<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission File Number 0-265520
CALIFORNIA INDEPENDENT BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0349947
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1227 BRIDGE ST., SUITE C, YUBA CITY, CALIFORNIA 95991
(Address of principal executive offices)
(Zip Code)
(530) 674-4444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class March 31, 2000
----- --------------
Common stock, no par value 1,905,065 shares
This report contains 22 pages. The Exhibit Index is on page 21.
<PAGE>
PART I- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1
<S> <C>
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE-MONTHS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-19
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II- OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 21
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5
OTHER INFORMATION 21
ITEM 6
EXHIBITS AND REPORTS ON FORM 8K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31,1999 MARCH 31,1999
------------------ ------------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash and Due From Banks $ 10,739,921 $ 15,887,475 $ 19,596,359
Federal Funds Sold 19,200,000 22,000,000 8,900,000
------------------ ------------------- -----------------
Cash and Cash Equivalents 29,939,921 37,887,475 28,496,359
Investment securities:
Held-to-Maturity Securities, at Amortized Cost (fair value
of $15,854,377, $6,098,247 and $9,689,171 respectively) 15,942,714 16,178,653 9,344,340
Available-for-Sale Securities, at Fair Value 82,265,769 70,819,851 64,687,804
------------------ ------------------- -----------------
Total Investments 98,208,483 86,998,504 74,032,144
Loans and Leases 112,767,090 116,032,691 142,818,871
Loans and Leases Held-for-Sale 42,396,513 45,287,979 33,157,629
------------------ ------------------- -----------------
Gross Loans and Leases 155,163,603 161,320,670 175,976,500
Less: Allowance for Loan and Lease Losses (6,789,109) (6,770,523) (6,566,694)
------------------ ------------------- -----------------
Net Loans and Leases 148,374,494 154,550,147 169,409,806
Premises and Equipment, Net 7,177,125 7,342,659 7,729,785
Interest Receivable 3,073,314 3,282,957 3,089,879
Other Real Estate Owned 1,076,099 1,299,637 101,014
Cash Surrender Value of Insurance Policies 4,702,471 4,648,123 2,341,519
Deferred Taxes 3,622,155 3,650,310 2,445,370
Other Assets 428,825 700,650 1,220,765
Net Assets From Discontinued Operations - - 476,077
------------------ ------------------- -----------------
Total Assets $ 296,602,887 $ 300,360,462 $ 289,342,718
------------------ ------------------- -----------------
------------------ ------------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-Bearing $ 51,707,284 $ 60,483,798 $ 55,961,148
Interest-Bearing 218,063,747 212,975,320 207,132,584
------------------ ------------------- -----------------
Total Deposits 269,771,031 273,459,118 263,093,732
Interest Payable 1,560,084 1,533,539 1,446,152
Accrued Compensation Payable 464,505 343,346 267,453
Other Liabilities 1,089,232 1,677,478 707,708
Net Liabilities From Discontinued Operations 109,096 112,134 -
------------------ ------------------- -----------------
Total Liabilities $ 272,993,948 $ 277,125,615 $ 265,515,045
------------------ ------------------- -----------------
------------------ ------------------- -----------------
Shareholders' Equity
Common stock, no par value-Authorized-20,000,000
Issued and Outstanding - 1,905,065 shares March 31,
2000, 1,904,618 Shares December 31, 1999 and
1,749,873 Shares March 31, 1999 17,954,339 17,950,525 15,614,306
Retained Earnings 6,703,779 6,233,226 8,490,772
Debt Guarantee of ESOP - - (40,000)
Accumulated Other Comprehensive Income (Loss) (1,049,179) (948,904) (237,405)
------------------ ------------------- -----------------
Total Shareholders' Equity 23,608,939 23,234,847 23,827,673
------------------ ------------------- -----------------
Total Liabilities and Shareholders' Equity $ 296,602,887 $ 300,360,462 $ 289,342,718
------------------ ------------------- -----------------
------------------ ------------------- -----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
3
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
MARCH 31, 2000 MARCH 31, 1999
-----------------------------------------
<S> <C> <C>
Interest Income
Interest and Fees on Loans and Leases $ 3,869,491 $ 4,705,450
Interest on Investment-
Taxable Interest Income 1,372,986 876,867
Nontaxable Interest Income 33,598 45,351
Interest on Federal Funds Sold 407,810 205,593
-----------------------------------------
Total Interest Income 5,683,885 5,833,261
-----------------------------------------
Interest Expense
Interest on Deposits 2,235,486 2,051,521
Interest on Other Borrowings 7,006 3,412
-----------------------------------------
Total Interest Expense 2,242,492 2,054,933
-----------------------------------------
Net Interest Income 3,441,393 3,778,328
Provision for Loan and Lease Losses (150,000) (550,000)
-----------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 3,291,393 3,228,328
-----------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 249,706 203,713
Brokered Loan Fees 28,541 95,665
Other 411,724 310,753
-----------------------------------------
Total Noninterest Income 689,971 610,131
-----------------------------------------
Noninterest Expense
Salaries and Employee Benefits 1,535,834 1,584,403
Occupancy Expense 169,659 186,459
Furniture and Equipment Expense 301,044 356,589
Legal and Professional Fees 51,995 114,184
Other 849,363 830,211
-----------------------------------------
Total Noninterest Expense 2,907,895 3,071,846
-----------------------------------------
Income Before Provision for Income Taxes 1,073,469 766,613
Provision for Income Taxes 396,425 278,850
-----------------------------------------
Net Income From Continuing Operations 677,044 487,763
Income on Discontinued Operations, Net of Tax Effect 3,038 498
-----------------------------------------
Net Income $ 680,082 $ 488,261
-----------------------------------------
-----------------------------------------
Per Share Amounts
Basic Earnings Per Share From Continuing Operations $ 0.36 $ 0.28
-----------------------------------------
Diluted Earnings Per Share From Continuing Operations 0.35 0.27
-----------------------------------------
Basic Earnings Per Share After Discontinuance of Subsidiary 0.36 0.28
-----------------------------------------
Diluted Earnings Per Share After Discontinuance of Subsidiary 0.35 0.27
-----------------------------------------
Cash Dividends Per Common Share 0.11 0.11
-----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
4
<PAGE>
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,2000 MARCH 31,1999
-----------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 680,082 $ 488,261
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities
Depreciation and Amortization 251,014 279,114
Allowance for Loan and Lease Losses 150,000 550,000
Provision for Deferred Taxes - 20,330
Gain on Sale of Premises and Equipment (13,485) -
(Increase) Decrease in Assets
Interest Receivable 209,643 (235,205)
Other Assets 245,632 (187,446)
Increase (Decrease) in Liabilities
Interest Payable 26,545 (176,507)
Fed Funds Purchased, Other Borrowings and Other Liabilities (470,125) (34,847)
-----------------------------------------
Net Cash Provided by Operating Activities $ 1,079,306 $ 703,700
CASH FLOWS FROM INVESTING ACTIVITIES
Net (Increase) Decrease in Loans 6,025,653 4,888,137
Purchase of Securities (11,832,083) (26,474,059)
Proceeds From Maturity of HTM Securities 350,000 920,000
Proceeds From Sales/Maturity of AFS Securities 171,829 11,889,914
Proceeds From Sales of Other Real Estate Owned 223,538 -
Purchases of Premises and Equipment (71,995) (250,999)
-----------------------------------------
Net Cash Used for Investing Activities $ (5,133,058) $ (9,027,007)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) in Noninterest Bearing Deposits (8,776,514) (9,680,330)
Net Increase in Interest Bearing Deposits 5,088,427 4,332,169
Cash Dividends (209,529) (192,312)
Stock Options Exercised 3,814 2,079
Cash Paid in Lieu of Fractional Shares - -
-----------------------------------------
Net Cash Provided by (Used in) Financing Activities $ (3,893,802) $ (5,538,394)
NET INCREASE (DECREASE) $ (7,947,554) $(13,861,701)
-----------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 37,887,475 $ 42,358,060
-----------------------------------------
-----------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,939,921 $ 28,496,359
-----------------------------------------
-----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
5
<PAGE>
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). In the opinion of
management, the unaudited consolidated financial statements contain
all adjustments which are necessary to present fairly the financial
position of California Independent Bancorp ("Company") and its
subsidiaries at March 31, 2000, December 31, 1999 and March 31,
1999, and the results of its operations for the three-month periods
ended March 31, 2000 and March 31, 1999, respectively.
Certain information and footnote disclosures normally presented in
annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance with
SEC rules or regulations. The results of operations for the period
ended March 31, 2000, are not necessarily indicative of the
operating results for the full year ending December 31, 2000. It is
suggested these financial statements be read in conjunction with the
financial statements and notes included in the Company's Annual
Report for the year ended December 31, 1999.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of
California Independent Bancorp (the "Company") 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 the Company and the
Bank have been eliminated in consolidation.
NOTE 3 - LOANS TO DIRECTORS
In the ordinary course of business, the Company makes loans to
directors of the Company, which on March 31, 2000, amounted to a
total of approximately $3,552,373.
NOTE 4 - COMMITMENTS & CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to
extend credit and letters of credit, which are not reflected in the
financial statements. Management does not anticipate any material
loss as a result of these transactions.
NOTE 5 - CASH AND STOCK DIVIDENDS
In February, May, August and November of 1999, and March of 2000,
the Company paid an eleven-cent per share cash dividend.
On August 17, 1999, the Company's Board of Directors authorized and
declared a five-percent stock dividend for shareholders of record as
of August 31, 1999. The dividend was distributed on September 17,
1999, and resulted in the issuance of 90,084 additional shares of
common stock.
NOTE 6 - EARNINGS PER SHARE
The Company calculates Earnings Per Share ("EPS") in accordance with
the Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." SFAS No., 128 establishes standards for
computing and presenting EPS. It replaced the presentation of
primary EPS with a presentation of basic EPS. It also required dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and
required reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed
by dividing income available to the common
6
<PAGE>
shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if options or other contracts to issue
common stock were exercised or converted into common stock, or
resulted in the issuance of common stock that then shared the
earnings of the Company.
NOTE 7 - FINANCIAL ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and 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 and
changes in the fair value of its available-for-sale investment
securities. Total comprehensive income (loss) for the three-months
ended March 31, 2000 and March 31, 1999 was ($369,097) and $250,856,
respectively.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting enterprise segments of
a company in the footnotes to the financial statements. The Company
has no segments that meet the requirements of a reportable segment
according to the guidelines set forth in SFAS 131.
In June 1998, the Financial Accounting Standards Board (FASB) issued
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
established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company will adopt
this statement on January 1, 2001 and does not expect that it will
have a material impact on its financial position or results of
operations.
On January 1, 1999, the Company adopted 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 interest based on its
ability and intent to sell or hold those investments. SFAS 134 did
not have an impact on the Company's financial statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 as a
California State commercial chartered bank. The Company was formed in 1994
and, after receiving regulatory and shareholder approval, became the holding
company for the Bank in May 1995. In October 1996, the Bank acquired E.P.I.
Leasing Co., Inc. ("EPI"), and operates this equipment leasing company as a
subsidiary. As a part of the Company and Bank's restructuring efforts, it is
anticipated that the business affairs of EPI will be dissolved and wound up
during the year 2000.
Certain statements in this Form 10-Q quarterly report include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are subject to the 'safe harbor' provisions created
by those sections. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. Such risks and uncertainties include, but
are not limited to, the following factors: competitive pressure in the
banking industry; changes in the interest rate environment; general economic
conditions, either nationally or regionally, that are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan and lease losses; the loss
of key personnel; changes in the regulatory environment; changes in business
conditions; volatility of rate sensitive deposits; operational risks
including data processing system failures or fraud; asset/liability matching
risks and liquidity risks; and changes in the securities markets. In
addition, such risks and uncertainties include mortgage banking activities,
merchant card processing, concentration of lending activities and the costs
and steps necessary to address the residual effects, if any, of the Year 2000
issues.
The following sections discuss significant changes and trends in the
financial condition, capital resources and liquidity of the Company from
March 31, 1999 and December 31, 1999 to March 31, 2000, and significant
changes and trends in the Company's results of operations for the
three-months ended March 31, 2000, compared to the same period in 1999.
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
The Company reported net income of $680,082 for the three-month period ending
March 31, 2000 as compared to $488,261 for the same period ending March 31,
1999. The 2000 figure represents a 39.3% increase over the same three-month
period in 1999. The increase in net income is primarily attributable to a
decrease in the Allowance for Loan and Lease Losses ("Allowance").
Total assets at March 31, 2000 were $296,602,887. This figure represents a
slight decrease from $300,360,462 at December 31, 1999 and an increase from
March 31, 1999 total assets of $289,342,718. Gross loans were $155,163,603 at
March 31, 2000, a 3.8% decrease from $161,320,670 at December 31, 1999 and
11.8% decrease from $175,976,500 at March 31, 1999. The decrease in total
loans over the past twelve-month period was due to the collection of certain
problem loans and the Bank's enhanced credit standards. Historically, the
Company's total loan balances decrease during the first and fourth quarters
of each year as payments are received from its agricultural borrowers. In
contrast, during the second and third quarters total loans rise in
conjunction with the increased demand for agricultural loans.
In addition to the decline in total loans, a reduction in lease financing
also occurred during 1999. This reduction is the result of the sale of a
lease portfolio and the Bank purchasing fewer leases from its subsidiary, EPI.
The Company's investment portfolio at March 31, 2000 was $98,208,483 compared to
December 31, 1999 investments of $86,998,504 and $74,032,144 at March 31, 1999.
The increase in the investment portfolio from December 31, 1999 and March 31,
1999, to March 31, 2000, reflects the reallocation, of loan proceeds
8
<PAGE>
received into investments rather than new loans. Cash and cash equivalents
which consists of cash and due from banks and federal funds sold, were
$29,939,921 at March 31, 2000, $37,887,475 at December 31, 1999 and
$28,496,359 as of March 31, 1999.
Total deposits of the Company remain strong at $269,771,031, $273,459,118 and
$263,093,732 at March 31, 2000, December 31, 1999 and March 31, 1999,
respectively. The increase at December 31, 1999 compared to the other two
periods, is indicative of normal seasonal fluctuations in deposits.
The total loan-to-deposit ratios were 57.5%, 59.0% and 66.9% at March 31,
2000, December 31, 1999 and March 31, 1999.
LOANS
Total loans and leases outstanding, as of March 31, 2000 was $155,163,603.
This represents a decrease of $6,157,067 or 3.8% since December 31, 1999 and
a decrease of $20,812,897 or 11.8% compared to March 31, 1999. The table
below sets forth the composition of the Company's loan portfolio as of March
31, 2000, December 31, 1998 and March 31, 1999.
COMPOSITION OF THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Loan Category March 31, 2000 December 31, 1999 March 31, 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial & Agricultural $43,051,081 $55,111,154 $67,810,602
Real Estate Construction 32,841,930 30,513,920 42,007,098
Real Estate Other 50,665,891 46,003,764 40,575,418
Lease Financing 25,744,855 27,009,815 23,136,943
Consumer 2,727,941 2,523,695 2,390,420
Other 131,905 158,322 56,019
-------------------------------------------------------------------------------------------------------------
TOTAL $155,163,603 $161,320,670 $175,976,500
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Company provides a wide range of loan products to farmers and businesses
throughout its trade area. Commercial and Agricultural loans declined
$12,060,073 or 21.9%. Most of the decrease in this category occurred in the
agricultural loan portfolio. Agricultural loans declined $8,322,000 or 22.9%
in the past three months. The decline is attributed to the following:
1. The U.S. and local agricultural economy has sustained economic
difficulties related to commodity prices and certain production
problems. As a result, certain farm borrowers have sustained cash
flow and liquidity problems. Over the past six months, the Company
has instituted more rigid loan underwriting standards and credit
qualifying criteria. Consequently, a reduced number of farm
borrowers meet the Company's credit standards. Borrowers failing to
qualify for loans through the Company have left to seek financing
elsewhere.
2. The Company has been successful in collecting certain problem
agricultural loans. Retiring these problem loans has resulted in a
reduction in agricultural loan volume.
3. The Company's agricultural loan portfolio is seasonal. Loan balances
increase when borrowers incur crop expenditures during the growing
season and loan balances decrease when borrowers receive proceeds
from the sale of crops. During the first quarter, borrowers repaid
1999-crop production loans upon receipt of crop sale proceeds.
Additionally, abnormally wet weather conditions during the first
quarter prevented borrowers from completing certain cultural
practices and therefore loan demand was reduced. As of March 31,
2000, the Company had undisbursed loan commitment to agricultural
borrowers totaling $21,719,752. A significant amount of this
available credit is expected to be advanced in the forthcoming
three-quarters.
4. Commercial and industrial loans declined $3,738,073 or 19.0% during
the first quarter of 2000. This decline is also attributed to the
resolution of specific problem loans, the Company's enhanced
9
<PAGE>
underwriting standards and to loan payoffs from earnings and
borrower refinancing through other lenders. The Company has targeted
business and commercial loans as an area of opportunity. Current
marketing and business development efforts are expected to result in
an increase in business loans during forthcoming quarters.
Lease financing receivables declined $1,264,960 or 4.7% between December 31,
1999 and March 31, 2000. Normal lease amortization during the quarter
exceeded the volume of new leases purchased by the Company from its
subsidiary EPI. The Company's announcement that EPI will cease lease
origination activities will result in a reduction in purchased leases in
forthcoming quarters. Consequently, the Company expects a reduction in its
lease financing receivables of 5% to 8% per quarter for the remainder of 2000.
Partially offsetting the declines in agricultural loans, commercial loans and
leases, were increases in real estate construction loans (up 7.6%), real
estate other loans (up 10.1%) and consumer loans (up 8.1%). The Company
extends construction loans primarily to builders of single family houses.
Loans are made to individual borrowers and to real estate developers. The
increase in real estate construction loans is primarily due to seasonality.
Construction loan demand increases during the spring and summer months when
construction activity is greatest. The loan category, real estate other,
consists of loans secured by residential, commercial and agricultural real
estate. The Company provides a variety of real estate loan products secured
by these properties. During the first quarter this category increased by
$4,662,127 or 10.1%. Most of the increase occurred in the commercial real
estate portfolio. The growth is attributed to a focus on this market, good
loan demand and successful business development activities. Similarly, the
growth in consumer loans is attributed to the same basic characteristics.
Total interest and fee income on loans and leases during the first quarter
2000 was $3,869,491 compared to $4,705,450 during the first quarter of 1999.
The difference of $835,959 represents a decline of 17.8%. The decrease was
primarily caused by lower outstanding loan totals. Additionally, increased
credit quality and competitive pressures have modestly reduced loan yields.
The reduction in interest and fees on loans and leases was largely offset by
increased interest income on investments. Total interest and fee income was
down only 2.6% for the first quarter 2000 compared to the first quarter 1999.
The Company lends primarily to small and medium sized businesses, small to
large sized farmers and consumers within its market area, which is comprised
principally of Sutter, Yuba, Colusa, and Yolo counties and secondarily Butte,
Glenn, Sacramento, Placer, El Dorado and Solano counties.
During the first quarter of 2000, there were no significant changes in the
Company's loan management, loan facilities, and lending philosophy or credit
processes. However, the Company continued to enhance its credit quality
management and sales and service culture. The Company will continue to
emphasize high credit quality and distinguished customer service as two key
components of its strategic direction.
LOAN QUALITY
The Company places loans automatically on nonaccrual status when principal or
interest has been in default for 90 days or more. A manual override can be
made if the loan is well secured and in the process of collection. The
company also places loans on non-accrual when payment in full of principal or
interest is not expected; or the financial condition of the borrower has
significantly deteriorated.
10
<PAGE>
The table shown below summarizes the composition of non-performing loans as
of March 31, 1999, December 31, 1999 and March 31, 2000 ($ in 000's) as well
as the changes between the periods.
COMPOSITION OF NON-PERFORMING LOANS AND LEASES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Accruing loans past due MARCH 31, CHANGE FROM DECEMBER 31, CHANGE FROM MARCH 31,
90 days or more 2000 MARCH 31, 1999 1999 MARCH 31, 1999 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ - 0% $ - 0% $ -
Agricultural 1,643 0% - 0% -
Real Estate 1,076 0% - 0% -
Leases - 0% - 0% -
Consumer - 0% - 0% -
-----------------------------------------------------------------------------------------
Total $2,719 0% $ - 0% $ -
Nonaccrual Loans
- --------------------------
Commercial $1,048 90.55% $ 868 57.82% $ 550
Agricultural 4,745 183.45% 3,851 130.05% 1,674
Real Estate 1,151 (62.29)% 1,237 (59.47)% 3,052
Leases 31 (87.91)% 51 (80.12)% 257
Consumer - 0.00% - 0.00% -
-----------------------------------------------------------------------------------------
Total $6,975 26.07% $6,007 8.58% $5,533
- -------------------------------------------------------------------------------------------------------------------
Total Nonperforming $9,694 75.22% $6,007 8.58% $5,533
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company experienced an increase in nonperforming loans of 8.6% for the
nine months from March 31, 1999 to December 31, 1999. This level has
increased 75.2% at March 31, 2000 over the level at March 31, 1999. These
significant increases were the direct result of additional agricultural loans
that experienced weather or commodity price adversity at the conclusion of
the 1999 crop year. As a result of this increase the Bank established a
Special Asset Department that will focus on prompt resolution to all
nonperforming and classified loans. Workout plans are in place for each
nonperforming loan and full recovery is expected. The increase in accruing
loans past due 90 days or more is the result of collection actions taken
which reflect delays associated with the borrower obtaining potential takeout
funding, initiating a foreclosure action, or formalizing a workout agreement
with the borrower.
Nonperforming loans comprised 3.1% of the portfolio on March 31, 1999, which
increased to 3.7% of the portfolio on December 31, 1999. The nonperforming
loans at March 31,2000 increased to 4.5% of total loans.
Nonperforming loans escalated significantly during the last two years. The
initial classification was mostly the result of two adverse years impacting
the agricultural portfolio. To remedy the situation, the Bank has established
a procedure, which requires written plans of resolution. These plans mandate
that prompt corrective action is undertaken before considering forbearance of
collection action or additional funding. The increase in nonperforming loans
during that period was attributable to increased risk exposure in a limited
number of large credit relationships. The corrective action plans have been
successful in collection of previously nonperforming loans. There has been
consistent reduction of previous troubled loans identified.
All of the nonperforming loans listed in the table above are in the process
of collection. In terms of specific resolution plans, 30.0% of the loans
(approximately $2.9 million) are in the process of collateral liquidation,
25.0% of these loans (approximately $2.4 million) have been restructured,
43.0% of the loans (approximately $4.1 million) are currently in a workout
arrangement, and less than 2.0% are in an undetermined status. Management
projects additional progress toward the resolution of these troubled loans
during the second quarter of 2000. However, due to particular factors
surrounding specific nonperforming loans, management projects that some of
these credits will require several additional quarters to resolve.
11
<PAGE>
Several large nonperforming loans listed in the table have been partially
charged-off such that the book balance of the asset is now lower than
Management's conservative estimate of the value of the supporting loan
collateral. As a result of these actions and the collection plans currently
in place, Management believes that the risk of additional credit loss in the
remaining nonperforming loans has been reduced.
The Company's nonperforming credits are concentrated in three credit
relationships that comprise 91.0% of the total nonaccrual loans at March 31,
2000. All three are large agricultural credit relationships. The largest
relationship comprises 40.0% of the total nonaccrual. This borrower sustained
financial difficulty stemming from a combination of adverse weather, labor
issues and uncollectable receivables. The Company is adequately
collateralized and no loss is currently expected. The second largest
relationship represents 31.0% of the total. The debtor is currently in
bankruptcy, which has slowed progress toward ultimate loan resolution. The
debt has been restructured and the loan has been charged down to an
appropriate level. The borrower has been performing according to the
restructure to date and additional loss is not expected. The third largest
relationship represents 20.0% of the nonaccrual loans. The borrower is
currently negotiating takeout funding and the Bank has recently entered into
a written workout agreement with the borrower. The loan position is
adequately secured by real property and full collection is expected.
The remaining 9.0% of the nonperforming loans are distributed among the
commercial, agricultural, real estate and lease portfolios. The nonaccrual
real estate and lease categories sustained decreases for the same period.
The Company's Allowance for Loan and Lease Losses ("Allowance") totaled
$6,789,109 or 4.4% of gross loans as of March 31, 2000. This amount is
compared to $6,770,523 or 4.2% as of December 31, 1999. The Company uses the
Allowance method in providing for possible loan and lease losses. Loan and
lease losses are charged to the Allowance and recoveries are credited to it.
Management believes that the total Allowance is adequate to cover potential
losses in the loan and lease portfolios. While Management uses available
information to provide for loan and lease losses, future additions to the
Allowance may be necessary based on changes in economic conditions and other
factors.
Additions to the Allowance are made by provisions for possible loan and lease
losses. The provision for possible loan and lease losses is charged to
operating expense and is based upon past loan loss experience and estimates
of potential losses which, in Management's judgment, deserves current
recognition. Other factors considered by Management include growth,
composition and overall quality of the loan and lease portfolio, review of
specific problem loans and leases and current economic conditions that may
affect the borrower's ability to repay the loan. Actual losses may vary from
current estimates. The estimates are reviewed, and adjustments, as necessary,
are charged to operations in the period in which they become known.
Contributions to loan and lease losses totaled $150,000 and $550,000 for the
three-month periods ending March 31, 2000 and March 31, 1999, respectively.
The total contribution to the Allowance totaled $1,000,000 for the year
ending December 31, 1999.
INVESTMENTS
The Company's investment portfolio was $98,208,483 at March 31, 2000 as
compared to $74,032,144 at March 31, 1999. The increase in 2000 over 1999,
reflects the reallocation of loan proceeds received into investments rather
than new loans.
As of March 31, 2000, the Company's "available-for-sale" category adjustment
reflected a net unrealized loss of $1,049,179 net of taxes, and the
approximate market value of the Company's investment portfolio was
$98,120,146. As of March 31, 1999, the Company's "available-for-sale"
category adjustment reflected a net unrealized loss of $237,405 net of taxes,
and the approximate market value of the Company's investment portfolio was
$74,376,975. The $811,774 increase between the two periods, in the net
unrealized loss on the Company's held-to-maturity securities, is the result
of the volatile bond market and increasing interest rates.
12
<PAGE>
RESULTS OF OPERATIONS
Three-Months Ended March 31, 2000
Compared with
Three-Months Ended March 31, 1999
Net income increased 39.3% for the three-month period ending March 31, 2000
over the same three-month period in 1999. Net income for the first
three-months of 2000 was $680,082, or $0.35 diluted earnings per share, as
compared to $488,261, or $0.27 diluted earnings per share at March 31, 1999.
The primary factor contributing to the increase in net income was a 72.7%
decline in the provision for loan and lease losses for the two periods
stated. This decline was the direct result of the successful progress toward
the resolution of troubled loans and leases.
Net interest income declined for the three-month period ending March 31, 2000
to $3,441,393 from $3,778,328 for the same three-month period in 1999, a
decrease of $336,935 or 8.9%. This decrease was the effect of lower average
outstanding loan balances resulting in lower interest income and increased
interest-bearing deposit accounts resulting in higher interest expenses.
The Company's primary source of income is interest and fees on loans and
leases. The table below depicts average loans and leases and yields for the
three-month periods ending March 31, 2000 and 1999.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
THREE-MONTHS THREE-MONTHS
LOANS & LEASES ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Average Loans Outstanding $ 155,877,873 $ 175,942,005
Average Yields 9.93% 10.70%
Amount of Interest & Fees Earned $ 3,869,491 $ 4,705,450
Average Prime Rate 8.69% 7.75%
------------------------------------------------------------------------------------------
</TABLE>
The three-month average outstanding loans and leases at March 31, 2000 were
down $20,064,132 or 11.4% from the same three-month period in 1999. This
decline has adversely impacted the fees and interest earned on loans and
leases. Additionally, the decline in average outstanding loans and leases is
reflective of the increasing interest rate environment, tightening of the
underwriting standards and competitive pressures. Narrower margins are in
part the result of obtaining business under a more stringent credit
underwriting process. This has a direct trade off in risk that is not
reflective in the yield calculation. Both volume and rate are further
impacted as a result of competitive pressure to acquire and retain quality
customers for the Company.
The Company has experienced an increase in total interest expense of 9.0% or
$183,965, for the three-month period ending March 31, 2000 over 1999. This is
the result of rising interest rates and a change in the mix of deposits.
Average rates paid on deposits increased from 3.12% at March 31, 1999 to
3.28% at March 31, 2000. Interest-bearing deposits consisted of 80.8% of
total deposits at March 31, 2000 as compared to 78.7% at March 31, 1999.
13
<PAGE>
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three-month period ended March 31, 2000, compared to the
same period in 1999, are set forth in the following table:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
THREE-MONTHS THREE-MONTHS
DEPOSITS ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------------------------------------------------
<S> <C> <C>
Average Deposits Outstanding $272,559,062 $263,415,213
Average Rates Paid 3.28% 3.12%
Amount of Interest Paid or Accrued $ 2,235,486 $ 2,051,521
------------------------------------------------------------------------------------------------
</TABLE>
The Company experienced an increase in total noninterest income of $79,840 or
13.1% for the three-month period in 2000 over the same periods in 1999. Total
noninterest income consists primarily of service charges on deposit accounts,
brokered loan fees and other noninterest income.
Service charge income on deposit accounts, one of the primary components in
noninterest income, showed a substantial increase between the three-month
periods of 2000 over 1999. Income derived from service charges on deposit
accounts was $249,706 and $203,713 for the three-month periods ending March
31, 2000 and 1999.
The income from brokered loan fees for the first three-months of 2000,
$28,541, fell by $67,124 or 70.2% in comparison to the first three-months of
1999. The decrease in brokered loan fee income between the two periods can in
part be traced to the Company's decision, during the first half of 1999, to
hold selected real estate loans in its portfolio instead of selling those
loans into secondary markets. The intent of this strategy was to diversify
the Company's loan portfolio and benefit from the long-term, higher yielding
interest income stream created by the real estate loans, instead of the
one-time brokerage fee earned from the loans' sale. In addition to the
implementation of the strategy, income generated from brokered loan fees has
been adversely impacted by general slowing in the home refinance market which
has accompanied the increase in general market interest rates, and staff
reductions implemented at the Company's real estate loan production offices
as a result of the slowing market.
Other noninterest income increased 32.5% from $310,753 at March 31, 1999 to
$411,724 at March 31, 2000. The primary source of this rise was increased
loan servicing fees, non-insured deposit product income and earnings on life
insurance policies.
The Company recognized a decrease of 5.3% in total noninterest expense during
the first three-months of 2000 over the same period in 1999. Total
noninterest expense stood at $2,907,895 and $3,071,846 for the three-month
periods ending March 31, 2000 and 1999, respectively. Noninterest expenses
consist of, salaries and employee benefits, occupancy and furniture and
equipment expense, legal and professional fees and other miscellaneous
expenses.
Salaries and employee benefits decreased during the three-month periods of
2000 over 1999. This reduction was due to continued centralization of
services, which created additional personnel efficiencies.
Occupancy and furniture and equipment expenses decreased by 13.3% and stood
jointly at $470,703 and $543,048 at March 31, 2000 and 1999, respectively.
This decrease is in large part due to the closures, during the later part of
1999, of the Bank's loan production offices in Madera and Chico, California.
Additionally, during 1999, the Company had expenses associated with Year 2000
equipment upgrades.
Legal and professional fees declined 54.5% to $51,995 at March 31, 2000 from
$114,184 at March 31, 1999. This decrease is associated with continued
progress towards the resolution of problem loans, and resulted in the
reduction of legal fees associated with the collection of such loans.
Applicable income taxes for the three-month periods ended March 31, 2000 and
1999, were $396,425 and
14
<PAGE>
$278,850, respectively. The increase in 2000 over 1999 reflects of the
increase in net income between the two periods. The Company's effective tax
rate was 36.9% and 36.4% for the three-month periods in 2000 and 1999,
respectively.
LIQUIDITY
Historically, during the first two quarters of each year the Bank 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 (exclusive of pledged
securities).
In order to fund its liquidity needs, the Bank has formal and informal
borrowing arrangements with the Federal Reserve Bank to meet unforeseen
deposit outflows or seasonal loan funding demands. The Bank also entered an
agreement to borrow funds from the Federal Home Loan Bank. Additionally, the
Bank has an agreement with Lehman Brothers for a standby short-term loan
secured by U.S. Government and Agency Obligations contained in the Bank's
investment portfolio. As of March 31, 2000, December 31, 1999 and March 31
1999, the Bank had no balances outstanding on these lines. Management
believes the Company maintains adequate amounts of liquid assets to meet its
liquidity needs.
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 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.
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 team. 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 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/trend.
15
<PAGE>
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. 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.
CAPITAL RESOURCES
The Company and the Bank are subject to requirements of the Federal Reserve
Board and FDIC, respectively, governing capital adequacy. These guidelines
are intended to reflect the degree of risk associated with both on and off
balance sheet items. Financial institutions are expected to comply with a
minimum ratio of qualifying total capital to risk-weighted assets of 8%, at
least half of which must be in Tier 1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4%,
which is intended to supplement the risk-based capital requirements and to
ensure that all financial institutions continue to maintain a minimum level
of core capital.
Total shareholders' equity on March 31, 2000, increased by $374,092 to
$23,608,939 over December 31, 1999, total shareholders' equity of
$23,234,847. As can be seen by the following tables, the Company and Bank
exceeded all regulatory capital ratios on March 31, 2000 and December 31,
1999.
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
AS OF MARCH 31, 2000
- ---------------------------------------------------------------------------------------------------------------------
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital $ 24,658 11.17% $ 24,557 11.12%
Tier 1 Capital Minimum Requirement 8,832 4.00% 8,831 4.00%
----------------------------------------------------------------
Excess 15,826 7.17% 15,726 7.12%
----------------------------------------------------------------
----------------------------------------------------------------
Total Capital 27,418 12.42% 27,321 12.38%
Total Capital Minimum Requirement 17,663 8.00% 17,662 8.00%
----------------------------------------------------------------
Excess 9,755 4.42% 9,659 4.38%
----------------------------------------------------------------
Risk-Adjusted Assets $220,792 $220,775
----------------------------------------------------------------
----------------------------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to Quarterly Average Total Assets $ 24,658 8.21% $ 24,557 8.20%
Minimum Leverage Requirement 12,011 4.00% 11,980 4.00%
----------------------------------------------------------------
Excess 12,647 4.21% 12,577 4.20%
----------------------------------------------------------------
----------------------------------------------------------------
Total Quarterly Average Assets $300,283 $299,508
------------------ -----------------
------------------ -----------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------
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%
---------------------------------------------------------
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>
SUPERVISION AND REGULATION
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 Federal Deposit Insurance Corporation ("FDIC") and California Department
of Financial Institutions ("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 and lease 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
resolutions 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 Board ("FRB") have notified the
Bank and the Company that they have determined that the condition of the Bank
and the Company are such that prior approval of the regulatory agencies is
necessary before adding or replacing any member of the boards of directors,
employing any person as a senior executive officer, or changing the
responsibilities of any senior executive officer so that the individual would
be assuming a different senior executive officer position. Finally, due to
the Bank's condition, the FDIC is also restricting the Company's and the
Bank's ability to enter into any contracts to pay or make any golden
parachute and indemnification payments to institution-affiliated parties.
17
<PAGE>
DIRECTOR AND SENIOR MANAGEMENT CHANGE
To further strengthen Senior Management of the Bank, Don McDonel was promoted
to Senior Vice President/ Senior Loan Officer effective February 15, 2000.
Prior to his role as Senior Vice President, Mr. McDonel was Senior Loan
Officer of the Bank. Mr. McDonel came to the Bank in 1999 with more than
twenty (20) years of experience in the banking industry, having most recently
served as Executive Vice President/Credit Administrator of Douglas National
Bank in Roseburg, Oregon.
In addition, the Board of Directors of the Company and Bank announced the
addition of John Jelavich to the Board's of the Company and the Bank
effective February 15, 2000. Mr. Jelavich has been a self-employed consultant
to the president and chief executive officer of the Bank since September
1999. Between 1988 and 1998, Mr. Jelavich was a regional vice president for
Union Bank of California.
DIVIDENDS
Federal and State banking and corporate laws could limit the Bank's ability
to pay dividends to the Company. The Federal Reserve Board has issued a
policy statement that a bank holding company should not declare or pay a cash
dividend to its shareholders if the dividend would place undue pressure on
the capital of its subsidiary banks or if the dividend could be funded only
through additional borrowings or other arrangements that may adversely affect
the financial position of the holding company. In addition, a bank holding
company may not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend, and
its prospective rate of earnings retention is sufficient to fully fund each
dividend and appears consistent with its capital needs, asset quality and
overall financial condition. As 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.
SEGMENT REPORTING
SFAS No. 131 establishes standards for public business enterprises' reporting
of information about operating segments in annual financial statements. The
Statement requires that the enterprise report selected information concerning
operating segments in interim financial reports issued to shareholders.
Additionally, the Statement establishes requirements for related disclosures
about products, services, geographic areas, and major customers.
SFAS No. 131 requires public business enterprises to report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. The Statement further requires reconciliation of total
segment revenues, total segment profit or loss, total segment assets, and
other amounts disclosed for segments to corresponding amounts in the
enterprise's general purpose financial statements. It requires that all
public business enterprises report information about the revenues derived
from the enterprise's products or services (or groups of similar products and
services), about the countries in which the enterprise earns revenues and
holds assets, and about major customers regardless of whether that
information is used in making operating decisions. However, SFAS No. 131 does
not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
The Company has adopted SFAS No. 131. The adoption of the applicable
provisions did not have a material effect on the Company, as management
believes that the Company operates only in one segment, the commercial
banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of
computer systems, software, and other equipment utilizing microprocessors to
distinguish to year 1900 from the year 2000. The Year 2000 issues
18
<PAGE>
posed significant risks for all businesses, households, and governments and
could have resulted in system failures and miscalculations causing
disruptions in normal business and governmental operations if actions were
not taken to fix the problem before the year 2000 arrived.
As a result of the Company's persistent commitment to its Year 2000
compliance efforts it was able to roll into the new millennium without
interruption. The Company will continue to manage its Year 2000 compliance
efforts to assure rollover of other key dates in the Year 2000. Additionally,
the Bank continues to carry reserves for loan and lease losses that could
arise with its borrowers that may experience any Year 2000 related problems.
There were no expenses associated with the Year 2000 compliance efforts
during the first quarter of 2000.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 -"REPORTING COMPREHENSIVE INCOME"
For financial statements issued after December 31, 1997, the FASB mandates
compliance with SFAS No. 130, "Reporting Comprehensive Income." SFAS 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. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES"
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities in
the statement of financial condition and the measurement of those instruments
at fair value. Recognition of changes in fair value will be recognized into
income or as a component of other comprehensive income depending upon the
type of the derivative and its related hedge, if any. As issued, SFAS No. 133
was to be effective for the Company beginning January 1, 2000. However, in
July 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133."
Statement 137 amended the required effective date of Statement 133, requiring
adoption of Statement 133 in years beginning after June 15, 2000. The
Corporation expects to adopt Statement 133 effective January 1, 2001. The
Company is in the process of determining the impact of SFAS No. 133 on the
Company's financial statements, which is not expected to be material.
SFAS NO. 134 - "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES
RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR
SALE BY A MORTGAGE BANKING ENTERPRISE"
FASB issued SFAS No. 134 in October of 1998, to be effective the first fiscal
quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65 to require
entities engaged in mortgage banking activities to classify their
mortgage-backed securities, or other retained interests, based upon their
ability and intent to sell or hold those investments. The intent of the
statement is to conform the subsequent accounting for securities retained
after mortgage loan securitization with the subsequent accounting for
securities retained after the securitization of other types of assets by
mortgage banking entities. The adoption of the applicable provisions of SFAS
No. 134 did not have a material effect on the Company.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In management's opinion, the Company's market risk and interest rate risk
profiles are within reasonable tolerances at this time. (See Item 2.
Management Discussion and Analysis of Financial Condition and Results of
Operations, sections discussing "Liquidity" and "Market Risk and Interest
Rate Risk" at page 15 & 16). No significant changes to the market risk or
interest rate risk of the Company have occurred since December 31, 1999.
20
<PAGE>
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None reported
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.
No changes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the period.
ITEM 5. OTHER INFORMATION.
None reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.
(a) Exhibits.
Exhibit No.
2.1 Plan of Reorganization and Merger Agreement dated January
30, 1995 by and between Feather River State Bank, FRSB
Merger Company and California Independent Bancorp. Filed as
Exhibit 2.1 to the Company's General Form for Registration
of Securities on Form 10 (File No. 0-26552).*
3.1 Secretary's Compiled, Amended and Restated Articles of
Incorporation for California Independent Bancorp as of
April 26, 1999. Filed as Exhibit 3.1 to the Company's
Quarterly Report filed on Form 10Q for the period ended
March 31, 1999.*
3.2 Secretary's Compiled, Amended and Restated Bylaws of
California Independent Bancorp as of September 30, 1999.
Filed as Exhibit 3.2 to the Company's Quarterly Report
filed on Form 10Q for the period ended September 30, 1999.*
27 Financial Data Schedule
- ---------------
*Document incorporated herein by reference.
(b) Reports on Form 8K.
No reports on Form 8K were filed during the period.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Independent Bancorp
Date: MAY 9, 2000 /s/ LARRY D. HARTWIG
------------ --------------------
Larry D. Hartwig
President/CEO
Date: MAY 9, 2000 /s/ BLAINE C. LAUHON
------------- --------------------
Blaine C. Lauhon
Senior Vice President/Chief Lending Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,739,921
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,265,769
<INVESTMENTS-CARRYING> 15,942,714
<INVESTMENTS-MARKET> 15,854,377
<LOANS> 155,163,603
<ALLOWANCE> 6,789,109
<TOTAL-ASSETS> 296,602,887
<DEPOSITS> 269,771,031
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,222,917
<LONG-TERM> 0
0
0
<COMMON> 17,954,339
<OTHER-SE> 5,654,600
<TOTAL-LIABILITIES-AND-EQUITY> 296,602,887
<INTEREST-LOAN> 3,869,491
<INTEREST-INVEST> 1,406,584
<INTEREST-OTHER> 407,810
<INTEREST-TOTAL> 5,683,885
<INTEREST-DEPOSIT> 2,235,486
<INTEREST-EXPENSE> 2,242,492
<INTEREST-INCOME-NET> 3,441,393
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,907,895
<INCOME-PRETAX> 1,073,469
<INCOME-PRE-EXTRAORDINARY> 677,044
<EXTRAORDINARY> 3,038
<CHANGES> 0
<NET-INCOME> 680,082
<EPS-BASIC> $0.36
<EPS-DILUTED> $0.35
<YIELD-ACTUAL> 8.34
<LOANS-NON> 6,974,426
<LOANS-PAST> 2,719,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,956,297
<ALLOWANCE-OPEN> 6,770,523
<CHARGE-OFFS> 197,774
<RECOVERIES> 66,360
<ALLOWANCE-CLOSE> 6,789,109
<ALLOWANCE-DOMESTIC> 6,789,109
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,237,700
</TABLE>
