Bank's enhanced credit standards
which resulted in the Bank choosing not to renew certain commercial and
agricultural loans during 1999. A reduction in lease financing occurred due to
the sale of a lease portfolio and the Bank purchasing fewer leases from its
subsidiary EPI.
11
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO
DECEMBER 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Commercial and Agricultural $ 55,111,154 $ 72,104,377 $ 79,384,520 $ 71,527,482 $ 74,355,093
Real Estate-Construction 30,513,920 53,967,821 23,927,538 29,916,204 18,048,005
Real Estate-Mortgage 46,003,764 28,930,047 28,032,552 28,564,640 28,288,337
Consumer 2,523,695 2,443,283 1,956,254 2,983,939 2,814,717
Lease Financing 27,009,815 23,033,956 33,223,586 15,892,783 3,216,140
Other 158,322 392,570 1,021,665 2,214,574 1,522,174
- ------------------------------------------------------------------------------------------------------------------------------
Total $161,320,670 $180,872,054 $167,546,115 $151,099,622 $128,244,466
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company lends to consumers, small and medium sized businesses and farmers
within its market area. The Company's primary market area is Sutter, Yuba,
Colusa and Yolo counties and, secondarily Butte, Glenn, Sacramento and Placer
counties.
A significant portion of the Company's loan portfolio consists of loans secured
by residential, commercial and agricultural real estate.
Real estate mortgages and construction loans, including loans secured by
agricultural real estate and commercial real estate, equaled $76,517,684 or
47.4% and $82,897,868 or 29.8% of the total loan portfolio at December 31, 1999
and 1998, respectively. These loans are secured by real estate, and advances are
generally limited to 65% to 80% of the appraised value depending on the type of
loan.
The Company makes agricultural production loans and other agricultural loans
that are secured by crops, crop proceeds and other collateral. These loans are
generally at their peak in the third quarter of each year. The Company had
$35,645,913 or 22.1% and $50,505,360 or 27.9% of its loan portfolio in
agricultural production loans outstanding at December 31, 1999 and 1998,
respectively. Approximately 5% of these loans are guaranteed by the Farm Service
Agency which is an agency of the U.S. Department of Agriculture.
The Company makes commercial and small business loans (including lines of
credit) that are secured by the assets of the business. The Company had
$19,465,241 or 12.1% and $21,599,017 or 11.9% of its loan portfolio in
commercial and industrial loans outstanding at December 31, 1999 and 1998,
respectively.
The Company originates mortgage loans on residential and agricultural
properties, 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, 1999, 1998, and 1997 total loans serviced by the Company were
$131,991,682, $146,025,594 and $151,619,000. Total loans sold by the Company
were $21,968,279 in 1999, $65,795,347 in 1998 and $66,953,000 in 1997. The
decrease in loans sold during 1999 is a function of lower production in
residential and farm mortgage lending and the Company's strategy to retain
certain real estate secured loans in its loan portfolio.
The higher interest rates experienced in 1999 severely curtailed mortgage loan
demand. As a result, the Company restructured its residential real estate
lending department during the fourth quarter of the year. Specifically, the
Bank's loan production offices located in Madera and Chico, California were
closed and staffing in the Bank's Yuba City Real Estate Department was reduced
by half. Real estate lending operations conducted from these loan production
offices were consolidated to the Bank's Yuba City Real Estate Department and its
Citrus Heights loan production office. In summary, the Bank streamlined its
residential lending operations to appropriately reflect the current loan demand.
Restructuring the Bank's residential real estate lending operations was done for
two purposes. First, operations were downsized and processes were modified to
gain expense efficiencies. The Bank anticipates substantial cost savings as a
result of the restructuring beginning in 2000. Secondly, the loan production
office closures were completed in an attempt to refocus the Bank's business
operations in its core market area. From a geographic perspective, the Company
is refocusing its real estate lending activities within the Sacramento Valley.
Residential loan activity is now principally conducted from the Bank's Yuba
City, Citrus Heights and Woodland locations.
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 credit worthiness 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 and lease losses ("Allowance"). As an integral part of this
process, the Allowance is subject to review and possible adjustment as a result
of Management's assessment of risk or through regulatory examinations conducted
by governmental agencies.
12
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company uses the Allowance method in providing for loan losses. Loan and
lease losses are charged against and recoveries are credited to the Allowance.
The Allowance at December 31, 1999 was $6,770,523 or 4.2% of total loans
outstanding as compared to $6,024,111 or 3.3% of total loans outstanding at
December 31, 1998. Management, after a careful analysis supported by a third
party loan review, believes that the Allowance at December 31, 1999, 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 and
lease 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 leases and a general allocation for other loans based upon
the loss experience during the past twelve rolling months for each 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 they become known.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ACTIVITY IN ALLOWANCE FOR LOAN AND LEASE LOSSES
1999 1998 1997 1996 1995
-------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Loans and Leases Outstanding $161,321 $180,872 $167,546 $151,100 $128,244
Average Loans and Leases 181,166 189,892 173,906 148,294 131,893
Balance of Allowance at January 1 6,024 5,514 4,053 3,911 3,288
Charge-Off by Category:
Commercial and Other 1,009 2,095 4,311 323 413
Consumer 15 49 73 - 46
Real Estate 123 189 335 4 96
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,147 $ 2,333 $ 4,719 $ 327 $ 555
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries by Loan Category:
Commercial and Other $ 627 $ 499 $ 19 $ 53 $ 249
Consumer - 98 3 31 44
Real Estate 267 - 5 - 10
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 894 $ 597 $ 27 $ 84 $ 303
- ---------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs $ 253 $ 1,736 $ 4,692 $ 243 $ 252
Provision Charged to Expense 1,000 2,246 6,153 385 875
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 6,771 $ 6,024 $ 5,514 $ 4,053 $ 3,911
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Ratios:
Net Charge-Offs
to Average Loans and Leases 0.14% 0.91% 2.70% 0.16% 0.19%
Allowance as a Percentage of
Total Loans and Leases 4.20% 3.33% 3.29% 2.68% 3.05%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had loan and lease charge-offs of $1,146,903 in 1999, $2,333,268 in
1998 and $4,718,424 in 1997, and net loan charge-offs (which includes
recoveries) of $253,588, $1,736,333, and 4,691,484, respectively. These net
charge-offs are equal to 0.1%, 0.9%, and 2.7% of average loans for 1999, 1998
and 1997.
The table above includes loan and lease losses sustained during 1999. Losses are
divided among three loan categories, "commercial and other" category totaled
$1,008,895 or 88.0% of total loan and lease losses, real estate loan losses
amounted to $122,933 or 10.7% and consumer loan losses were $15,075 or 1.3%.
The largest category of loss is "commercial and other" which includes
subcategories for commercial, agricultural and lease losses. Of these three
subcategories, lease losses were $929,406 or 81.0% of total losses and
represented the largest category of loss. Until the discontinuance of the
operations of EPI, the Company purchased leases from this subsidiary, who
originated the leases. Recognizing the inherent risks associated with this
activity, the Company maintains higher reserves for this portfolio than it does
for its other conventional loan portfolios. To date actual net charge-offs have
been higher than anticipated, but remains within established reserves for this
portfolio. The Company has made numerous changes to correct the higher than
desired charge-off rate for leases.
Commercial and agricultural loan losses at December 31, 1999 were limited to
$79,489 or 6.9% of total losses. Recoveries exceeded losses in the commercial
and agricultural subcategories and totaled $351,242. This was due to successful
recovery of previously charged off-loans in these categories. Real estate loans
also experienced $144,209 in net
13
<PAGE>
recovery for 1999. Total recoveries for 1999 were $893,315 or 77.9% of the loans
and leases charged off during the year.
During 1998, five sizable charged-off loans accounted for 64.3% of the total
loan losses ($1,500,000) and one of these five credits accounted for 33.0% of
total loan losses ($770,000). 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 group were all
commercial credits. Each of these businesses sustained cash flow difficulties
largely due to adverse economic conditions.
During 1997, loan losses were centered in five credit relationships and a group
of 22 leases. This group of credits comprised 93.0% of total loan and lease
losses. Of the five loans, two were agricultural 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE
1999 1998 1997 1996 1995
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 $3,642 53.79% $3,644 60.49% $3,423 62.07% $1,918 47.34% $2,267 57.98%
Real Estate-Construction 417 6.16 925 15.36 897 16.28 802 19.80 550 14.07
Real Estate-Mortgage 542 8.00 610 10.13 392 7.11 766 18.90 863 22.06
Consumer 48 0.71 32 0.53 31 0.56 80 1.97 86 2.19
Leases 940 13.88 706 11.72 656 11.89 364 8.97 - -
Other 1,182 17.46 107 1.77 115 2.09 123 3.02 145 3.70
- --------------------------------------------------------------------------------------------------------------------------------
Total $6,771 100.00% $6,024 100.00% $5,514 100.00% $4,053 100.00% $3,911 100.00%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS:
Loans Accounted for on a
Nonaccrual Basis $6,115 $5,644 $7,585 $ 846 $ 293
Other Loans Contractually
Past Due 90 Days or More - 854 328 2,202 60
------ ------ ------ ------ ------
Total $6,115 $6,498 $7,913 $3,048 $ 353
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------------------------
</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 as of December 31, 1999. The
$1,182,000 amount shown as "Other" consisted of a special Year 2000 allocation
of $160,000 for borrowers that could have potentially experienced Year 2000
computer related problems, $133,000 reserved for undisbursed commitments on the
combined loan portfolios and $889,000 in unallocated reserves. This unallocated
reserve equals 13.1% of the reserve deemed necessary by Management and provides
an added margin of safety to the overall portfolio.
Management uses available information to provide for loan and lease loss reserve
allocation, however, future additions to the Allowance may be necessary based
upon changes in economic conditions and other variables.
NONPERFORMING LOANS
Loans are generally placed on nonaccrual status when they are 90 days past due
as to either interest or principal. The Company utilizes an automatic nonaccrual
policy for loans and leases that meet these criteria. At that time, any accrued
but uncollected interest is reversed, and additional income is recorded on a
cash basis as payments are received. At the discretion of Management, 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. 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.
The trend in nonperforming assets has improved slightly over the past year as
nonperforming assets decreased from $6,498,000 or 3.6% of the portfolio on
December 31, 1998 to $6,115,399 or 3.8% of the portfolio on December 31, 1999.
The Company continues to successfully implement its classified asset reduction
plan and enhance quality control in the management of the loan portfolio.
Improvement was achieved despite poor agricultural results due to weather
adversities and oversupply conditions causing lower commodity prices for select
segments of the Company's agricultural borrowers. As a result, numerous
agricultural borrowers' financial positions continued to deteriorate from the
previous years adverse El Nino weather patterns and the Asian economic crisis.
14
<PAGE>
Due to continued adversities in the agricultural portfolio, at December 31,
1999, nonaccrual loans amounted to $6,115,399 or 3.8% of total loans. This
reflects a slight increase over December 31, 1998 when nonaccrual loans stood at
$5,644,000 or 3.1% of total loans. Nonaccrual loans at December 31, 1999,
remained below the $7,585,000 or 4.5% level sustained at December 31, 1997.
The Company's nonaccrual loans as of December 31, 1999 included four
agricultural relationships aggregating $5,699,787 or 93.2%, one commercial
relationship for $135,177 or 2.2%, and cumulative leases of $71,920 or 1.2% of
total nonaccrual loans. Two of the agricultural relationships comprise
$5,284,215 or 86.4% of the total nonaccrual loans. The largest agricultural
nonaccrual loan represents $2,788,036 or 45.6% of total nonaccrual loans. This
borrower was significantly impacted by adverse weather during the 1998 year. The
borrower has completed the 1999 operating year and has significantly reduced the
balance and is voluntarily liquidating real property collateral to repay this
debt. The Company is adequately supported by tangible real property collateral
supported by appraisal. The second largest nonaccrual agricultural loan
comprises $2,496,179 or 40.8% of total nonaccrual loans. This borrower is
currently in bankruptcy and now has a restructure plan confirmed by the
bankruptcy court. The Company has previously charged this relationship down to a
level that is adequately supported by appraised real property collateral. This
borrower has now made two consecutive years, 1998 and 1999, of required payments
as agreed.
The Company's nonaccrual assets as of December 31, 1998 included twelve loan
relationships and thirteen leases. Seventy percent of these nonaccrual loans
were concentrated in two credit relationships. The largest nonaccrual loan was
an agricultural loan. Nonaccrual loans to this borrower comprised 46.0% 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. Twenty-three percent of the Company's
nonaccrual loans were extended to a real estate developer. The restructuring
plan with this debtor failed and the Company has foreclosed on the collateral.
The Company acquired this real property during 1999 and is in the process of
liquidating 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
relationship was an agricultural loan and the second largest was a loan to a
real estate developer. 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 were distributed among a number of smaller loans and
leases. These loans were either in the process of collection or in the process
of being restructured.
Loans on accrual status that were past due 90 days or more as to the principal
and interest decreased to zero at December 31, 1999 compared to $854,000 at
December 31, 1998. Due to the implementation of the Company's automatic
nonaccrual policy when a loan's interest or principal is over 90 days past due,
there were no loans that were in accrual status that fit this criteria at
December 31, 1999. Loans that met these criteria as of December 31, 1997 totaled
$328,000. Although the automatic nonaccrual policy was implemented during 1998,
the increase experienced between 1997 and 1998 was due to one large loan being
modified at the end of the 1998-year. The modification was concluded in January
1999 and the loan was removed from nonaccrual status.
INVESTMENTS
In 1999, the Company's investment portfolio was $86,998,504 or 29.0% of total
assets, an increase from $60,639,334 or 20.6% of total assets in 1998, and
$57,198,043 or 19.6% of total assets in 1997. At December 31, 1999, 1998 and
1997, federal funds sold were $22,000,000, $12,100,000 and $35,600,000,
respectively. Federal funds sold are overnight deposits with other banks. In
1999 and 1998, the increase in investment securities was due in part to the
transfer of funds from overnight federal funds sold to longer term investments
that yield a higher return. Also the increase was due to deposits growing at a
faster pace than loans and the reduction of loan volume due to stricter credit
standards.
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 shareholders' equity,
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, 1999 and 1998.
15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Available-for-Sale:
Obligations of U.S. Government Agencies $52,990,659 $ -- $(1,673,846) $51,316,813
Mortgage-Backed Securities 12,578,147 1,676 (53,110) 12,526,713
Equity Securities 6,976,325 -- -- 6,976,325
- --------------------------------------------------------------------------------------------------------------------------
$72,545,131 $ 1,676 $(1,726,956) $70,819,851
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Obligations of States and Political Subdivisions $3,606,928 $ 1,894 $ (27,063) $ 3,581,759
Debt and Other Securities 12,571,725 517 (55,754) 12,516,488
- --------------------------------------------------------------------------------------------------------------------------
$16,178,653 $ 2,411 $ (82,817) $16,098,247
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Available-for-Sale:
Obligations of U.S. Government Agencies $33,978,884 $ 99,533 $ (56,399) $34,022,018
Mortgage-Backed Securities 10,557,206 22,972 (4,416) 10,575,762
Equity Securities 6,935,525 -- -- 6,935,525
- --------------------------------------------------------------------------------------------------------------------------
$51,471,615 $122,505 $ (60,815) $51,533,305
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury Securities $ 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
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, the Company's "available-for-sale" category adjustment
reflected a net unrealized loss of $948,904 net of taxes, and the approximate
market value of the Company's total investment portfolio was $86,998,504,
reflecting an unrealized loss of $1,805,686.
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 $60,639,334,
reflecting an unrealized gain of $158,441.
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 $33,224,728 and $18,765,780 at December 31, 1999 and 1998,
respectively.
OTHER ASSETS
During 1999, the Company recognized an increase in total other assets. These
assets consist primarily of premises and equipment, interest receivable, other
real estate owned ("OREO"), cash surrender value of life insurance policies
associated with certain executive officers and directors of the Company, taxes
and to a smaller extent other miscellaneous assets.
Total other assets of continuing operations increased $4,370,210 to $20,924,336
at December 31, 1999 compared to $16,554,126 in 1998. The two major components
of this increase were cash surrender value of insurance policies and OREO.
Cash surrender value of insurance policies stood at $4,648,123 and $2,315,705 at
December 31, 1999 and 1998, respectively. The additional $2,332,418 in cash
surrender value of insurance policies was associated with the addition of
policies for the Company's new CEO and for a director of the Company. These
policies have appreciated over the period from December 31, 1998 to 1999.
The other factor associated with the growth in total other assets, was an
increase in OREO. OREO 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 for loan and lease losses. Subsequent declines, if any, in
estimated fair value are charged to expense. OREO increased $1,198,623 from the
December 31, 1998 balance of $101,014 to $1,299,637 at December 31, 1999. This
increase was attributable to four properties that were foreclosed on and brought
into OREO for liquidation. Three of the properties acquired were building lots
from a real estate development loan and comprise 70.0% of the OREO. The
remaining property is a commercial building lot that was provided as additional
collateral on a commercial credit arrangement. Values of OREO properties have
been discounted for liquidation costs. Liquidation of all properties currently
held in OREO is anticipated prior to the 2000 calendar year end.
16
<PAGE>
DEPOSITS
Total deposits at December 31, 1999, 1998 and 1997 were $273,459,118,
$268,441,893 and $266,930,858, respectively. These figures represent an increase
of $5,017,225 or 1.9% during 1999, and $1,511,035 or 0.6% in 1998 over 1997.
Average total deposits were $264,379,566 in 1999, $253,933,569 in 1998, and
$247,278,369 in 1997.
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. Total deposits consist of interest and noninterest-bearing deposits. The
mix of deposits consists of 22.1% noninterest bearing and 77.9%
interest-bearing. The mix of interest-bearing deposits consists of 46.1% in time
certificates of deposit, 34.6% interest checking and 19.3% in savings and money
market accounts. Average time certificates of deposit, the largest portion of
interest bearing deposit accounts, increased to $97,162,885 in 1999, from
$94,129,266 in 1998, and $93,321,953 in 1997, representing an increase of 3.2%
in 1999 over 1998 and 0.9% in 1998 over 1997.
The remaining maturities of the Company's certificates of deposit, including
public time deposits, as of December 31, 1999 and 1998, are indicated in the
following table. Interest expense on these certificates of deposit totaled
$4,917,252 in 1999 and $5,176,285 in 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MATURITY OF TIME CERTIFICATES OF DEPOSITS
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------
$100,000 AND OVER UNDER $100,000 $100,000 AND OVER UNDER $100,000
-------------- ------------ --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three Months or Less $16,523 $18,945 $15,604 $24,085
Over Three Months Through Twelve Months 19,121 27,895 14,473 24,529
Over One Year Through Three Years 5,933 4,919 8,131 3,182
Over Three Years 3,279 1,564 4,332 2,489
- --------------------------------------------------------------------------------------------------------------------------
Total $44,856 $53,323 $42,540 $54,285
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER LIABILITIES
Total other liabilities of continuing operations for the Company increased to
$3,554,363 at December 31, 1999 from $2,632,168 in 1998. Total other liabilities
consist of interest payable on interest-bearing liabilities, the Bank's accrued
compensation payable and other miscellaneous liabilities. The increase of
$922,195 or 35.0% in total other liabilities was primarily the result of
treasury tax and loan payments received from the customers of the Bank. The
Bank's customers present these payments to the Bank who in turn forwards the
funds, on scheduled dates, to the U.S. Treasury. These tax payments increased
133.4% or $538,218 due a substantial growth in the number of customers who make
these types of payments through the Bank.
NONINTEREST INCOME
Noninterest income from continuing operations for 1999 was $2,564,447, a
decrease of 25.8% over 1998, which stood at $3,454,179. Noninterest income in
1998 was 9.9% greater than the 1997 amount of $3,142,139. The table below sets
forth the components of noninterest income for the years indicated:
<TABLE>
- ----------------------------------------------------------------------------------------------
NONINTEREST INCOME
1999 1998 1997
------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service Charges on Deposit Accounts $ 971 $ 918 $1,009
Brokered Loan Fees 235 1,252 1,028
Other 1,358 1,284 1,105
- ---------------------------------------------------------------------------------------------
Total $2,564 $3,454 $3,142
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
Service charges and fees on deposit accounts, one of the primary components of
noninterest income, increased in 1999 to $970,908 or 5.7% over the 1998 amount
of $918,118. This rise was primarily the result of the Bank's decision to
increase its overdraft fees in keeping with those of other financial
institutions in its markets.
Brokered loan fees, another primary source of noninterest income, were $235,768
in 1999. This represents a decrease of $1,016,298 over 1998 which stood at
$1,252,066. The 1998 brokered loan fee income represented an increase of 21.7%
over 1997. The reduction in brokered loan fee income in 1999 can in part be
traced to the Company's decision during
17
<PAGE>
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.
In addition to the implementation of the strategy, income generated from
brokered loan fees has been adversely impacted by the closing of two of the
Company's real estate loan production offices, the reduction in its real estate
lending staff, and a general slowing in the home refinance market which has
accompanied the increase in market interest rates.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and Benefits $ 6,835 $ 6,818 $ 6,433
Occupancy 746 748 671
Furniture and Equipment 1,339 1,394 1,264
Other 4,890 3,890 3,532
- -------------------------------------------------------------------------------------------
Total $13,810 $12,850 $11,900
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense from continuing operations increased in 1999 to $13,810,491
or by 7.5% over 1998 results which stood at $12,850,678. The 1998 results
reflected an increase of 8.0% over 1997 totals of $11,900,255. Salaries and
employee benefits were $6,834,859 in 1999, $6,817,870 in 1998 and $6,432,910 in
1997 representing increases of 0.2% and 6.0% in 1999 and 1998 over their
respective preceding year.
During 1998, and continuing into 1999, the Company attempted to centralize
services and create additional personnel efficiencies to reduce the growth in
staffing expense. The higher interest rates experienced in 1999 severely
curtailed mortgage loan demand. As a result, the Company completely restructured
its residential real estate lending department during the fourth quarter of 1999
to appropriately reflect the current residential mortgage loan demand.
Specifically, the Bank's loan production offices located in Madera and Chico,
California, were closed and staffing in the Bank's Real Estate Department was
reduced by half. Real estate lending operations conducted from these loan
production offices were consolidated into the Bank's Yuba City Real Estate
Department and its Citrus Heights loan production office. The substantial
savings that resulted from this consolidation were offset partially by the
continued restructuring and strengthening of the Bank's loan administration.
Loan administration is considered a critical part of lending operations as this
unit is charged with management and oversight of the loan portfolio. The
restructuring of this unit has involved reassigning certain loan management
duties among existing staff members and hiring additional staff. The Bank has
hired a new chief executive officer and an additional senior loan administrator
with a strong credit background. The Bank also restructured its salaries to a
level competitive with other banks in its operating areas.
The increase of $384,960 in salaries and employee benefits in 1998 over 1997 was
due to commissions paid to the Bank's mortgage lending staff. The Bank
recognized a substantial volume increase in real estate mortgage refinancing
which in turn increased income to the Bank and resulted in an increase in the
commissions being paid.
Other noninterest expenses were $4,890,195 in 1999 a substantial increase of
25.7% over 1998's noninterest expenses of $3,890,304. These same expenses
amounted to $3,532,094 in 1997. While the Company has attempted to recognize
operating efficiencies and control operating expenses, it incurred expenses
related to the Year 2000 issues, its 1989 Stock Option Plan, and the retention
of a new president and chief executive officer for the Company and Bank. In
preparing for the transition into the Year 2000, the Company took precautionary
measures to ensure it was technologically sound.
To maintain its commitment to its Year 2000 readiness program, the Company
expensed $482,860 in 1999 as compared to $302,000 in 1998.
Another significant increase to noninterest expense in 1999 includes an increase
of $294,000 attributed to expenses incurred under the Company's 1989 Stock
Option Plan. This increase was due to the exercise of options expiring in 1999.
The 1989 Stock Option Plan allows for gross-up bonuses associated with the tax
expense incurred by directors and officers when an option is exercised.
Additionally, the Company has incurred expenses of approximately $577,000, which
are primarily associated with the hiring of the new president and chief
executive officer along with a severance and consulting agreement entered into
with the former president and chief executive officer of the
18
<PAGE>
Bank and Company. The entire amount of the contract was expensed in 1999 with
equal monthly payments beginning July 1999 and continuing through June 2000.
Other contributors were expenses associated with efforts to improve the quality
of the loan portfolio and consulting fees associated with the streamlining of
operational processes handled by the Bank.
Another component of other noninterest expense is attorney fees. These fees
decreased substantially in 1999 to $377,000 or 52.6% over the 1998 expense of
$795,000. The 1998 expense reflected an increase of 133.1% over 1997's total of
$340,000. The substantial decrease in 1999 over 1998 was associated with
continued progress towards the resolution and collection of problem loans and
leases. The increase in attorney fees during 1998 was attributed to the
escalated legal expenses associated with the collection and resolution of
nonperforming loans.
INCOME TAXES
The provision (benefit) for income taxes from continuing operations was $865,000
in 1999, $1,603,600 in 1998 and ($511,350) in 1997. The Company's effective tax
rate was 35.2%, 37.1% and (62.9%) for 1999, 1998 and 1997, 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. As interest rates change, interest income and expense also change
thereby changing net interest income ("NII"). NII is the primary component of
the Company's earnings. 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 following table depicts the Company's interest rate sensitivity position as
of December 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 1999
REPRICING OPPORTUNITY
----------------------------------------------------------------------------------
OVER THREE
THREE MONTHS
MONTHS THROUGH 1 YEAR- OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
---------- ------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSESTS:
<S> <C> <C> <C> <C> <C>
Federal Funds Sold $ 22,000 $ - $ - $ - $ 22,000
Loans 81,551 9,941 12,739 57,090 161,321
Investments 11,257 6,459 3,901 65,382 86,999
- ---------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $114,808 $ 16,400 $ 16,640 $122,472 $270,320
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Interest Bearing Demand $ 65,467 $ - $ - $ - $ 65,467
Savings and Money Market Deposits 49,330 - - - 49,330
Time Certificates 35,468 47,016 10,852 4,843 98,179
- ---------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities $150,265 $47,016 $ 10,852 $ 4,843 $212,976
Gap (35,457) (30,616) 5,788 117,629 57,344
- ---------------------------------------------------------------------------------------------------------------------
Cumulative Gap $(35,457) $(66,073) $(60,285) $ (57,344)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset and liability management encompasses an analysis of market risk, the
control of interest rate risk (interest sensitivity management) and the ongoing
maintenance and planning of liquidity and capital. The composition of the
Company's statement of condition is planned and monitored by the Asset and
Liability Committee ("ALCO"), a committee comprised of the Bank's executive
management. The primary tool used by the committee to measure and manage
interest rate exposure is a simulation model. Use of the model to perform
simulations reflecting changes in interest rates over one and two-year time
horizons has enabled management to develop and initiate strategies for managing
exposure to interest rate risks. The committee believes that both individually
and in the aggregate these assumptions are reasonable, but the complexity of the
simulation modeling process results in a sophisticated estimate, not an
absolutely precise calculation of exposure.
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
19
<PAGE>
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 the ALCO. In this
capacity ALCO 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/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 NII, the primary component of the Company's earnings. ALCO utilizes
the results of the detailed and dynamic simulation model to quantify the
estimated exposure of NII to sustained interest rate changes.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet as well as for off balance sheet
financial instruments. This sensitivity analysis is compared to ALCO 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 following reflects the Company's
NII sensitivity analysis as of December 31, 1999 as compared to the Bank's
policy to limit the one-year NII. The NII shall not exceed 10% of annual
projected or annualized NII when using a 200 bp shock over a one-year horizon.
Also, when expressing the gap ratio as a percentage risk to net interest margin,
it shall not exceed a 10% variance from the projected or annualized NII,
expressed as a percentage of average assets.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(Dollars in thousands) -200bp Base +200bp
----------- --------- ----------
<S> <C> <C> <C>
Year 1 NII $12,939 $13,371 $13,951
NII $ Change $ (432) - $ 580
NII % Change -3.23% - 4.34%
- -----------------------------------------------------------
Policy Limit 10.00%
- -----------------------------------------------------------
</TABLE>
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected future operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, repayments on loans, leases and securities, deposit rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change. Also, as market conditions vary from
those assumed in the sensitivity analysis, actual results will also differ due
to: prepayment/refinancing levels likely deviating from those assumed, the
varying impact of interest rate change caps or floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
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, the 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
experiences 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 $55,597,534
and $53,068,963 at December 31, 1999 and 1998, respectively. Liquid assets as a
percentage of total assets and were 18.5% and 18.0%, respectively as of those
dates. Liquidity is also affected by collateral requirements of its public
deposits and certain borrowings. Total pledged securities were $33,224,728 at
December 31, 1998 and $18,765,780 at December 31, 1997.
The Bank has formal and informal borrowing arrangements with the Federal Reserve
Bank to meet unforeseen deposit outflows or seasonal loan funding demands.
Additionally, the Bank has established a borrowing line with the Federal Home
Loan Bank. 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
20
<PAGE>
demand. As of December 31, 1999 and 1998, the Bank had no outstanding balances
under these agreements. At December 31, 1999, 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 8.0%, at least half of
which must be in Tier 1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4.0%,
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, 1999, decreased by $566,133 to
$23,234,847 over December 31, 1998, total shareholders' equity of $23,800,980.
The decrease is attributed to the loss of $991,457 on the disposal and
discontinuance of EPI. As can be seen by the following table, the Company and
Bank exceeded all regulatory capital ratios on December 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
RISK BASED CAPITAL RATIO AS OF DECEMBER 31, 1999
COMPANY BANK
--------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 Capital $ 24,184 10.56% $ 24,058 10.51%
Tier 1 Capital Minimum Requirement 9,158 4.00% 9,153 4.00%
- --------------------------------------------------------------------------------------------------------------------------
Excess $ 15,026 6.56% $ 14,905 6.51%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total 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%
- -------------------------------------------------------------------------------------------------------------------------
Risk-Adjusted Assets $228,955 $228,828
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to Quarterly Average Total Assets $ 24,184 7.97% $ 24,058 7.94%
Minimum Leverage Requirement 12,134 4.00% 12,125 4.00%
- --------------------------------------------------------------------------------------------------------------------------
Excess $ 12,050 3.97% $ 11,933 3.94%
- -------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total Quarterly Average Assets $303,345 $303,133
-------- --------
-------- --------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
INFLATION
It is Management's opinion that the effects of inflation on the Company's
financial statements for the years ended December 31, 1999, 1998 and 1997 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, and 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, 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
21
<PAGE>
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 1998 financial performance
and continued concerns regarding the quality of the Bank's loan portfolio, the
Bank's Board of Directors passed a resolution to remedy the concerns. The
resolution requires the Bank to: have Management acceptable to the FDIC and DFI;
continue with the diligent implementation of a previously adopted plan to reduce
the level of non-performing and problem loans, continue with the diligent
implementation of revised lending and collection policies and procedures; ensure
that the Bank maintains an adequate reserve for loan losses; and 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.
In March 2000, the FDIC and DFI completed an examination of the Bank. The final
results of this examination have not been reported to the Bank. Management
believes that the Bank will continue to operate under the resolution addressing
the issues described above, and that the Bank can comply with all regulatory
requirements without any material impact on its operations.
CHANGES IN SENIOR MANAGEMENT
To further strengthen senior management of the Bank and Company, Larry D.
Hartwig has been appointed, with appropriate regulatory approval, to the
positions of President andChief Executive Officer of the Company and Bank. Mr.
Hartwig brings to the Company and Bank more than thirty years of experience in
the banking industry, having most recently served as President and Chief
Executive Officer of SC Bancorp and its wholly-owned subsidiary, Southern
California Bank.
SEGMENT REPORTING
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.
The Company has no segments that meet the requirements of a reportable segment
according to the guidelines set forth in SFAS 131.
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 action were not taken to fix the problem before the
year 2000 arrived.
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 from its borrowers
due to Year 2000 issues.
Expenses associated with the Year 2000 compliance efforts amounted to
approximately $482,860 in 1999 and $302,000 in 1998.
22
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Sacramento, California
February 11, 2000
23
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1999 1998
------------- -----------
<S> <C> <C>
ASSETS
Cash and Due From Banks $ 15,887,475 $ 30,258,060
Federal Funds Sold 22,000,000 12,100,000
- ------------------------------------------------------------------------------------------------
Cash and Cash Equivalents $ 37,887,475 $ 42,358,060
Investment Securities Held-to-Maturity 16,178,653 9,106,029
Investment Securities Available-for-Sale 70,819,851 51,533,305
- ------------------------------------------------------------------------------------------------
Total Investments $ 86,998,504 $ 60,639,334
Loans and Leases 116,032,691 150,609,296
Loans and Leases Held-for-Sale 45,287,979 30,262,758
Less: Allowance for Loan and Lease Losses (6,770,523) (6,024,111)
- ------------------------------------------------------------------------------------------------
Net Loans and Leases $154,550,147 $174,847,943
Premises and Equipment, Net 7,342,659 7,757,900
Interest Receivable 3,282,957 2,854,674
Other Real Estate Owned 1,299,637 101,014
Cash Surrender Value of Insurance Policies 4,648,123 2,315,705
Deferred Taxes 3,650,310 2,585,124
Other Assets 324,738 745,035
Income Tax Receivable 375,912 194,674
Net Assets From Discontinued Operations - 475,578
- ------------------------------------------------------------------------------------------------
Total Assets $300,360,462 $294,875,041
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing $ 60,483,798 $ 65,641,478
Interest-Bearing 212,975,320 202,800,415
- ------------------------------------------------------------------------------------------------
Total Deposits $273,459,118 $268,441,893
Interest Payable 1,533,539 1,622,659
Accrued Compensation Payable 343,346 227,465
Other Liabilities 1,677,478 782,044
Net Liabilities From Discontinued Operations 112,134 -
- ------------------------------------------------------------------------------------------------
Total Liabilities $277,125,615 $271,074,061
- ------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Common Stock, No Par Value- Shares Authorized --
20,000,000, Shares Issued and Outstanding --
1,904,618 in 1999 and 1,744,580 in 1998 $ 17,950,525 $ 15,612,227
Retained Earnings 6,233,226 8,194,823
Debt Guarantee of ESOP - (40,000)
Accumulated Other Comprehensive Income (Loss) (948,904) 33,930
- ------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 23,234,847 $ 23,800,980
- ------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $300,360,462 $294,875,041
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
24
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 18,624,289 $ 20,752,673 $ 19,225,132
Interest on Investments:
Taxable Interest Income 3,900,332 3,219,517 2,313,613
Nontaxable Interest Income 161,764 291,112 274,620
Interest on Federal Funds Sold 593,197 536,411 1,573,312
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 23,279,582 24,799,713 23,386,677
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 8,390,638 8,401,804 9,264,853
Interest on Other Borrowings 182,745 428,970 23,841
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 8,573,383 8,830,774 9,288,694
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 14,706,199 15,968,939 14,097,983
PROVISION FOR LOAN AND LEASE LOSSES 1,000,000 2,246,145 6,153,000
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 13,706,199 13,722,794 7,944,983
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service Charges on Deposit Accounts 970,908 918,118 1,008,691
Brokered Loan Fees 235,768 1,252,066 1,028,550
Other 1,357,771 1,283,995 1,104,898
- -------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 2,564,447 3,454,179 3,142,139
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and Employee Benefits 6,834,859 6,817,870 6,432,910
Occupancy Expense 746,046 748,445 671,000
Furniture and Equipment Expense 1,339,391 1,394,059 1,264,251
Other 4,890,195 3,890,304 3,532,094
- -------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expense 13,810,491 12,850,678 11,900,255
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Provision (Benefit) for Income Taxes 2,460,155 4,326,295 (813,133)
PROVISION (BENEFIT) FOR INCOME TAXES 865,000 1,603,600 (511,350)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 1,595,155 2,722,695 (301,783)
Loss on Disposal of Subsidiary (Net of Income Tax Benefit
of $499,094, $0, $0) (713,772) - -
Income (Loss) on Discontinued Operations (Net of
Income Tax Benefit (Provision) of $185,225, ($110,700), ($98,450)) (277,685) 157,781 140,353
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 603,698 $ 2,880,476 $ (161,430)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS
Basic Earnings (Loss) Per Share From Continuing Operations $ 0.88 $ 1.54 $ (0.17)
- -------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share From Continuing Operations 0.87 1.46 (0.17)
- -------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share After Disposal and
Discontinuance of Subsidiary 0.33 1.63 (0.09)
- -------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share After Disposal and
Discontinuance of Subsidiary 0.33 1.55 (0.09)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Common Share 0.42 0.40 0.38
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
25
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK DEBT OTHER
------------------------- RETAINED GUARANTEE COMPREHENSIVE
SHARES AMOUNT EARNINGS OF ESOP INCOME (LOSS) TOTAL
--------- ----------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 1,546,032 $ 11,138,650 $11,031,155 $(120,000) $ (17,816) $ 22,031,989
Comprehensive Income:
Net Loss From Continuing Operations - - (301,783) - - (301,783)
Net Income From Discontinued Operations - - 140,353 - - 140,353
Other Comprehensive Income, Net of Tax:
Net Unrealized Investment Gains - - - - - 62,864
Less: Reclassification Adjustments for
Gains (Losses) 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 77,304 2,203,164 (2,218,649) - - (15,485)
Reduction of ESOP Debt - - - 40,000 - 40,000
Options Exercised 29,857 41,175 - - - 41,175
Shares Surrendered From Exercise of Options (2,062) (57,957) - - - (57,957)
Tax Benefit Arising From Exercise of
Nonqualified Stock Options and
Disqualifying Dispositions - 312,847 - - - 312,847
Cash Dividends - - (691,630) - - (691,630)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 1,651,131 $ 13,637,879 $ 7,959,446 $ (80,000) $ (1,202) $ 21,516,123
Comprehensive Income:
Net Income From Continuing Operations - - 2,722,695 - - 2,722,695
Net Income From Discontinued Operations - - 157,781 - - 157,781
Other Comprehensive Income, Net of Tax:
Net Unrealized Investment Gains - - - - - 35,132
Less: Reclassification Adjustments
for Gains (Losses) 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 82,433 1,895,959 (1,908,005) - - (12,046)
Reduction of ESOP Debt - - - 40,000 - 40,000
Options Exercised 20,190 55,837 - - - 55,837
Shares Surrendered From Exercise of Options (9,174) (121,307) - - - (121,307)
Tax Benefit Arising From Exercise of
Nonqualified Stock Options and
Disqualifying Dispositions - 143,859 - - - 143,859
Cash Dividends - - (737,094) - - (737,094)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 1,744,580 $ 15,612,227 $ 8,194,823 $ (40,000) $ 33,930 $ 23,800,980
Comprehensive Income:
Net Income From Continuing Operations - - 1,595,155 - - 1,595,155
Loss on Discontinued Operations - - (277,685) - - (277,685)
Loss on Disposal of Discontinued Operation - - (713,772) - - (713,772)
Other Comprehensive Loss, Net of Tax:
Net Unrealized Investment Losses - - - - - (982,834)
Less: Reclassification
Adjustments for (Losses)
Included in Net Income - - - - - -
------------
Other Comprehensive Loss, Net of Tax: - - - - (982,834) (982,834)
------------
Comprehensive Income - - - - - (379,136)
------------
------------
5% Stock Dividend With Cash Paid
in Lieu of Fractional Shares 90,084 1,756,638 (1,766,084) - - (9,446)
Reduction of ESOP Debt - - - 40,000 - 40,000
Options Exercised 132,482 117,755 - - - 117,755
Shares Surrendered From Exercise of Options (62,528) (163,580) - - - (163,580)
Tax Benefit Arising From Exercise
of Nonqualified Stock Options
and Disqualifying Dispositions - 627,485 - - - 627,485
Cash Dividends - - (799,211) - - (799,211)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 1,904,618 $ 17,950,525 $ 6,233,226 $ - $ (948,904) $ 23,234,847
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 603,698 $ 2,880,476 $ (161,430)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,055,667 1,132,251 951,209
Provision for Losses on Other Real Estate Owned 3,800 54,153 80,389
Provision for Loan and Lease Losses 1,000,000 2,246,145 6,153,000
Provision for Deferred Taxes (1,065,186) 20,330 (1,067,925)
Investment Security Losses, Net 440,634 - (46,250)
Purchase of Loans and Leases Held-for-Sale (16,171,844) (26,920,053) (28,445,574)
Proceeds From Loan and Lease Sales 21,968,279 65,795,347 66,953,000
(Gain) Loss on Sale of Real Estate Properties, Net - - (11,363)
Loss on Disposal of Discontinued Operations 713,772 - -
(Increase) Decrease in Assets:
Interest Receivable (428,283) (183,741) (457,850)
Deferred Taxes (361,754) (608,994) 504,438
Cash Surrender Value of Insurance Policies (2,332,418) (103,532) (632,144)
Income Tax Receivable (181,238) (185,676) (380,350)
Net Assets From Discontinued Operations - (157,781) (140,352)
Other Assets 782,051 1,060,880 1,274,814
Increase (Decrease) in Liabilities:
Interest Payable (89,120) (191,538) 408,166
Accrued Compensation Payable 115,881 227,465 (170,127)
Net Liabilities From Discontinued Operations (126,060) - -
Other Liabilities 935,434 (426,200) 48,545
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 6,863,313 $ 45,010,884 $ 44,860,196
CASH FLOWS FROM INVESTING ACTIVITIES
Net Decrease in Loans 20,803,511 3,368,551 7,363,029
Origination of Loans Held-for-Sale (8,807,109) (57,512,441) (67,234,000)
Purchase of Securities Held-to-Maturity (9,226,784) (4,994,679) (15,440,977)
Purchase of Securities Available-for-Sale (47,981,149) (39,119,032) (30,986,075)
Proceeds From Maturity of Securities Held-to-Maturity 2,174,299 14,993,880 19,538,000
Proceeds From Sales and Maturities of Securities Available-for-Sale 27,250,996 25,713,672 4,417,506
Proceeds From Sales of Other Real Estate Owned 302,536 968,692 239,569
Purchases of Premises and Equipment (640,426) (785,331) (1,712,361)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities $(16,124,126) $(57,366,688) $(83,815,309)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Noninterest-Bearing Deposits (5,157,680) 4,064,072 6,655,176
Net Increase (Decrease) in Interest-Bearing Deposits 10,174,905 (1,906,093) 21,931,470
Cash Dividends (799,211) (737,094) (691,630)
Stock Options Exercised 581,660 78,389 296,065
Cash Paid in Lieu of Fractional Shares (9,446) (12,046) (15,485)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities $ 4,790,228 $ 1,487,228 $ 28,175,596
- ----------------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents $ (4,470,585) $(10,868,576) $(10,779,517)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 42,358,060 $ 53,226,636 $ 64,006,153
CASH AND CASH EQUIVALENTS, END OF YEAR $ 37,887,475 $ 42,358,060 $ 53,226,636
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $ 8,662,503 $ 9,480,232 $ 8,969,709
Income Taxes 477,434 1,740,000 988,234
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
CONTINUED ON NEXT PAGE
27
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------- ------------
<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) (982,834) 35,132 16,614
Tax Benefit Arising From Exercise of Nonqualified Stock
Options and Disqualifying Dispositions 627,485 143,859 312,847
Stock Dividends 1,756,638 1,895,959 2,203,164
Increase (Decrease) in Other Real Estate Owned as a Result of Foreclosure 1,504,959 (206,324) 144,510
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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, E.P.I. Leasing Company, Inc.
(EPI). Significant intercompany balances and transactions between CIB and the
Bank 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 one loan production office, emphasizing residential mortgage. 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 as "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.
28
<PAGE>
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 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 did not have
a material 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, 1999,
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 excess servicing
retained and the sold portion of the loan, based on the relative fair market
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 excess 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 excess servicing fees, the Bank is required to
estimate a "normal" servicing fee. The Bank uses the contractual rate of 100
basis points as its estimate of a normal servicing fee.
ALLOWANCE FOR LOAN AND LEASE LOSSES-
The Allowance for loan and lease losses is maintained at a level considered
adequate by Management to provide for losses that can be reasonably anticipated.
Accordingly, loan and lease losses are charged to the Allowance for loan and
lease losses, and recoveries are credited to it. The provision for loan and
lease 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 for loan and lease losses. 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.
29
<PAGE>
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 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.
STOCK-BASED COMPENSATION-
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation." As permitted by SFAS
123, the Company has not changed its method of accounting for stock options but
has provided the additional required disclosures. For the years ended December
31, 1999, 1998 and 1997 the Company recognized no compensation expense related
to stock options.
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.
The Company has no segments that meet the requirements of a reportable segment
according to the guidelines set forth in SFAS 131.
On January 1, 1999, the Bank adopted the Statement of Financial Accounting
Standards No. 134 (SFAS 134), "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise." 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. SFAS 134 did not have an impact on the Company's financial
statements.
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, 1999, 1998, and 1997, the Bank's shareholders' equity
reflected a net unrealized gain (loss), net of applicable taxes, of $(948,904),
$33,930, and $(1,202), respectively.
The amortized cost and approximate fair value of investments in debt securities
and other investments at December 31, 1999 and 1998 were as follows:
30
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Available-for-Sale:
Obligations of U.S. Government Agencies $ 52,990,659 $ - $ (1,673,846) $ 51,316,813
Mortgage-Backed Securities 12,578,147 1,676 (53,110) 12,526,713
Equity Securities 6,976,325 - - 6,976,325
- ---------------------------------------------------------------------------------------------------------------------------
$ 72,545,131 $ 1,676 $ (1,726,956) $ 70,819,851
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
Obligations of States and Political Subdivisions $ 3,606,928 $ 1,894 $ (27,063) $ 3,581,759
Debt and Other Securities 12,571,725 517 (55,754) 12,516,488
- ---------------------------------------------------------------------------------------------------------------------------
$ 16,178,653 $ 2,411 $ (82,817) $ 16,098,247
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
Available-for-Sale:
Obligations of U.S. Government Agencies $ 33,978,884 $ 99,533 $ (56,399) $ 34,022,018
Mortgage-Backed Securities 10,557,206 22,972 (4,416) 10,575,762
Equity Securities 6,935,525 - - 6,935,525
- ---------------------------------------------------------------------------------------------------------------------------
$ 51,471,615 $ 122,505 $ (60,815) $ 51,533,305
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity:
U.S. Treasury Securities $ 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
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the amortized cost and estimated fair value of
investment securities by contractual maturity at December 31, 1999 and 1998.
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, 1999
Within One Year $10,733,734 $10,727,508 $ 6,976,325 $ 6,976,325
After One But Within Five Years 5,184,919 5,110,739 47,416,479 46,131,606
After Five But Within Ten Years 260,000 260,000 18,152,327 17,711,920
- --------------------------------------------------------------------------------------------------------------------------
Total $16,178,653 $16,098,247 $72,545,131 $70,819,851
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
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 1999, 1998 and 1997 were $(440,634), $0 and $46,250, respectively.
Gross gains of $14,141, $0 and $46,250 and gross losses of $454,775, $0 and
$0 were realized on those sales in 1999, 1998 and 1997, respectively.
Investment securities pledged as collateral for certain deposits amounted to
$33,224,728 and $18,765,780 at December 31, 1999 and 1998, respectively.
31
<PAGE>
(3) LOANS:
Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
- ----------------------------------------------------------------
DECEMBER 31,
----------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Commercial and
Agricultural $ 55,111,154 $ 72,104,377
Real Estate Construction 30,513,920 53,967,821
Real Estate Mortgage 46,003,764 28,930,047
Consumer 2,523,695 2,443,283
Lease Financing 27,009,815 23,033,956
Other 158,322 392,570
- ----------------------------------------------------------------
Totals $161,320,670 $180,872,054
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
Loans on which the accrual of interest has been discontinued or reduced amounted
to approximately $6,115,399, and $6,498,000 at December 31, 1999, 1998,
respectively. This represents the total recorded investment in impaired loans.
The allowance for loan and lease losses that was allocated to these impaired
loans totaled $956,854 and $1,137,457 as of December 31, 1999 and 1998,
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 1999 and 1998 was $5,774,926 and $7,659,329
respectively. Interest income recorded on those loans during 1999, 1998 and 1997
was $212,610, $343,812 and $642,230, respectively. Foregone interest on loans
placed on nonaccrual status was $883,268, $1,431,874 and $982,125 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Changes in the allowance for loan and lease losses are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Balance,
beginning of Year $6,024,111 $5,514,299 $4,052,783
Provision 1,000,000 2,246,145 6,153,000
Loans Charged-Off (1,146,903) (2,333,268) (4,718,424)
Recoveries on Loans
Previously Charged-Off 893,315 596,935 26,940
- ---------------------------------------------------------------
Balance, End of Year $6,770,523 $6,024,111 $5,514,299
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
(4) PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
DECEMBER 31,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Land $ 1,432,957 $ 1,432,957
Bank Premises
and Improvements 6,026,660 6,015,264
Furniture, Fixtures and Equipment 6,717,304 6,231,161
----------- -----------
$14,176,921 $13,679,382
Less Accumulated Depreciation
and Amortization (6,834,262) (5,921,482)
- -----------------------------------------------------------------
$ 7,342,659 $ 7,757,900
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to expense was $1,055,667, $1,132,251, and
$975,178 in 1999, 1998 and 1997, respectively.
(5) DEPOSITS:
A summary of deposit balances follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
DECEMBER 31,
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Demand $ 60,483,798 $ 65,641,478
Interest-Bearing
Transaction Accounts 73,762,727 66,012,224
Savings Deposits 41,033,748 39,963,668
Time Certificates of Deposit 98,178,845 96,824,523
- --------------------------------------------------------------------
Total Deposits $273,459,118 $268,441,893
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Time certificates of deposit of $100,000 or more, including public time
deposits, amounted to approximately $44,856,075 and $42,540,013 at December 31,
1999 and 1998, respectively.
Interest expense on time certificates of deposit of $100,000 or more, including
public time deposits, amounted to approximately $2,192,867, $2,123,535 and
$2,186,861 in 1999, 1998 and 1997, respectively.
At December 31, 1999, the scheduled maturities of all time certificates of
deposit were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
- ----------------------------------------------------------
DECEMBER 31, 1999
-----------------
<S> <C>
Three Months or Less $35,468,192
Over Three Through Twelve Months 47,015,836
Over One Through Three Years 10,851,776
Over Three Years 4,843,041
- ----------------------------------------------------------
Total $98,178,845
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
</TABLE>
(6) OTHER NONINTEREST INCOME AND EXPENSE:
The components of other operating income and expense were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
- -----------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Servicing Fees on Loans $ 553 $ 507 $ 572
Gains on Sales of Leases 45 192 -
Other 760 585 533
- -----------------------------------------------------------
Total Other
Noninterest Income $1,358 $1,284 $1,105
- -----------------------------------------------------------
- -----------------------------------------------------------
Telephone Expense 320 295 329
Attorney Fees 377 795 340
Other 4,193 2,800 2,863
- -----------------------------------------------------------
Total Other
Noninterest Expense $4,890 $3,890 $3,532
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
32
<PAGE>
(7) INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
- -----------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
---------- ----------- ---------
<S> <C> <C> <C>
Current-
Federal $ 1,765,746 $1,122,994 $ 519,554
State 164,440 460,276 37,021
- -----------------------------------------------------------
$ 1,930,186 $1,583,270 $ 556,575
- -----------------------------------------------------------
Deferred-
Federal (983,263) 69,891 (907,736)
State (81,923) (49,561) (160,189)
- -----------------------------------------------------------
$(1,065,186) $ 20,330 $(1,067,925)
- -----------------------------------------------------------
$865,000 $1,603,600 $ (511,350)
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
- -----------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------ ------- -------
<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 (7.2)
Tax-Exempt Interest (4.0) (3.0) (15.5)
Corporate Dividends Received - (1.9) (11.1)
Tax Reserve Adjustment - - 6.5
Other (2.0) 0.8 (1.6)
- -----------------------------------------------------------
35.2% 37.1% (62.9)%
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
The components of the net deferred tax asset of the Bank, recorded in other
assets, as of December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
- -----------------------------------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets-
Loan Losses $2,270,139 $2,000,524
California Franchise Tax 55,910 166,422
Other Real Estate Owned - 58,383
Unrealized Loss on
Available-for-Sale Securities 776,376 -
Nonaccrual Loans 748,940 376,629
Other 266,436 231,475
- -----------------------------------------------------------------
Total Deferred Tax Assets $4,117,801 $2,833,433
- -----------------------------------------------------------------
Deferred Tax Liabilities-
Depreciation $ 197,619 $ 220,549
Accretion - -
Unrealized Gain on
Available-for-Sale Securities - 27,760
Stock Dividends 269,872 -
- -----------------------------------------------------------------
Total Deferred Tax Liabilities $ 467,491 $ 248,309
- -----------------------------------------------------------------
Net Deferred Tax Asset $3,650,310 $2,585,124
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The components of the deferred income tax provisions are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
Provisions for
Possible Loan Losses $ (269,615) $ 508,548 $(1,019,549)
Interest on
Nonaccrual Loans (372,311) (205,772) 157,633
Tax Depreciation Methods (22,930) (30,029) (6,360)
California Franchise Tax 110,512 (136,782) (175,715)
Other Real Estate Owned 58,383 73,286 (15,228)
Accretion - (100,838) 15,602
Other (569,225) (88,083) (24,308)
- ------------------------------------------------------------------------
$(1,065,186) $ 20,330 $(1,067,925)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
(8) DISCONTINUED OPERATIONS:
On March 21, 2000, the Board of Directors of the Bank, voting as the sole
shareholder of EPI, approved the dissolution and winding up of EPI's affairs.
The loss associated with the 1999 operation and disposal of EPI is $991,457, net
of income tax benefit. The loss on disposal of EPI includes the write-down of
the assets of EPI to estimated net realizable values, the write-off of the Banks
investment in EPI and the goodwill associated with it, and the estimated costs
of disposing of these operations.
Summarized balance sheet data for the discontinued operations as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
- -----------------------------------------------------------
ASSETS
<S> <C>
Cash and Due From Banks $ 143,086
Leases 292,245
Commercial Loans 26,925
Receivables and All Other Assets 766,808
- -----------------------------------------------------------
Total Assets $1,229,064
- -----------------------------------------------------------
- -----------------------------------------------------------
LIABILITIES
Payables and All Other Liabilities $1,341,198
Total Liabilities 1,341,198
- -----------------------------------------------------------
Net Liabilities of Discontinued Operations $ 112,134
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
(9) SHAREHOLDERS' EQUITY:
At December 31, 1999, the Company was authorized to issue 20,000,000 shares of
no par common stock. Of this amount, 1,904,618 and 1,744,580 shares of common
stock were issued and outstanding at December 31, 1999 and 1998, 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, 1999, the Company had approximately $1,057,833
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:
33
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
INCOME (NUMERATOR) PER SHARE AMOUNT
-------------------------------------------- ---------------------------------
CONTINUING DISCONTINUED SHARES CONTINUING DISCONTINUED
Basic Earnings (Loss) Per Share OPERATIONS OPERATIONS NET (DENOMINATOR) OPERATIONS OPERATIONS NET
---------- ---------- ----------- ------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 1,595,155 $ (991,457) $ 603,698 1,821,549 $0.88 $(0.54) $0.33
1998 2,722,695 157,781 2,880,476 1,763,408 1.54 0.09 1.63
1997 (301,783) 140,353 (161,430) 1,738,917 (0.17) 0.08 (0.09)
Effect of Dilutive Securities-Employee Stock Options
1999 - - - 19,701 - - -
1998 - - - 99,946 - - -
1997 - - - - - - -
Diluted Earnings (Loss) Per Share
1999 $ 1,595,155 $ (991,457) $ 603,698 1,841,250 $0.87 $(0.54) $0.33
1998 2,722,695 157,781 2,880,476 1,863,354 1.46 0.08 1.55
1997 (301,783) 140,353 (161,430) 1,738,917 (0.17) 0.08 (0.09)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1997, employee stock options in the amount of
82,727 were excluded from the computation of diluted earnings (loss) per share,
as their effect was antidilutive.
In August 1999, the Board of Directors authorized a five percent stock dividend
that was distributed on September 17, 1999. The dividend was declared on August
17, 1999, to holders of record on August 31, 1999. The dividend resulted in the
issuance of 90,084 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
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.
(10) 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,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Cash Equivalents $ 37,887,475 $ 37,887,475 $ 42,358,060 $ 42,358,060
Investments 86,998,504 86,918,098 60,639,334 60,736,085
Loans (Net) 154,550,147 154,159,581 174,847,943 177,637,438
FINANCIAL LIABILITIES:
Deposits $273,459,118 $272,994,117 $268,441,893 $268,081,545
Interest Payable and Other Liabilities 3,554,363 3,554,363 2,632,168 2,632,168
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
(11) 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 market 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.
Federal income tax benefits relating to options exercised under both plans have
been credited to shareholders' 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 SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS: As Reported $1,595,155 $2,722,695 $(301,783)
Pro Forma 313,074 2,461,329 (560,875)
BASIC EPS: As Reported 0.88 1.54 (0.17)
Pro Forma 0.17 1.40 (0.32)
DILUTED EPS: As Reported 0.87 1.46 (0.17)
Pro Forma 0.17 1.32 (0.32)
- -----------------------------------------------------------------------------------------------------------------
</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,
1999, 1998 and 1997, and changes during the years then ended is presented in the
table and narrative below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Outstanding at Beginning of Year 245,766 223,171 225,813
Granted 248,577 42,638 39,359
Exercised (119,353) (19,543) (39,912)
Expired - - (2,089)
Forfeited (30,533) (500) -
- ---------------------------------------------------------------------------------------------------------
Outstanding at End of Year 344,457 245,766 223,171
- ---------------------------------------------------------------------------------------------------------
Exercisable at End of Year 282,489 243,561 222,106
Weighted Average Fair Value of Options Granted $7.48 $9.03 $9.35
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The options outstanding at December 31, 1999 have exercise prices between $6.55
and $28.50 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 1999, 1998 and 1997, respectively: weighted
average risk-free interest rates of 5.46, 5.48 and 6.43 percent; weighted
average expected dividend yields of 2.05, 1.77 and 1.80 percent. For all three
years, the expected life used was seven years and the expected volatility used
was 31.3 percent.
(12) 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 15% 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
35
<PAGE>
investment options. The Bank's matching contribution amounted to approximately $
40,000 in 1999, $40,000 in 1998 and $35,000 in 1997.
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 was payable in five equal
annual installments with interest at prime minus 1/2 percent, which rate was 8%
at December 31, 1999. The Bank made contributions to the ESOP of approximately
$40,000 in each of the years 1999, 1998 and 1997.
(13) 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 2000 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, 1999, were as follows:
<TABLE>
- ----------------------------------------------------------
<S> <C>
Loan Commitments $ 53,911,995
Standby Letters of Credit 73,000
- ----------------------------------------------------------
</TABLE>
The Bank is obligated under a number of noncancelable operating leases for
premises and equipment used for banking purposes. Minimum future rental
commitments under noncancelable operating leases as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
Lease Commitments
-----------------
<S> <C>
2000 50,123
2001 51,624
2002 53,792
2003 56,051
2004 58,406
Thereafter 60,859
- ----------------------------------------------
</TABLE>
Rent under operating leases was approximately $179,201, $180,944, and $149,713
in 1999, 1998 and 1997, respectively.
(14) 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, 1999 and 1998,
respectively, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loan Balances -
Beginning of Year $4,375,296 $8,215,744
Additions 8,929,977 4,922,154
Collections (7,089,852) (8,832,602)
------------ ------------
End of Year $6,215,421 $4,375,296
------------ ------------
------------ ------------
- -----------------------------------------------------------
</TABLE>
The Bank had loans outstanding to a director of the Bank and his associates in
excess of five percent of shareholders' equity. The total principal balance of
the loans to this director was approximately $1,904,450 and $3,298,977 at
December 31, 1999 and 1998, respectively.
Remodeling work of branches and offices of the Bank was done by directors of the
Bank. The Bank paid approximately $0, $9,711 and $442,168, for this work in
1999, 1998 and 1997, respectively.
36
<PAGE>
(15) CALIFORNIA INDEPENDENT BANCORP FINANCIAL STATEMENTS (PARENT ONLY):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
DECEMBER 31,
------------
1999 1998
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET-
Assets:
Cash and Due From Banks $ 21 $ 54
Investment in Subsidiaries 23,109 23,505
Other Assets 105 102
- --------------------------------------------------------------------------------------------------
Total Assets $23,235 $23,661
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Shareholders' Equity $23,235 $23,661
- --------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $23,235 $23,661
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME-
Administrative Expense $ 127 $ 81
Other Expense 96 97
- --------------------------------------------------------------------------------------------------
Loss Before Equity in Net Income of Subsidiaries $ 223 $ 178
Equity in Net Income of Subsidiaries:
Distributed 899 899
Undistributed (165) 2,086
Income Tax Benefit 93 73
- --------------------------------------------------------------------------------------------------
Net Income $ 604 $ 2,880
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS-
Operating Activities:
Net Income $ 604 $ 2,880
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities-
Undistributed Equity in Net Income of Subsidiaries 165 (2,086)
Deferred Income Taxes - -
Decrease in Other Operating Assets 6 7
Net Cash Provided by Operating Activities 775 801
Financing Activities:
Dividends Paid (808) (749)
Net Cash Used in Financing Activities (808) (749)
Increase (Decrease) Increase in Cash and Cash Equivalents (33) 52
Cash and Cash Equivalents, Beginning of Year 54 2
- --------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 21 $ 54
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(16) 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.
37
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999 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 $5,831 $ 5,733 $5,820 $5,895
Interest Expense 2,055 2,039 2,244 2,235
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 3,776 3,694 3,576 3,660
Provision for Loan and Lease Losses 550 250 50 150
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Loan and Lease Losses 3,226 3,444 3,526 3,510
Noninterest Income 646 586 687 645
Noninterest Expense 3,110 3,493 3,500 3,707
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 762 537 713 448
Provision for Income Taxes 279 194 254 138
Net Income From Continuing Operations 483 343 459 310
- ---------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal of Subsidiary &
Discontinued Operations 1 (7) (63) (922)
Net Income (Loss) $ 484 $ 336 $ 396 $ (612)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share From Continuing Operations $ 0.28 $ 0.19 $ 0.25 $ 0.16
Diluted Earnings Per Share From Continuing Operations $ 0.27 $ 0.19 $ 0.25 $ 0.16
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding-Basic 1,747,213 1,792,691 1,841,000 1,903,362
<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 $5,964 $ 6,330 $6,553 $5,953
Interest Expense 2,172 2,191 2,368 2,100
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 3,792 4,139 4,185 3,853
Provision for Loan and Lease Losses 396 290 754 806
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan and Lease Losses 3,396 3,849 3,431 3,047
Noninterest Income 761 934 1,014 745
Noninterest Expense 2,966 3,522 3,390 2,973
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,191 1,261 1,055 819
Provision for Income Taxes 438 476 393 297
Net Income From Continuing Operations 753 785 662 522
- ---------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal of Subsidiary &
Discontinued Operations 58 65 18 17
Net Income $ 811 $ 850 $ 680 $ 539
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share From Continuing Operations $ 0.43 $ 0.45 $ 0.38 $ 0.29
Diluted Earnings Per Share From Continuing Operations $ 0.41 $ 0.43 $ 0.36 $ 0.27
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding-Basic 1,733,688 1,735,796 1,752,835 1,830,090
<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 $5,471 $ 5,903 $6,162 $5,851
Interest Expense 2,210 2,360 2,407 2,312
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 3,261 3,543 3,755 3,539
Provision for Loan and Lease Losses 40 3,296 - 2,817
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
and Lease Losses 3,221 247 3,755 722
Noninterest Income 686 703 879 874
Noninterest Expense 2,619 2,970 3,150 3,161
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,288 (2,020) 1,484 (1,565)
Provision (Benefit) for Income Taxes 508 (855) 587 (751)
Net Income From Continuing Operations 780 (1,165) 897 (814)
- ---------------------------------------------------------------------------------------------------------------------------
Gain (Loss) on Disposal of Subsidiary &
Discontinued Operations 37 (28) 91 41
Net Income (Loss) $ 817 $(1,193) $ 988 $ (773)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share From Continuing Operations $ 0.48 $ (0.71) $ 0.54 $ (0.47)
Diluted Earnings Per Share From Continuing Operations $ 0.48 $ (0.71) $ 0.54 $ (0.47)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding-Basic 1,623,334 1,630,448 1,650,073 1,719,598
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
(17) 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, 1999, that the
Company and Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 1999, 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, 1999:
Total Risk-Based Capital:
California Independent Bancorp $27,046 11.81% > or = 18,316 > or = 8.00% > or = 22,895 > or = 10.00%
Feather River State Bank 26,918 11.76% > or = 18,306 > or = 8.00% > or = 22,883 > or = 10.00%
Tier I Risk-Based Capital:
California Independent Bancorp 24,184 10.56% > or = 9,158 > or = 4.00% > or = 13,737 > or = 6.00%
Feather River State Bank 24,058 10.51% > or = 9,153 > or = 4.00% > or = 13,730 > or = 6.00%
Tier I Leverage Ratio:
California Independent Bancorp 24,184 7.97% > or = 12,134 > or = 4.00% > or = 15,167 > or = 5.00%
Feather River State Bank 24,058 7.94% > or = 12,125 > or = 4.00% > or = 15,157 > or = 5.00%
AS OF DECEMBER 31, 1998:
Total Risk-Based Capital:
California Independent Bancorp $26,660 10.38% > or = 20,540 > or = 8.00% > or = 25,675 > or = 10.00%
Feather River State Bank 26,502 10.33% > or = 20,528 > or = 8.00% > or = 25,660 > or = 10.00%
Tier I Risk-Based Capital:
California Independent Bancorp 23,416 9.12% > or = 10,270 > or = 4.00% > or = 15,405 > or = 6.00%
Feather River State Bank 23,260 9.06% > or = 10,264 > or = 4.00% > or = 15,396 > or = 6.00%
Tier I Leverage Ratio:
California Independent Bancorp 23,416 8.20% > or = 11,427 > or = 4.00% > or = 14,284 > or = 5.00%
Feather River State Bank 23,260 8.15% > or = 11,419 > or = 4.00% > or = 14,283 > or = 5.00%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(18) 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, 2000. 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, 2001 and does not expect that it will
have a material impact on its financial position or results of
operations.
39
<PAGE>
CALIFORNIA INDEPENDENT BANCORP, FEATHER RIVER STATE BANK AND SUBSIDIARY,
DIRECTORS AND MANAGEMENT TEAM
- -------------------------------------------------------------------------------
CALIFORNIA INDEPENDENT BANCORP AND FEATHER RIVER STATE BANK DIRECTORS
DAVID A. OFFUTT
CHAIRMAN OF THE BOARD
President, Offutt, Shephard & Haven
Attorney-at-Law
JOHN L. DOWDELL
DIRECTOR
President/CEO, Dowdell Financial Services
HAROLD M. EASTRIDGE
DIRECTOR
President, Trident Investment Corporation
Real Estate Development
WILLIAM H. GILBERT
DIRECTOR
Partner, Gilbert Orchards, Walnut Grower
DONALD H. LIVINGSTONE
DIRECTOR
Teaching Professor, BYU
Marriott School of Business
LARRY D. HARTWIG
PRESIDENT/CHIEF EXECUTIVE OFFICER
California Independent Bancorp
President/Chief Executive Officer
Feather River State Bank
ALFRED G. MONTNA
DIRECTOR
Owner, Montna Farms
WILLIAM K. RETZER
DIRECTOR
Chairman/CEO Examen, Inc.
ROSS D. SCOTT
DIRECTOR
Owner, Scott Center, Physical Therapist
MICHAEL C. WHEELER
DIRECTOR
President and General Manager
Wheeler Chevrolet-Oldsmobile-Cadillac
DIRECTOR EMERITUS
CHARLES M. LEWIS
Vice President, Federal Agricultural Mortgage Corporation (Farmer Mac)
DIRECTOR EMERITUS
DALE L. GREEN
Chief Financial Officer
Dale L. Green, Inc.
Contractor
DIRECTOR EMERITUS
LAWRENCE HARRIS
Walnut Grower
Consulting Civil Engineer
DIRECTOR EMERITUS
LOUIS F. TARKE
Partner, Tarke Brothers & Anderson
Walnut and Rice Grower
- -------------------------------------------------------------------------------
CALIFORNIA INDEPENDENT BANCORP MANAGEMENT TEAM
LARRY D. HARTWIG
PRESIDENT/CHIEF EXECUTIVE OFFICER
ANNETTE BERTOLINI
CHIEF FINANCIAL OFFICER
FEATHER RIVER STATE BANK MANAGEMENT TEAM
LARRY D. HARTWIG
PRESIDENT/CHIEF EXECUTIVE OFFICER
KENNETH M. ANDERSON
SENIOR VICE PRESIDENT/DIRECTOR OF MARKETING
AND BRANCH SERVICES
ANNETTE BERTOLINI
SENIOR VICE PRESIDENT/CHIEF FINANCIAL OFFICER
BLAINE C. LAUHON
SENIOR VICE PRESIDENT/CHIEF LENDING OFFICER
DOUGLAS R. MARR
SENIOR VICE PRESIDENT/CHIEF CREDIT OFFICER
DON R. MCDONEL
VICE PRESIDENT/SENIOR LOAN OFFICER
EPI LEASING COMPANY, INC. MANAGEMENT
ROBERT J. LAMPERT
PRESIDENT/CHIEF EXECUTIVE OFFICER
FINANCIAL INFORMATION
Analysts, stockholders and other investors seeking financial information about
California Independent Bancorp or any of the subsidiaries should contact:
INVESTOR RELATIONS DEPARTMENT
Annette Bertolini
P.O. Box 929002
Yuba City, California 95992
(530) 674-4444 or 800-258-4334
MEDIA CONTACT
News media seeking general information should contact:
INVESTOR RELATIONS DEPARTMENT
Annette Bertolini
P.O. Box 929002
Yuba City, California 95992
(530) 674-4444 or 800-258-4334
CERTIFIED PUBLIC ACCOUNTANTS/AUDITORS
Arthur Andersen LLP
Sacramento, California
LEGAL COUNSEL
Weintraub, Genshlea & Sproul
Sacramento, California
40
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND
FEATHER RIVER STATE BANK
BRANCHES AND OFFICES
YUBA CITY, CA
1. BRIDGE STREET BRANCH
Agricultural Loan Center &
Agricultural Real Estate Center
1221 Bridge Street
(530) 821-2750
2. COLUSA AVENUE BRANCH
Business/Consumer Loan Center & Residential Real Estate Center
777 Colusa Avenue
[MAP] (530) 821-2750
3. ADMINISTRATIVE OFFICE
CIB/FRSB Corporate Headquarters
1227 Bridge Street, Suite C
(530) 674-4444
ARBUCKLE, CA
4. ARBUCKLE BRANCH
540 Amanda Street
(530) 476-3281
COLUSA, CA
5. COLUSA BRANCH
655 Fremont Street
(530) 458-8241
MARYSVILLE, CA
6. MARYSVILLE BRANCH
700 E Street
(530) 821-2750
CITRUS HEIGHTS, CA
7. REGIONAL LENDING CENTER
6929 Sunrise Boulevard, Suite 111
(916) 722-2700
WHEATLAND, CA
8. WHEATLAND BRANCH
114 D Street
(530) 633-3150
WOODLAND, CA
9. WOODLAND BRANCH
203 Main Street
(530) 661-6400
<PAGE>
[LOGO]
[LOGO]
Member FDIC
<PAGE>
Exhibit 23
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 30, 2000
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<PAGE>
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<CIK> 0000948976
<NAME> CALIFORNIA INDEPENDENT BANCORP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
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<LOAN-LOSSES> 1,000,000
<SECURITIES-GAINS> (440,634)
<EXPENSE-OTHER> 13,369,857
<INCOME-PRETAX> 2,460,155
<INCOME-PRE-EXTRAORDINARY> 1,595,155
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