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 June 30, 2000
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission File Number 0-265520
--------
CALIFORNIA INDEPENDENT BANCORP
------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0349947
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1227 BRIDGE ST., SUITE C, YUBA CITY, CALIFORNIA 95991
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(530) 674-4444
--------------
(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 June 30, 2000
----- --------------
Common stock, no par value 1,907,018 shares
This report contains 40 pages. The Exhibit Index is on page 24.
1
PART I- FINANCIAL INFORMATION
ITEM 1
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE-MONTHS 4
CONSOLIDATED STATEMENTS OF INCOME FOR SIX-MONTHS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-22
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
PART II-OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 23
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5
OTHER INFORMATION 23
ITEM 6
EXHIBITS AND REPORTS ON FORM 8K 24
SIGNATURES 25
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
2000 1999 1999
ASSETS
Cash and Due From Banks $ 16,135,892 $ 15,887,475 $ 19,550,611
Federal Funds Sold - 22,000,000 -
--------------------------------------------------
Cash and Cash Equivalents 16,135,892 37,887,475 19,550,611
Investment securities:
Held-to-Maturity Securities, at amortized cost
(fair value of $7,518,980, $16,098,247 and
$8,684,672 respectively) 7,611,415 16,178,653 8,714,055
Available-for-Sale Securities, at fair value 84,282,196 70,819,851 61,391,066
--------------------------------------------------
Total Investments 91,893,611 86,998,504 70,105,121
Loans and Leases 128,498,350 116,032,691 147,614,151
Loans and Leases Held-for-Sale 41,124,032 45,287,979 42,401,959
--------------------------------------------------
Gross Loans and Leases 169,622,382 161,320,670 190,016,110
Less: Allowance for Loan and Lease Losses (6,791,504) (6,770,523) (6,663,063)
--------------------------------------------------
Net Loans and Leases 162,830,878 154,550,147 183,353,047
Premises and Equipment, Net 7,005,747 7,342,659 7,648,395
Interest Receivable 3,722,952 3,282,957 4,248,244
Other Real Estate Owned 919,711 1,299,637 1,485,159
Cash Surrender Value of Insurance Policies 4,757,124 4,648,123 2,832,652
Deferred Taxes 3,816,236 3,650,310 2,976,936
Income Tax Receivable 355,321 324,738 671,953
Other Assets 584,341 375,912 (2,807)
Net Assets From Discontinued Operations 163,822 - 467,837
--------------------------------------------------
Total Assets $ 292,185,635 $ 300,360,462 $ 293,337,148
==================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing $ 53,781,139 $ 60,483,798 $ 54,627,894
Interest-Bearing 206,174,287 212,975,320 207,146,690
--------------------------------------------------
Total Deposits 259,955,426 273,459,118 261,774,584
Interest Payable 1,578,339 1,533,539 1,300,469
Other Borrowings 6,821,718 941,676 6,029,097
Other Liabilities 525,724 1,079,148 511,360
Net Liabilities From Discontinued Operations - 112,134 -
--------------------------------------------------
Total Liabilities $ 268,881,207 $ 277,125,615 $ 269,615,510
==================================================
Shareholders' Equity
Common stock, no par value-Authorized-20,000,000
Issued and outstanding - 1,907,018 shares June
30,2000, 1,904,618 shares December 31, 1999, and
1,809,859 shares June 30, 1999. 17,953,709 17,950,525 16,116,518
Retained Earnings 7,199,798 6,233,226 8,532,215
Debt Guarantee of ESOP (200,000) - (40,000)
Accumulated Other Comprehensive Income (Loss) (1,649,079) (948,904) (887,095)
--------------------------------------------------
Total Shareholders' Equity 23,304,428 23,234,847 23,721,638
--------------------------------------------------
Total Liabilities and Shareholders' Equity $ 292,185,635 $ 300,360,462 $ 293,337,148
==================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
3
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------
Interest Income
Interest and Fees on Loans and Leases $ 4,122,255 $ 4,664,057
Interest on Investment-
Taxable Interest Income 1,535,683 990,695
Nontaxable Interest Income 29,212 40,952
Interest on Federal Funds Sold and Other Interest Income 128,459 37,288
------------------------------------------
Total Interest Income 5,815,609 5,732,992
------------------------------------------
Interest Expense
Interest on Deposits 2,240,649 2,008,611
Interest on Other Borrowings 18,826 30,452
Total Interest Expense 2,259,475 2,039,063
------------------------------------------
Net Interest Income 3,556,134 3,693,929
Provision for Loan and Lease Losses (50,000) (250,000)
------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 3,506,134 3,443,929
------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 253,358 255,413
Servicing and Brokered Loan Fees 45,602 150,028
Alternative Investment Fee Income 53,002 61,292
Cash Surrender Value of Life Insurance Policies 64,108 38,626
Other 128,941 41,902
------------------------------------------
Total Noninterest Income 545,011 547,261
------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 1,624,165 1,603,971
Occupancy Expense 161,506 183,713
Furniture and Equipment Expense 292,851 340,213
Legal and Professional Fees 105,263 94,589
Other 753,757 1,233,787
------------------------------------------
Total Noninterest Expense 2,937,542 3,456,273
------------------------------------------
Income Before Provision for Income Taxes 1,113,603 534,917
Provision for Income Taxes 425,350 191,400
------------------------------------------
Net Income From Continuing Operations 688,253 343,517
Income (Loss) on Discontinued Operations, net of tax effect 17,323 (8,240)
------------------------------------------
Net Income $ 705,576 $ 335,277
==========================================
Share Data:
Earnings Per Share:
Basic-From Continuing Operations $ 0.36 $ 0.18
Basic-After Discontinuance of Subsidiary 0.37 0.18
Diluted-From Continuing Operations 0.36 0.18
Diluted-After Discontinuance of Subsidiary 0.37 0.18
Shares Outstanding 1,907,018 1,900,352
Weighted Average Basic Shares 1,905,706 1,882,326
Weighted Average Diluted Shares 1,925,133 1,901,905
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
4
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
----------------------------------------------
Interest Income
Interest and Fees on Loans and Leases $ 7,991,746 $ 9,369,507
Interest on Investment-
Taxable Interest Income 2,908,669 1,867,562
Nontaxable Interest Income 62,810 86,303
Interest on Federal Funds Sold and Other Interest Income 536,269 242,881
----------------------------------------------
Total Interest Income 11,499,494 11,566,253
----------------------------------------------
Interest Expense
Interest on Deposits 4,476,135 4,060,132
Interest on Other Borrowings 25,832 33,864
----------------------------------------------
Total Interest Expense 4,501,967 4,093,996
----------------------------------------------
Net Interest Income 6,997,527 7,472,257
Provision for Loan and Lease Losses (200,000) (800,000)
----------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 6,797,527 6,672,257
----------------------------------------------
Noninterest Income
Service Charges on Deposit Accounts 503,064 459,126
Servicing and Brokered Loan Fees 264,874 420,396
Alternative Investment Fee Income 104,184 92,125
Cash Surrender Value of Life Insurance Policies 127,734 70,035
Other 235,126 115,710
----------------------------------------------
Total Noninterest Income 1,234,982 1,157,392
----------------------------------------------
Noninterest Expense
Salaries and Employee Benefits 3,159,999 3,188,374
Occupancy Expense 331,165 370,172
Furniture and Equipment Expense 593,895 696,802
Legal and Professional Fees 157,258 208,773
Other 1,603,120 2,063,998
----------------------------------------------
Total Noninterest Expense 5,845,437 6,528,119
----------------------------------------------
Income Before Provision for Income Taxes 2,187,072 1,301,530
Provision for Income Taxes 821,775 470,250
----------------------------------------------
Net Income From Continuing Operations 1,365,297 831,280
Income (Loss) on Discontinued Operations, net of tax effect $ 20,361 $ (7,742)
----------------------------------------------
Net Income $ 1,385,658 $ 823,538
==============================================
Share Data:
Earnings Per Share:
Basic-From Continuing Operations $ 0.72 $ 0.45
Basic-After Discontinuance of Subsidiary 0.73 0.44
Diluted-From Continuing Operations 0.71 0.44
Diluted-After Discontinuance of Subsidiary 0.72 0.44
Shares Outstanding 1,907,018 1,900,352
Weighted Average Basic Shares 1,905,254 1,858,582
Weighted Average Diluted Shares 1,924,681 1,878,161
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
5
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended June 30, 2000 and June 30, 1999
(UNAUDITED)
JUNE 30, 2000 JUNE 30, 1999
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,385,658 $ 823,538
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 490,380 548,052
Provision for loan and lease losses 200,000 800,000
Write-down of other real estate owned - 120,849
Provision for deferred taxes - 753,566
Gain on sale of premises and equipment 6,790 -
(Increase) decrease in assets-
Interest receivable (439,995) (1,393,570)
Other assets 58,931 (1,192,950)
Net Assets from Discontinued Operations of Subsidiary (275,956) 7,741
Increase (decrease) in liabilities-
Interest payable 44,800 (322,190)
Fed Funds purchased, other borrowings and other liabilities 5,126,618 5,373,647
----------------------------------------
Net cash provided by operating activities 6,597,226 5,518,683
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans and leases (8,480,731) (10,950,952)
Purchase of securities (15,751,108) (31,085,349)
Proceeds from maturity of HTM Securities 8,506,655 1,490,000
Proceeds from sales/maturity of AFS Securities 1,076,301 19,208,537
Proceeds from sales of other real estate owned 379,926 101,014
Purchases of premises and equipment (160,258) (437,374)
----------------------------------------
Net cash used for investing activities (14,429,215) (21,674,124)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in noninterest bearing deposits (6,702,659) (11,162,237)
Net increase (decrease) in interest bearing deposits (6,801,033) 4,346,275
Cash dividends (419,086) (390,797)
Stock options exercised 3,184 554,751
----------------------------------------
Net cash provided by (used in) financing activities (13,919,594) (6,652,008)
NET INCREASE (DECREASE) (21,751,583) (22,807,449)
----------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 37,887,475 42,358,060
----------------------------------------
----------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 16,135,892 19,550,611
========================================
The accompanying notes are an integral part of these consolidated statements
6
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
June 30, 2000, December 31, 1999, and June 30, 1999, and the results
of its operations for the three and six-month periods ended
June 30, 2000, and June 30, 1999.
Certain information and footnote disclosures normally presented in
annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance with SEC
rules or regulations. The results of operations for the period ended
June 30, 2000, are not necessarily indicative of the operating results
for the full year ending December 31, 2000. It is suggested that these
financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual Report for the
year ended December 31, 1999.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its wholly owned subsidiary, Feather River State Bank (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 June 30, 2000 amounted to a total of
approximately $3,341,683.
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 and June 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
7
and required reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to the common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options or other contracts to
issue common stock were exercised or converted into common stock, or
resulted in the issuance of common stock that then shared the earnings
of the Company.
NOTE 7 - FINANCIAL ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and displaying of comprehensive income and its components in
the financial statements. Comprehensive income refers to revenues,
expenses, gains, and losses that generally accepted accounting
principles recognize as changes in value to an enterprise but are
excluded from net income.
For the Company, comprehensive income includes net income and changes
in the fair value of its available-for-sale investment securities.
Total comprehensive income (loss) for the six-months ended June 30,
2000 and June 30, 1999 was ($263,421) and ($63,557), respectively.
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting enterprise segments of a
company in the footnotes to the financial statements. The Company has
no segments that meet the requirements of a reportable segment
according to the guidelines set forth in SFAS 131.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which is effective for fiscal years beginning after June
15, 2000. This statement established accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company
will adopt this statement on January 1, 2001 and does not expect that
it will have a material impact on its financial position or results of
operations.
On January 1, 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This
statement amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities", to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained
interest based on its ability and intent to sell or hold those
investments. SFAS 134 did not have an impact on the Company's financial
statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
California Independent Bancorp ("Company") through its wholly owned
subsidiary, Feather River State Bank (the "Bank") engages in a broad range of
financial service activities. The Bank commenced operations in 1977 as a
California State 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, EPI is
no longer originating leases. It is anticipated that the business affairs of
EPI will be dissolved and wound up during the year 2000.
Certain statements in this Form 10-Q quarterly report include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are subject to the "safe harbor" provisions created
by those sections. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. Such risks and uncertainties include, but
are not limited to, the following factors: competitive pressure in the
banking industry; changes in the interest rate environment; general economic
conditions, either nationally or regionally, that are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan and lease losses; the loss
of key personnel; changes in the regulatory environment; changes in business
conditions; volatility of rate sensitive deposits; operational risks
including data processing system failures or fraud; asset/liability matching
risks and liquidity risks; and changes in the securities markets. In
addition, such risks and uncertainties include mortgage banking activities,
merchant card processing, concentration of lending activities and the costs
and steps necessary to address the residual effects, if any, of the Year 2000
issues.
The following sections discuss significant changes and trends in the
financial condition, capital resources and liquidity of the Company from June
30, 1999 and December 31, 1999 to June 30, 2000. The sections also discuss
significant changes and trends in the Company's results of operations for the
three and six-months ended June 30, 2000, compared to the same period in 1999.
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
Total assets at June 30, 2000 were $292,185,635. This figure represents a
small decrease from $300,360,462 at December 31, 1999 and $293,337,148 at
June 30, 1999.
Gross loans and leases were $169,622,382 at June 30, 2000, a 5.1% increase
from $161,320,670 at December 31, 1999, and a 10.7% decrease from
$190,016,110 at June 30, 1999. The decrease in total loans and leases over
the past twelve-month period was due to the collection of certain problem
loans and leases and the Bank's enhanced credit standards. The increase over
December's figure reflects the seasonal nature of the Company's loan
portfolio. 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.
Contributing to the decline in total loans and leases at June 30, 2000 in
comparison to June 30, 1999 was a reduction in lease financing. The 1999
reduction was primarily the result of the sale of a lease portfolio and the
Bank's purchase of fewer leases from its subsidiary, EPI. The 2000 reduction
can be attributed to the Company and Bank's restructuring efforts and the
discontinuance of EPI's lease origination activities.
9
The Company's investment portfolio at June 30, 2000 was $91,893,611 compared
to December 31, 1999 investments of $86,998,504 and $70,105,121 at June 30,
1999. Cash and cash equivalents which consists of cash and due from banks and
federal funds sold, were $16,135,892 at June 30, 2000, $37,887,475 at
December 31, 1999, and $19,550,611 as of June 30, 1999. The higher balance at
December 31,1999, is attributed to the Company's investment in overnight
Federal Funds.
Total deposits of the Company remain strong at $259,955,426, $273,459,118 and
$261,774,584 as of June 30, 2000, December 31, 1999 and June 30, 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 65.3%, 59.0% and 72.6% at June 30,
2000, December 31, 1999 and June 30, 1999, respectively.
LOANS AND LEASES
The Company lends primarily to small and medium sized businesses, small to
large sized farmers, and consumers within its market area, which is comprised
principally of Sutter, Yuba, Colusa, and Yolo counties and secondarily
Placer, Sacramento, El Dorado, Butte and Glenn counties. During the second
quarter of 2000, there were no significant changes in the Company's loan
management, lending philosophy or credit delivery procedures.
Total loans and leases outstanding, as of June 30, 2000, were $169,622,382.
This represents an increase of $8,301,712 or 5.1%, since December 31, 1999,
and a decrease of $20,393,728 or 10.7%, compared to June 30, 1999.
The Company provides a wide range of loan products to farmers, commercial
businesses and retail and industrial businesses throughout its trade area.
Due to the composition of the loan portfolio, the Company sustains moderate
variations in outstanding loan totals. Specifically, certain seasonal
variations are expected to occur in the agricultural and construction loan
portfolios. The table below sets forth the composition of the Company's loan
portfolio as of June 30, 2000, December 31, 1999 and June 30, 1999.
COMPOSITION OF THE LOAN PORTFOLIO
---------------------------------- -------------------- -------------------- ------------------
Loan Category 6/30/00 12/31/99 6/30/99
---------------------------------- -------------------- -------------------- ------------------
Commercial & Agricultural $52,634,543 $55,111,154 $80,475,016
Real Estate Construction 31,001,274 30,513,920 36,500,172
Other Real Estate 56,114,571 46,003,764 44,944,208
Lease Financing 23,924,767 27,009,815 25,341,259
Consumer 3,713,417 2,523,695 2,697,035
Other 2,233,810 158,322 58,420
---------------------------------- -------------------- -------------------- ------------------
TOTAL $169,622,382 $161,320,670 $190,016,110
---------------------------------- -------------------- -------------------- ------------------
The principal changes in the loan portfolio between June 30, 1999 and June
30, 2000 are discussed below:
1. Commercial and Agricultural loans declined $27,840,473, or 34.6%, from
June 30, 1999, to June 30, 2000. The primary decline in loan volume
occurred in the Bank's agricultural loan portfolio. Agricultural loans
declined $26,758,007 between June 30, 1999 and June 30, 2000. Three
factors contributed to this event. First, the Bank closed its Madera
Loan Production office during the fourth quarter of 1999. As a result,
most of the agricultural loans originated from this office left the
Bank. Second, the Bank's enhanced credit standards resulted in lower
agricultural loan production during the past twelve months. And third,
increased competition in the Bank's market area resulted in some
agricultural borrowers leaving the bank.
10
2. As of June 30, 2000, 51.4% of the Bank's portfolio was real estate
secured. Other Real Estate loans increased by $11,170,367 between June
30, 1999 and June 30, 2000. Loans in this category include those loans
secured by residential (single family and multi-family), commercial and
agricultural real property. The Company offers a wide variety of loans
secured by real estate. The increase is attributable to successful
business development efforts and the Company's intensified focus on the
core real estate markets in its served geographic area.
3. Lease financing receivables declined $3,085,048 or 11.4%, between
December 31, 1999, and June 30, 2000. The Company's March 2000
announcement that EPI would cease lease origination activities resulted
in the discontinuance of leases purchased from EPI by the Bank.
Consequently, the Company expects an ongoing, steady reduction in its
lease financing receivables.
LOAN AND LEASE QUALITY
The Company places loans on non-accrual status when either principal or
interest has been past due for 90 days or more. Exceptions to this policy can
be made if the loan is well secured and in the process of collection. The
Company also places loans on non-accrual when payment in full of principal or
interest is not expected or the financial condition of the borrower has
significantly deteriorated.
The following table summarizes the composition of non-performing loans and
leases which consists of "Accruing loans and leases past due 90 days or more"
and "Nonaccrual loans and leases" as of June 30, 2000, December 31, 1999 and
June 30, 1999 ($ in 000's) as well as the changes between the periods.
COMPOSITION OF NON-PERFORMING
- ---------------------------- -----------------------------------------------------------------
ACCRUING LOANS PAST DUE $ AMT. CHANGE $ AMT. CHANGE $ AMT.
90 DAYS OR MORE 6/30/00 FROM 6/99 12/31/99 FROM 6/99 6/30/99
-----------------------------------------------------------------
COMMERCIAL 0 N/A 0 N/A 0
AGRICULTURAL 374 N/A 0 N/A 0
REAL ESTATE 638 N/A 0 N/A 0
LEASES 0 N/A 0 N/A 0
CONSUMER 0 N/A 0 N/A 0
TOTAL 1,012 N/A 0 N/A 0
NONACCRUAL LOANS
COMMERCIAL 1,890 125.00% 868 3.33% 840
AGRICULTURAL 4,689 191.06% 3,851 139.04% 1,611
REAL ESTATE 1,089 -40.46% 1,237 -32.37% 1,829
LEASES 31 -77.21% 51 -62.50% 136
CONSUMER 7 0.00% 0 0.00% -0-
TOTAL 7,706 74.50% 6,007 36.03% 4,416
- ---------------------------- -----------------------------------------------------------------
TOTAL NONPERFORMING 8,718 97.42% 6,007 36.03% 4,416
- ---------------------------- -----------------------------------------------------------------
Total nonperforming loans and leases at June 30, 2000 were $8,718,000, an
increase of $2,711,000, or 45.1%, from December 31, 1999. In comparison to
June 30, 1999, non-performing loans and leases at June 30, 2000 have
increased $4,302,000, or 97.4%. Total nonperforming loans and leases
comprised 2.3% of the portfolio on June 30, 1999, which increased to 3.7% of
the portfolio on December 31, 1999. Nonperforming loans and leases at June
30, 2000, are 5.1% of total loans and leases. While comparisons to the prior
year and December 31, 1999 figures show significant increases, since March
11
31, 2000 the Company's total nonperforming loans and leases have decreased by
$976,000. As of March 31, 2000 total nonperforming loans were $9,694,000, or
6.3% of gross loans and leases.
The Company had no loans and leases in the "Accruing Loans past due 90 days
or more" category as of June 30, 1999 and December 31, 1999. The increased
level at June 30, 2000 of $1,012,000 in this category reflects the addition
of four agriculture and agricultural related loans; all of which currently
have adequate security and are in the process of collection.
Nonaccrual loans and leases were $7,706,000 at June 30, 2000, an increase of
$1,699,000, or 28.3%, and $3,290,000, or 74.5%, in comparison to December 31,
t1999 and June 30, 1999, respectively. These increases were centered in the
Bank's agriculture portfolio and the agriculture related portion of its
commercial portfolio. The increases are primarily the result of the impact of
adverse weather conditions on crop production and lower commodity pricing due
to rising crop supply.
The Company's nonaccrual loan and leases are concentrated in three credit
relationships that comprise 81.0% of the total nonaccrual loans at June 30,
2000. All three are large agricultural credit relationships. The largest
relationship comprises 36.0% 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 28.0% 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 currently expected. The third
largest relationship represents 17.0% 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 currently
expected. The remaining 19.0% 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.
An additional factor that has impacted the level of nonperforming loans and
leases is the Company's objective to substantially reduce the level of all
classified loans and leases during the year 2000. The Bank established a
Special Asset Department in November 1999 that focused on prompt resolution
to identify classified loans and leases. Workout plans are in place for each
classified loan and lease and adjustments are taken immediately if full
recovery is not expected. These intensified collection actions have
contributed to the increased levels of nonperforming loans and leases. The
actions are intended to accelerate collection and include the following: 1)
loan restructuring, 2) potential takeout funding, 3) foreclosure action and,
4) formalizing the workout agreement with the borrower before renewal of the
existing loan position is allowed. This aggressive collection approach tends
to temporarily increase the accrual over 90 days past due levels.
The Company's practice with regard to all non-performing loans and leases is
to re-assess the value of the collateral underlying the loan and, if
necessary, write the loan or lease down to the level supported by the
collateral valuation. Additionally, workout plans are in place for each
nonperforming loan and lease and, at this time, current analysis does not
indicate any further loss content.
All of the nonperforming loans and leases listed in the previous table are in
the process of collection or resolution. In terms of specific resolution
plans, 40% of the loans (approximately $3.5 million) are in the process of
collateral liquidation, 39% (approximately $3.4 million) have been
restructured and, 20% (approximately $1.8 million) are currently in a workout
arrangement. Management projects additional progress toward the resolution of
these troubled loans and leases during the third quarter of 2000. However,
due to particular factors surrounding specific nonperforming loans and
leases, Management projects that some of these credits will require
additional time to resolve.
12
The Company's Allowance for Loan and Lease Loss ("ALLL") totaled $6,791,504,
or 4.0% of gross loans and leases, as of June 30, 2000. This amount compares
to $6,770,523 or 4.2% of gross loans and leases as of December 31, 1999. The
Company uses the allowance method in providing for possible loan and lease
losses. Loan and lease losses are charged against the ALLL and recoveries are
credited to it. Management believes that the total ALLL is adequate to cover
potential losses in the loan and lease portfolios. While Management uses all
available information to provide for loan and lease losses, future additions
to ALLL may be necessary based on changes in economic conditions and other
factors.
Additions to the ALLL are made by provisions for possible losses. The
provision for possible loan and lease losses is charged to operating expense
and is based upon past loss experience and estimates of potential losses
which, in Management's judgment and in accordance of Generally Acceptable
Accounting Principles, deserves current recognition. Other factors considered
by Management include growth, composition and overall quality of the loan and
lease portfolio, review of specific problem loans and leases, and current
economic conditions that may affect the customer's ability to repay the
obligation. Actual losses may vary from current estimates. The estimates are
reviewed regularly and adjustments, as necessary, are charged to operations
in the period in which they become known.
Contributions to the ALLL totaled $200,000 and $800,000 for the six-month
periods ending June 30, 2000 and June 30, 1999, respectively, and $50,000 and
$250,000 for the three-month periods ending June 30, 2000 and June 30, 1999,
respectively. Total Contributions to the ALLL for year ending December 31,
1999 equaled $1,000,000. Loan and lease charge-offs for the six months ended
June 30, 2000 totaled $541,527 as compared to $711,894 for the six months
ended June 30, 1999. Loan recoveries were $362,508 for the six-months ended
June 30, 2000 compared to $550,846 for the six-months ended June 30, 1999.
The Company has no foreign loans and therefore none of the allowance is for
foreign loans.
INVESTMENTS
The Company's investment portfolio was $91,893,611 at June 30, 2000, as
compared to $70,105,121 at June 30, 1999. The increase in 2000 over 1999 is
consistent with the year-over-year decrease in the Company's loan portfolio,
a relatively stable deposit base, and the Company's objective to most
effectively utilize its excess seasonal funds flow.
As of June 30, 2000, the Company's "available-for-sale" category market
valuation allowance reflected a net unrealized loss of $1,649,079 net of
taxes. The approximate market value of the Company's entire investment
portfolio at June 30, 2000 was $91,801,176. As of June 30, 1999, the
Company's "available-for-sale" category adjustment reflected a net unrealized
loss of $887,095 net of taxes, and the approximate market value of the
Company's entire investment portfolio was $70,075,738. The $761,984 increase
between the two periods, in the net unrealized loss on the Company's
available for sale securities, is primarily the result of increasing interest
rates, and to a lesser extent, volatility in the bond markets.
13
RESULTS OF OPERATIONS
Three and Six-Months Ended June 30, 2000
Compared with
Three and Six-Months Ended June 30, 1999
The Company recognized net income for the first half of 2000 of $1,385,658
resulting in diluted earnings per share of $0.72. Net income for the
three-month period ending June 30, 2000, was $705,576 resulting in diluted
earnings of $0.37 per share. The net income for the three and six-month
periods ending June 30, 2000 was substantially higher than the comparable
1999 periods. The Company reported net income of $335,277 or $0.18 per share
on a diluted basis for the three-month period of 1999 and $823,538 or $0.44
per share on a diluted basis for the six-month period of 1999, respectively.
The increase in 2000 net income over the same period for 1999 was due to
several factors as discussed in this section.
One of the primary factors contributing to the increase in net income was a
75.0% decline in the provision for loan and lease losses for the two
comparative six-month periods ended June 30th. The provision for loan and
lease loss declined 80.0% between the two comparative three-month periods.
These declines were primarily due to decreased charge-offs and higher than
anticipated recoveries on previously charged-off loans and leases, both of
which mitigated the need to further build reserves via provisions through
charges to income.
Additionally, total noninterest expense declined $682,682 or 10.5%, from the
six-month period ending June 30, 2000 over June 30, 1999. Noninterest expense
declined $518,731 or 15.0%, for the three-month period ending June 30, 2000
over June 30, 1999. These declines are discussed in more detail later in this
section.
Net interest income declined for the six-month period ending June 30, 2000 to
$6,997,527 from $7,472,257 for the same six-month period in 1999, a decrease
of $474,730 or 6.4%. Net interest income also declined for the three-month
period ending June 30, 2000 to $3,556,134 or 3.7% from the June 30, 1999
amount of $3,693,929. These decreases were primarily the effect of a variety
of factors affecting interest income and interest expense as described later
in this section.
The Company's primary source of income is interest and fees on loans and
leases. The table below depicts average loans and leases and yields for the
three and six-month periods ending June 30, 2000 and 1999.
- --------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------------------------------------------------------------------
Average loans and leases
outstanding $ 161,216,298 $ 182,152,901 $ 158,562,121 $ 179,073,787
Average yields 10.23% 10.24% 10.08% 10.46%
Interest & fees earned $ 4,122,255 $ 4,664,057 $ 7,991,746 $ 9,369,507
Average prime rate 9.25% 7.75% 8.97% 7.75%
- --------------------------------------------------------------------------------------------------------------------
The three and six-month average outstanding loans and leases at June 30,
2000, were down $20,936,603 or 11.5%, and $20,511,666 or 11.5%, respectively,
from the same three and six-month
14
periods in 1999. This decline has adversely impacted the fees and interest
earned on loans and leases. The decline in average outstanding loans and
leases is reflective of the increasing interest rate environment, tightening
of the Bank's underwriting standards, and increasing competitive pressures.
Narrower margins are in part the result of 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.
As an offset to the decline in interest income and fees on loans and leases,
the Company experienced an increase in its investment income of $533,248, or
51.7%, for the three-month periods and $1,017,614 or 52.1%, for the six-month
periods ending June 30, 2000 over June 30, 1999, respectively. These
increases are primarily the result of a rise in total investments outstanding
between the two periods reported.
The Company has experienced an increase in total interest expense on deposits
of 11.6% or $232,038, for the three-month period and 10.2% or $416,003, for
the six-month period ending June 30, 2000 over 1999. This is primarily
attributed to of rising interest rates and a change in the mix of deposits.
Average rates paid on deposits increased from 3.1% at June 30, 1999 to 3.3%
at June 30, 2000. Interest-bearing deposits consisted of 79.3% of total
deposits at June 30, 2000 as compared to 79.1% at June 30, 1999.
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three and six-month periods ended June 30, 2000, compared to
the same periods in 1999, are set forth in the following table:
- -----------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------
Average deposits outstanding $263,749,727 $259,022,565 $268,147,463 $261,992,482
Average rates paid 3.40% 3.10% 3.34% 3.10%
Amount of interest paid or accrued $ 2,240,649 $ 2,008,611 $ 4,476,135 $ 4,060,132
- -----------------------------------------------------------------------------------------------------------------
The Company experienced a slight decrease in total noninterest income of
$2,250 or 0.4% for the three-month period ending June 30, 2000 over the same
period in 1999. Total noninterest income increased $77,590 or 6.7% for the
six-month period ended June 30, 2000 compared to the same 1999 period. Total
noninterest income consists primarily of service charges on deposit accounts,
servicing and brokered loan fees and other noninterest income.
Service charge income on deposit accounts, one of the primary components in
noninterest income, showed an increase between the six-month periods of 2000
over 1999. Income derived from service charges on deposit accounts was
$503,064 and $459,126 for the six-month periods ending June 30, 2000, and
1999.
Income from servicing and brokered loan fees for the three-months ended June
30, 2000, declined by $104,426, or 69.6%, in comparison to the first
three-months of 1999. The income for these fees declined by $155,522, or
37.0%, during the six-month period ended June 30, 2000 over June 30, 1999.
The decrease in servicing and 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.
Additionally, income
15
generated from brokered loan fees has been adversely impacted by a general
slowing in the home refinance market which has accompanied the increase in
general market interest rates and, to a lesser extent, staff reductions
implemented at the Company's real estate loan production offices as a result
of the slowing market.
All other noninterest income increased 73.5% for the three-month period from
$141,820 at June 30, 1999 to $246,051 at June 30, 2000. For the six-month
period ending June 30, 2000, all other noninterest income increased by 68.1%
to $467,044 over $277,870 at June 30, 1999. The primary source of this rise
was increased non-insured deposit product income and earnings on life
insurance policies.
The Company experienced a decrease of $518,73 or 15.0%, and $682,682 or
10.5%, in total noninterest expense during the three and six-month periods
ending June 30, 2000, over the same periods in 1999. Total noninterest
expense stood at $2,937,542 and $3,456,273 for the three-month periods and
$5,845,437 and $6,528,119 for the six-month periods ending June 30, 2000, and
1999, respectively. Noninterest expenses consist of, salaries and employee
benefits, occupancy and furniture and equipment expense, legal and
professional fees, and other miscellaneous noninterest expenses.
Salaries and employee benefits decreased slightly during the six-month period
of 2000 over 1999. This reduction was primarily due to efficiencies gained
from continued centralization of services, which were partially offset by
annual salary increases and other personnel activity.
Occupancy and furniture and equipment expenses decreased by 13.3% for both
the three and six-month periods and stood jointly at $925,060 and $1,066,974
at June 30, 2000 and 1999, respectively. This decrease is in large part due
to the closures, during the later part of 1999, of the Bank's loan production
offices in Madera and Chico, California. Additionally, during 1999, the
Company had nonrecurring expenses associated with Year 2000 equipment
upgrades.
Legal and professional fees declined 24.7% to $157,258 at June 30, 2000 from
$208,773 at June 30, 1999. This decrease is associated with continued
progress towards the resolution of problem loans and leases, and resulted in
the reduction of legal fees associated with the collection of such loans and
leases.
Other noninterest miscellaneous expenses decreased by $480,030 or 38.9%, for
the three-month period and $460,878 or 22.3%, for the six-month period ending
June 30, 2000 over June 30, 1999. These decreases are primarily associated
with expenses recognized during the first half of 1999, of $221,060 incurred
under the Company's 1989 Stock Option Plan. Additionally, other operating
efficiencies were recognized which attributed to the decline in miscellaneous
noninterest expense during the three and six-month periods ending June 30,
2000 over the same periods in 1999.
Applicable income taxes for the three and six-month periods ended June 30,
2000, were $452,350 and $821,775, respectively. This is compared to $191,400
and $470,250 at the three and six-month periods, respectively, ended June 30,
1999. The increase in 2000 over 1999 reflects of the increase in pre-tax
income between the two periods. The Company's effective tax rate was 38.2%
and 37.6% for the three and six-month periods in 2000 and 35.8% and 36.1% for
the three and six-month periods, respectively, in 1999.
LIQUIDITY
Historically, during the first two quarters of each year the Bank experiences
excess liquidity. The Bank's seasonal agricultural loan demand, which occurs
each year during the second and third quarters, tends to absorb excess
liquidity and frequently results in a net borrowed position during that
timeframe. The Bank's short-term liquid assets consist of cash and due from
banks, federal funds sold and investment securities with maturities of one
year or less (exclusive of pledged securities). Irrespective of maturity,
16
U.S. Government and Agency securities qualify as collateral for borrowings at
the Federal Home Loan Bank and with broker-dealers.
In order to fund its liquidity needs, the Bank has formal and informal
borrowing arrangements with the Federal Reserve Bank to meet unforeseen
deposit outflows or seasonal loan funding demands. The Bank also entered an
agreement to borrow funds from the Federal Home Loan Bank of San Francisco.
Additionally, the Bank has an agreement with Lehman Brothers for a standby
short-term loan secured by U.S. Government and Agency Obligations contained
in the Bank's investment portfolio. As of June 30, 2000, December 31, 1999
and June 30 1999, the Bank had $5,373,000, $0 and $5,110,000 outstanding on
these lines, respectively.
The Bank monitors its credit facility availability and unencumbered
qualifying collateral in conjunction with its asset/liability management
process. Policy limits are established and monitored for maximum borrowings
and minimum contingency liquidity levels.
Management believes the Company maintains adequate amounts of liquidity to
meet its needs.
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The Company's
primary market risk exposure is interest rate risk. The on-going monitoring
and management of the risk is an important component of the Company's
asset/liability management process, which is governed by policies established
by its Board of Directors that are reviewed and approved annually. The Board
of Directors delegates responsibility for carrying out the asset/liability
management policies to Management. In this capacity, Management develops
guidelines and strategies impacting the Company's asset/liability management
related activities based upon estimated market risk sensitivity, policy
limits and overall market interest rate levels and trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income and
expense streams associated with the Company's financial instruments also
change thereby impacting net interest income ("NII"), the primary component
of the Bank's earnings. Management utilizes the results of a detailed and
dynamic simulation model to quantify the estimated exposure of NII to
sustained interest rate changes. The Company believes, individually and in
the aggregate, the many assumptions incorporated in the simulation model are
reasonable. However, the complexity of the simulation modeling process is
only expected to produce reasonable estimates, not an absolutely precise
calculation of exposure.
This sensitivity analysis is compared to the Company's policy limits which
specify a maximum tolerance level for NII exposure over a one year horizon,
assuming no balance sheet growth, given both a 200 basis point ("bp") upward
and downward shift in interest rates. A parallel and pro rata shift in rates
over a 12-month period is assumed.
The Bank's assessment of interest rate risk reflects an exposure of NII to a
sustained falling interest rate environment. The Bank has been operating
within the Board approved policy limit of 10.0%.
Additionally, Management monitors NII sensitivity over a two-year horizon and
tutilizes additional tools to monitor potential longer-term interest rate
risk.
The composition of the Company's statement of condition is planned and
monitored by Management of the Bank. The results of the interest rate
sensitivity analysis are utilized by Management to develop and initiate
strategies for managing interest rate risk.
17
CAPITAL RESOURCES
The Company and the Bank are subject to requirements of the Federal Reserve
Board and Federal Deposit Insurance Corporation ("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 June 30, 2000, increased by $69,581 to
$23,304,428 over December 31, 1999, total shareholders' equity of
$23,234,847. During the six-month period from January 1, 2000 through June
30, 2000, shareholders' equity was increased by net income of $1,385,658 and
stock options exercised of $3,184. These increases were offset by the Bank's
guaranty of its Employee Stock Ownership Plan debt of $200,000, the payment
of cash dividends of $419,086, and an increase in the net unrealized loss
related to the Company's available-for-sale securities of $700,175, net of
taxes.
As can be seen by the following tables, the Company and Bank exceeded all
regulatory capital ratios on June 30, 2000, and December 31, 1999.
RISK BASED CAPITAL RATIO
AS OF JUNE 30, 2000
- ---------------------------------------------------------------------------------- -------------------------------
COMPANY BANK
---------------------------------------- -------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------- -------------------------------
Tier 1 Risk-Based Capital $24,954 11.43% $24,811 11.44%
Tier 1 Capital Minimum Requirement 8,732 4.00% 8,676 4.00%
---------------------------------------- -------------------------------
Excess $16,222 7.43% $16,135 7.44%
======================================== ===============================
Total Risk-Based Capital 27,733 12.70% 27,573 12.71%
Total Capital Minimum Requirement 17,465 8.00% 17,353 8.00%
---------------------------------------- -------------------------------
Excess $10,268 4.70% $10,220 4.71%
---------------------------------------- -------------------------------
Net Risk-Weighted Assets $218,308 $216,910
======================================== ===============================
LEVERAGE CAPITAL RATIO
Tier 1 Capital to total assets $24,954 8.56% $24,811 8.51%
Minimum leverage requirement 11,665 4.00% 11,660 4.00%
---------------------------------------- -------------------------------
Excess $13,289 4.56% $13,151 4.51%
======================================== ===============================
Average total assets $291,620 $291,506
======================== ==============
- ---------------------------------------------------------------------------------- -------------------------------
18
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1999
- --------------------------------------------------------------------------------- --------------------------------
COMPANY BANK
-------------------------------- --------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------- --------------------------------
Tier 1 Risk-Based Capital $24,184 10.56% $24,058 10.51%
Tier 1 Capital Minimum Requirement 9,158 4.00% 8,676 4.00%
-------------------------------- --------------------------------
Excess $15,026 6.56% $15,382 6.51%
================================ ================================
Total Risk-Based Capital 27,046 11.81% 26,918 11.76%
Total Capital Minimum Requirement 18,316 8.00% 18,306 8.00%
-------------------------------- --------------------------------
Excess $ 8,730 3.81% $ 8,612 3.76%
-------------------------------- --------------------------------
Net Risk-Weighted Assets $228,955 $228,828
================================ ================================
LEVERAGE CAPITAL RATIO
Tier 1 Capital to Quarterly
Tier 1 Capital to total assets $24,184 7.97% $24,058 7.94%
Minimum leverage requirement 12,134 4.00% 11,660 4.00%
------------------------------- ---------------------------------
Excess $12,050 3.97% $12,398 3.94%
=============================== =================================
Average total assets $303,345 $303,133
================= =================
- ------------------------------------------------------------------------------------------------------------------
SUPERVISION AND REGULATION
As a result of the Company's and Bank's 1999 financial performance, the final
results of the FDIC and California Department of Financial Institutions'
("DFI") most recent examination of the Bank, and continued concerns regarding
the quality of the Bank's loan portfolio, the Bank's Board of Directors
passed a resolution to address the concerns. The resolution requires the Bank
to: (1) maintain management acceptable to the FDIC and DFI, (2) to seek
approval of the agencies prior to appointing any individual as a director or
senior officer, (3) continue with the diligent implementation of a previously
adopted plan to reduce the level of non-performing and problem loans and
leases, (4) maintain an adequate reserve for loan and lease losses, and (5)
seek prior approval of the FDIC and DFI before the payment of any cash
dividends. Additionally, the Board passed a resolution in 1998 requiring the
Bank to maintain a minimum Tier 1 Leverage ratio of 7% which remains in
effect.
Furthermore, the FDIC has notified the Bank that it has determined that the
condition of the Bank is such that prior approval of the regulatory agency is
necessary before adding or replacing any member of the boards of directors,
employing any person as a senior executive officer, or changing the
responsibilities of any senior executive officer so that the individual would
be assuming a different senior executive officer position. Finally, due to
the Bank's condition, the FDIC is also restricting the Company's and the
Bank's ability to enter into any contracts to pay or make any golden
parachute and indemnification payments to institution-affiliated parties.
19
SENIOR MANAGEMENT CHANGE
Effective June 15, 2000, Senior Vice President and Chief Financial Officer
Annette Bertolini elected to take early retirement and resigned from her
executive officer positions with the Bank and Company. The Company and Bank's
boards of directors ("Boards") have worked closely with Ms. Bertolini to
assure a smooth transition, and Ms. Bertolini has agreed to continue her
association with the Bank as a long-term consultant.
To further strengthen senior management of the Bank and Company, the Boards
have announced that Robert J. Lampert has accepted the positions of executive
vice president and chief operating officer of the Company and Bank. In these
positions, Mr. Lampert will also serve as the Company and Bank's chief
financial officer. He has accepted this assignment after serving as the
president and chief executive officer of EPI since November of 1999. Prior to
joining EPI, Mr. Lampert was Executive Vice President Strategic Operations of
the Commercial Lending Division of The Money Store, and holds the credentials
of a certified public accountant. The Company and the Bank have received the
necessary approvals to appoint Mr. Lampert to these executive officer
positions.
DIVIDENDS
Federal and State banking and corporate laws could limit the Bank's ability
to pay dividends to the Company. The Federal Reserve Board has issued a
policy statement that a bank holding company should not declare or pay a cash
dividend to its shareholders if the dividend would place undue pressure on
the capital of its subsidiary banks or if the dividend could be funded only
through additional borrowings or other arrangements that may adversely affect
the financial position of the holding company. In addition, a bank holding
company may not continue its existing rate of cash dividends on its common
stock unless its net income is sufficient to fully fund each dividend, and
its prospective rate of earnings retention is sufficient to fully fund each
dividend and appears consistent with its capital needs, asset quality and
overall financial condition. As a result of the Bank's disappointing 1999
financial performance and continued concerns regarding the quality of the
Bank's loan portfolio, the Bank's Board of Directors has passed a resolution
which requires the Bank to seek the prior approval of the FDIC and DFI for
the payment of any cash dividends.
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.
20
The Company has adopted SFAS No. 131. The adoption of the applicable
provisions did not have a material effect on the Company, as Management
believes that the Company operates only in one segment, the commercial
banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of
computer systems, software, and other equipment utilizing microprocessors to
distinguish the year 1900 from the year 2000. The Year 2000 issues posed
significant risks for all businesses, households, and governments and could
have resulted in system failures and miscalculations causing disruptions in
normal business and governmental operations if actions were not taken to fix
the problem before the year 2000 arrived.
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 half of 2000.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 -"REPORTING COMPREHENSIVE INCOME"
For financial statements issued after December 31, 1997, the FASB mandates
compliance with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and display of comprehensive income
and its components in the financial statements. Comprehensive income refers
to revenues, expenses, gains, and losses that generally accepted accounting
principles recognize as changes in value to an enterprise but are excluded
from net income. The Company has adopted SFAS No. 130, and does not expect
the statement to have a material impact on its financial statements.
SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES"
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities in
the statement of financial condition and the measurement of those instruments
at fair value. Recognition of changes in fair value will be recognized into
income or as a component of other comprehensive income depending upon the
type of the derivative and its related hedge, if any. As issued, SFAS No. 133
was to be effective for the Company beginning January 1, 2000. However, in
July 1999, the FASB issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133."
Statement 137 amended the required effective date of Statement 133, requiring
adoption of Statement 133 in years beginning after June 15, 2000. The
Corporation expects to adopt Statement 133 effective January 1, 2001. The
Company is in the process of determining the impact of SFAS No. 133 on the
Company's financial statements, which is not expected to be material.
21
SFAS NO. 134 - "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED
AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A
MORTGAGE BANKING ENTERPRISE"
FASB issued SFAS No. 134 in October of 1998, to be effective the first fiscal
quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65 to require
entities engaged in mortgage banking activities to classify their
mortgage-backed securities, or other retained interests, based upon their
ability and intent to sell or hold those investments. The intent of the
statement is to conform the subsequent accounting for securities retained
after mortgage loan securitization with the subsequent accounting for
securities retained after the securitization of other types of assets by
mortgage banking entities. The adoption of the applicable provisions of SFAS
No. 134 did not have a material effect on the Company.
END TO POOLING-OF-INTERESTS ACCOUNTING FOR BUSINESS COMBINATIONS
In April 1999, FASB announced its tentative decision to no longer deem the
pooling-of-interests method of accounting as an acceptable method to account
for business combinations between independent parties. The FASB expects a
final standard will be issued and become effective during 2001. A portion of
the Company's business strategy is to pursue appropriate acquisition
opportunities 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion, the Company's market risk and interest rate risk
profiles are within reasonable tolerances at this time. (See Item 2.
Management Discussion and Analysis of Financial Condition and Results of
Operations, sections discussing "Liquidity", "Market Risk" and "Interest Rate
Risk" at pages 16-18). No significant changes to the market risk or interest
rate risk of the Company have occurred since December 31, 1999.
22
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.
California Independent Bancorp's Annual Meeting of Shareholders was
held on May 17, 2000, in Yuba City, California. The following
resolutions were distributed to stockholders and adopted:
To elect the following 11 (eleven) nominees to serve as directors until
the next Annual Meeting and until their successors are elected and have
been qualified:
For Against Abstain
John L. Dowdell 1,441,223 0 143,191
Harold M. Eastridge 1,348,211 0 236,203
William H. Gilbert 1,388,046 0 196,368
Larry D. Hartwig 1,442,061 0 142,353
John L. Jelavich 1,440,692 0 143,722
Donald L. Livingstone 1,441,630 0 142,784
Alfred G. Montna 1,441,612 0 142,802
David A. Offutt 1,439,362 0 145,052
William K. Retzer 1,289,325 0 295,089
Ross D. Scott 1,440,529 0 143,885
Michael C. Wheeler 1,392,408 0 192,006
To ratify the appointment of Arthur Andersen LLP as the Company's
independent public accountants.
Vote For 1,557,493
Against 1,817
Abstained 25,104
To adopt the California Independent Bancorp 2000 Stock Option Plan.
Vote For 988,655
Against 249,648
Abstained 73,269
Broker Non-Votes 272,842
ITEM 5. OTHER INFORMATION.
None reported.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.
(a) Exhibits.
Exhibit No.
2.1 Plan of Reorganization and Merger Agreement dated January 30,
1995 by and between Feather River State Bank, FRSB Merger
Company and California Independent Bancorp. Filed as Exhibit
2.1 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
3.1 Secretary's Compiled, Amended and Restated Articles of
Incorporation for California Independent Bancorp as of April
26, 1999. Filed as Exhibit 3.1 to the Company's Quarterly
Report filed on Form 10Q for the period ended March 31, 1999.*
3.2 Secretary's Compiled, Amended and Restated Bylaws of
California Independent Bancorp as of September 30, 1999. Filed
as Exhibit 3.2 to the Company's Quarterly Report filed on Form
10Q for the period ended September 30, 1999.*
10.21 Promissory Note, Loan Agreement and Annual Contribution
Agreement dated May 11, 2000, by and between Feather River
State Bank Employee Stock Ownership Plan and Trust and United
ComServe.
27 Financial Data Schedule
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*Document incorporated herein by reference.
(b) Reports on Form 8K.
No reports on Form 8K were filed during the period.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Independent Bancorp
Date: August 8, 2000 /s/ Larry D. Hartwig
--------------- --------------------
Larry D. Hartwig
President/Chief Executive Officer
Date: August 8, 2000 /s/ Robert J. Lampert
--------------- ---------------------
Robert J. Lampert
Executive Vice President/Chief Operating Officer
(Principal Financial and Accounting Officer)
25