FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D. C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the fiscal year ended December 31, 1999 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _________ FDIC Certificate No. 03440
First Northern Bank of Dixon
(Exact name of Bank as specified in its charter)
California 94-0475380
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
195 North First Street
Dixon, California 95620
[Address of principal executive offices] [Zip Code]
Bank's telephone number, including area code: (707) 678-3041
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Bank (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Bank was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Bank's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Bank was approximately $43,927,620 as of February 29, 2000, based upon the sale
price on the OTC Bulletin Board reported for such date. This calculation does
not reflect a determination that certain persons are affiliates of the Bank for
any other purpose.
3,082,640 shares of the Bank's common stock, no par value, were outstanding
at February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12, and 13 of Part III incorporate by
reference information from the Bank's Proxy Statement to be filed with the
Federal Deposit Insurance Corporation in connection with the solicitation of
proxies for the Bank's 2000 Annual Meeting of Shareholders.
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Part 1
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ITEM 1 BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. Forward-looking statements
include the information concerning possible or assumed future results of
operations of the Bank set forth under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Forward-looking
statements also include statements in which words such as "expect,"
"anticipate," "intend," "plan," "believe," estimate," "consider," or similar
expressions are used. 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 risks discussed under "Risk Factors That May Affect Results"
on pages 10 through 14 herein and other risk factors discussed elsewhere in this
Report.
Unless otherwise indicated, all information herein has been adjusted to
give effect to a two-for-one stock split affected by the Bank in September 1998.
First Northern Bank of Dixon ("First Northern" or the "Bank") was
established in 1910 under State Charter as Northern Solano Bank, and opened for
business on February 1st of that year. On January 2, 1912, the First National
Bank of Dixon was established under a Federal Charter, and until 1955, the two
entities operated side by side under the same roof and with the same management.
In an effort to increase efficiency of operation, reduce operating expense, and
improve lending capacity, the two banks were consolidated on April 8, 1955, with
the First National Bank of Dixon as the surviving entity.
In order to reduce reserve requirements and operate with higher lending
limits, on January 1, 1980, the Federal Charter was relinquished in favor of a
State Charter, and the Bank's name was changed to First Northern Bank of Dixon.
First Northern Bank of Dixon engages in the general commercial banking
business in Solano and Yolo Counties, and parts of Sacramento County.
The Bank's Administrative Offices are located in Dixon. Also located in
Dixon are the Data Processing/Central Operations Department and the Central Loan
Department.
The Bank has seven (7) full service Branches. Three are located in the
Solano County cities of Dixon, Fairfield, and Vacaville. The remaining four
Branches are located in the Yolo County cities of Winters, Davis, West
Sacramento and Woodland. In addition, the Bank has a Real Estate Department in
Davis which deals solely in residential mortgages and construction loans, a Real
Estate Loan Office in El Dorado Hills, El Dorado County, and an SBA Loan Office
in Sacramento, Sacramento County.
First Northern is in the commercial banking business, which includes
accepting demand, interest bearing transaction, savings, and time deposits, and
making commercial, consumer, and real estate related loans. It also offers
installment note collection, issues cashier's checks and money orders, sells
travelers' checks, rents safe deposit boxes, and provides other customary
banking services. The Bank is a member of the Federal Deposit Insurance
Corporation ("FDIC") and each depositor's account is insured up to $100,000.
First Northern also offers a complete range of alternative investment
products and services. The Bank offers these services through Select Capital
Corporation, an independent broker/dealer and a member of NASD and SIPC; and
Select Advisors, Inc., a registered investment advisor. All investments and/or
financial services offered by the representatives of Select Capital Corporation
and Select Advisors, Inc. are not insured by the FDIC.
The Bank offers limited international banking services and is looking into
providing trust services through an affiliation.
The operating policy of the Bank since inception has emphasized serving the
banking needs of individuals and small-to medium-sized businesses. In Dixon,
this has included businesses involved in crop and livestock production. The
economy of the Dixon area was primarily dependent upon agricultural related
sources of income and most employment opportunities were also related to
agriculture.
Agriculture continued to be a significant factor in the Bank's business
after the opening of the first Branch Office in Winters in 1970. A significant
step was taken in 1976 to reduce the Bank's dependence on agriculture with the
opening of the Davis Branch.
-2-
The Davis economy is supported significantly by the University of
California, Davis. In 1981, a depository Branch was opened in South Davis, and
was consolidated into the main Davis Branch in 1986.
In 1983, the West Sacramento Branch was opened. The West Sacramento economy
is built around transportation and distribution related business. This addition
to the Bank's market area has further reduced the Bank's dependence on
agriculture.
In order to accommodate the demand of the Bank's customers for long-term
residential real estate loans, a Real Estate Loan Office was opened in 1983.
This office is centrally located in Davis, and has enabled the Bank to access
the secondary real estate market.
The Vacaville Branch was opened in 1985. Vacaville is a rapidly growing
community with a diverse economic base including state prison (Department of
Corrections), food processing, distribution, shopping centers (Factory Outlet
Stores), medical, and other varied industries.
In 1994, the Fairfield Branch was opened. Fairfield has also been a rapidly
growing community bounded by Vacaville on the east. Its diverse economic base
includes military (Travis AFB), food processing (Anheuser-Busch plant), retail
(Solano Mall), manufacturing, medical, and agriculture. Fairfield is the county
seat for Solano County.
A Real Estate Loan Production Office was opened in El Dorado Hills, in April of
1996, to serve the growing mortgage loan demand in the foothills area north of
Sacramento.
A Small Business Administration (SBA) Loan Department was opened in April of
1997 in Sacramento to serve the small business and industrial loan demand
throughout the Bank's entire market area.
In June of 1997, the Bank's seventh Branch was opened in Woodland, the County
Seat of Yolo County. Woodland is an expanding and diversified 10.5 square mile
city with an economy dominated by agribusiness, retail services, and an
expanding industrial sector.
Through this period of change and diversification, the Bank's policy, which
emphasizes serving the banking needs of individuals and small-to medium-sized
businesses, has not changed. The Bank takes real estate, crop proceeds,
securities, savings and time deposits, automobiles, and equipment as collateral
for loans.
Most of the Bank's deposits are attracted from the market of northern and
central Solano County and southern and central Yolo County. The Bank is not
dependent on any single person or entity for its deposits. The loss of any one
or more of the Bank's depositors would not have a material adverse effect on the
business of the Bank.
-3-
As of February 29, 2000, the Bank employed a total of 195 people: 77 officers,
including four principal officers, plus 45 full-time and 73 part-time employees.
First Northern has historically experienced seasonal swings in both deposit and
loan volumes due primarily to the agricultural economy. Deposits have typically
hit lows in February or March and peaked in November or December. Loans
typically peaked in the late spring and hit lows in the fall as crops are
harvested and sold. More recent experience shows the same deposit and loan
swings, since the real estate and agricultural economies tend to follow the same
seasonal cycle.
-4-
The Effect of Government Policy on Banking
The earnings and growth of the Bank are affected not only by local market area
factors and general economic conditions, but also by government monetary and
fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Bank cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Bank is particularly susceptible to being
affected by the enactment of federal and state legislation which may have the
effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Bank.
Bank Regulation and Supervision
The Bank is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions ("DFI") and the Federal Deposit
Insurance Corporation (the "FDIC"). The regulations of these agencies affect
most aspects of the Bank's business and prescribe permissible types of loans and
investments, the amount of required reserves, requirements for branch offices,
the permissible scope of the Bank's activities and various other requirements.
While the Bank is not a member of the FRB, it is also subject to certain
regulations of the FRB dealing primarily with check clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
Under California law, the Bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the
maintenance of branch offices and automated teller machines, capital and reserve
requirements, deposits and borrowings, stockholder rights and duties, and
investment and lending activities. Whenever it appears that the contributed
capital of a California bank is impaired, the California Commissioner of
Financial Institutions ("Commissioner") shall order the bank to correct such
impairment. If a bank is unable to correct the impairment, such bank is required
to levy and collect an assessment upon its common shares. If such assessment
becomes delinquent, such common shares are to be sold by the bank.
California law permits a state chartered bank to invest in the stock and
securities of other corporations, subject to a state chartered bank receiving
either general authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner. Federal banking laws,
however, impose limitations on the activities and equity investments of state
chartered, federally insured banks. The FDIC rules on investments prohibit a
state bank from acquiring an equity investment of a type, or in an amount, not
permissible for a national bank. Non-permissible investments must have been
divested by state banks no later than December 19, 1996. FDIC rules also
prohibit a state bank from engaging as a principal in any activity that is not
permissible for a national bank, unless the bank is adequately capitalized and
the FDIC approves the activity after determining that such activity does not
pose a significant risk to the deposit insurance fund. The FDIC rules on
activities generally permit subsidiaries of banks, without prior specific FDIC
authorization, to engage in those activities that have been approved by the FRB
for bank holding companies because such activities are so closely related to
banking to be a proper incident thereto. Other activities generally require
specific FDIC prior approval, and the FDIC may impose additional restrictions on
such activities on a case-by-case basis in approving applications to engage in
otherwise impermissible activities.
-5-
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off-balance-sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off-balance-sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level the Bank is required to maintain, the federal
banking agencies do not, in all respects, follow generally accepted accounting
principles ("GAAP") and have special rules which have the effect of reducing the
amount of capital that will be recognized for purposes of determining the
capital adequacy of the Bank.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. Additionally, as of April 1,
1995, for Tier 1 capital purposes, deferred tax assets that can only be realized
if an institution earns sufficient taxable income in the future will be limited
to the amount that the institution is expected to realize within one year, or
ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of
a limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and
off-balance-sheet items of 4%.
On October 1, 1998, the FDIC adopted two rules governing minimum capital levels
that FDIC-supervised banks must maintain against the risks to which they are
exposed. The first rule makes risk-based capital standards consistent for two
types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The FDIC rules also provide
that a qualifying institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse retained. In
general, a qualifying institution is one that is well-capitalized under the
FDIC's prompt corrective action rules. The amount of recourse that can receive
the preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. It is improbable; however, that an institution with a
3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
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As of December 31, 1999, the Bank's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for the
Bank, compared to the standards for well-capitalized depository institutions, as
of December 31, 1999 (amounts in thousands except percentage amounts).
Well Minimum
Actual Capitalized Capital
Ratio Requirement
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Capital Ratio
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Leverage................................... $32,421 8.67% 5.0% 4.0%
Tier 1 Risk-Based.......................... 32,421 13.63% 6.0% 4.0%
Total Risk-Based........................... 35,454 14.91% 10.0% 8.0%
The federal banking agencies must take into consideration concentrations of
credit risk and risks from non-traditional activities, as well as an
institution's ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
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Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
-7-
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The federal banking agencies also have authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
In addition to the restrictions imposed under federal law, banks chartered under
California law generally may only pay cash dividends to the extent such payments
do not exceed the lesser of retained earnings of the bank or the bank's net
income for its last three fiscal years (less any distributions to shareholders
during such period). In the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner in an amount not exceeding the greatest of the bank's retained
earnings, the bank's net income for its last fiscal year, or the bank's net
income for its current fiscal year.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of premiums will
be.
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Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
Recently Enacted Legislation
On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley
Act, or the Financial Services Act of 1999 (the "FSA") which becomes effective
March 11, 2000. The FSA repeals provisions of the Glass-Steagall Act, which had
prohibited commercial banks and securities firms from affiliating with each
other and engaging in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and securities firms have been
eliminated.
The Bank Holding Company Act of 1956, as amended (the "BHCA"), is also amended
by the FSA, to allow new "financial holding companies" ("FHC") to offer banking,
insurance, securities and other financial products to consumers. Specifically,
the FSA amends section 4 of the BHCA in order to provide for a framework for the
engagement in new financial activities. Bank holding companies ("BHC") may elect
to become a financial holding company if all its subsidiary depository
institutions are well-capitalized and well-managed. If these requirements are
met, a BHC may file a certification to that effect with the FRB and declare that
it chooses to become a FHC. After the certification and declaration is filed,
the FHC may engage either de novo or through an acquisition in any activity that
has been determined by the FRB to be financial in nature or incidental to such
financial activity. BHCs may engage in financial activities without prior notice
to the FRB if those activities qualify under the BHCA. However, notice must be
given to the FRB within 30 days after a FHC has commenced one or more of the
financial activities.
Under the FSA, FDIC-insured state banks, subject to various requirements (and
national banks) are permitted to engage through "financial subsidiaries" in
certain financial activities permissible for affiliates of FHCs. However, to be
able to engage in such activities the state bank must also be well-capitalized
and well-managed and receive at least a "satisfactory" rating in its most recent
Community Reinvestment Act examination.
The Bank cannot be certain of the effect of the foregoing recently enacted
legislation on its business, although there is likely to be consolidation among
financial services institutions and increased competition for the Bank.
Pending Legislation and Regulations
Certain pending legislative proposals include bills to let banks pay interest on
business checking accounts, to cap consumer liability for stolen debit cards,
and to give judges the authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
-9-
Quantitative and Qualitative Disclosures About Market Risk
While there are several varieties of market risk, the market risk material to
the Bank is interest rate risk. Within the context of interest rate risk, market
risk is the risk of loss due to changes in market interest rates that have an
adverse effect on net interest income, earnings, capital or the fair value of
financial instruments. Exposure to this type of risk is a regular part of a
financial institution's operations. The fundamental activities of making loans,
purchasing investment securities, and accepting deposits inherently involve
exposure to interest rate risk. The Bank monitors the repricing differences
between assets and liabilities on a regular basis and estimates exposure to net
interest income, net income, and capital based upon assumed changes in the
market yield curve. The following tables summarize the expected maturity,
principal repayment and fair value of the financial instruments that are
sensitive to changes in interest rates:
Interest Rate Sensitivity Analysis at December 31, 1999
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Expected Maturity/Repricing/Principal Payment
In Thousands Within 1 1 Year to 3 Years to After 5 Total Fair
Year 3 Years 5 Years Years Balance Value
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Interest-Sensitive Assets:
Federal funds sold 37,300 - - - 37,300 37,300
Average interest rate 5.50% - - - 5.50%
Fixed rate investments 16,520 33,811 30,866 54,255 135,452 135,452
Average interest rate 6.20% 6.40% 6.40% 6.14% 6.27%
Fixed rate loans (1) 5,833 2,539 64 45,575 54,011 49,930
Average interest rate 8.38% 10.80% 10.80% 7.47% 7.73%
Floating rate loans (2) 83,524 14,739 - - 98,263 98,698
Average interest rate 9.89% 10.01% - - 9.91%
Loans held for sale - 10,657 - - 10,657 10,667
Average interest rate - 7.80% - - 7.80%
Interest-Sensitive Liabilities:
NOW account deposits (2) 10,261 9,072 7,256 9,695 36,284 36,284
Average interest rate 1.35% 1.35% 1.35% 1.35% 1.35%
Money market deposits (2) 15,800 13,166 13,166 10,540 52,672 52,672
Average interest rate 2.20% 2.20% 2.20% 2.20% 2.20%
Savings deposits (2) 17,446 9,970 12,462 9,967 49,845 49,845
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50%
Certificates of deposit 103,916 6,251 537 - 110,704 110,404
Average interest rate 4.53% 4.94% 4.47% - 4.55%
Interest-Sensitive Off-Balance Sheet
Items:
Commitments to lend - - - - 76,101 571
Standby letters of credit - - - - 3,600 36
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Interest Rate Sensitivity Analysis at December 31, 1998
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Expected Maturity/Repricing/Principal Payment
In Thousands Within 1 1 Year to 3 Years to After 5 Total Fair
Year 3 Years 5 Years Years Balance Value
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Interest-Sensitive Assets:
Federal funds sold 25,400 - - - 25,400 25,400
Average interest rate 4.75% - - - 4.75%
Fixed rate investments 19,924 36,004 16,135 55,486 127,549 127,549
Average interest rate 6.22% 5.95% 5.95% 6.51% 6.09%
Fixed rate loans (1) 9,739 1,608 69 11,722 23,138 23,003
Average interest rate 8.54% 10.42 10.42% 8.62% 8.72%
Floating rate loans (2) 91,630 7,870 - - 99,500 103,368
Average interest rate 9.05% 8.96% - - 9.04%
Loans held for sale - 29,021 - - 29,021 29,596
Average interest rate - 7.03% - - 7.03%
Interest-Sensitive Liabilities:
NOW account deposits (2) 10,261 9,072 7,256 9,695 36,394 36,394
Average interest rate 1.35% 1.35% 1.35% 1.35% 1.35%
Money market deposits (2) 15,800 13,166 13,166 10,540 43,942 43,942
Average interest rate 2.22% 2.22% 2.22% 2.22% 2.22%
Savings deposits (2) 17,446 9,970 12,462 9,967 41,844 41,844
Average interest rate 2.75% 2.75% 2.75% 2.75% 2.75%
Certificates of deposit 103,808 5,251 850 - 109,909 110,410
Average interest rate 4.79% 5.10% 4.92% - 4.81%
Interest-Sensitive Off-Balance Sheet
Items:
Commitments to lend 63,853 479
Standby letters of credit 713 7
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Based upon contractual maturity dates and interest rate repricing.
(2) NOW, money market and savings deposits do not carry contractual maturity
dates. The actual maturities of NOW, money market, and savings deposits could
vary substantially if future prepayments differ from the Bank's historical
experience.
</FN>
-10-
The Bank controls interest rate risk by matching assets and liabilities. One
tool used to ensure market rate return is variable rate loans. Loans totaling
$89,357,000 or 54.84% of the total loan portfolio (including loans held for
sale) are subject to repricing within one year. Loan maturities in the after
five-year category increased to $45,575,000 at December 31, 1999 from
$11,722,000 at December 31, 1998. The reason for this increase was due, for the
most part, to transfers effective July 1, 1999 and October 1, 1999 of
$25,567,000 and $3,656,000, respectively, from held for sale loans to held to
maturity loans.
The Bank is required by FASB 115 to mark to market the Available for Sale
investments at the end of each quarter. Mark to market resulted in a negative
capital entry of $3,7658,000 as reflected on the December 31, 1999 balance
sheet. Mark to market impact on capital on December 31, 1998 was a positive
$1,835,000. These entries were the result of fluctuating interest rates.
Risk Factors That May Affect Results
This Report includes forward-looking statements within the meaning of the
Exchange Act. These statements are based on management's beliefs and
assumptions, and on information currently available to management.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Bank set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Forward-looking statements also include statements in which words
such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions, including the risks discussed below and elsewhere in this Report.
The Bank's actual future results and shareholder values may differ materially
from those anticipated and expressed in these forward-looking statements. Many
of the factors that will determine these results and values, including those
below, are beyond the Bank's ability to control or predict.
Lending Risks Associated with Commercial Banking Activities
The Bank's business strategy is to focus on commercial business loans (which
includes agricultural loans), construction loans and commercial and multi-family
real estate loans. The principal factors affecting the Bank's risk of loss in
connection with commercial business loans include the borrower's ability to
manage its business affairs and cash flows, general economic conditions and,
with respect to agricultural loans, weather and climate conditions. Loans
secured by commercial real estate are generally larger and involve a greater
degree of credit and transaction risk than residential mortgage (one to four
family) loans. Because payments on loans secured by commercial and multi-family
real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. Real estate construction financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project which, when completed, has
a value which is insufficient to assure full repayment of the construction loan.
Although the Bank manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not
materialize, in which event the Bank's financial condition, results of
operations, cash flows and business prospects could be materially adversely
affected.
Dependence on Real Estate
At December 31, 1999, approximately 61% of the Bank's loans were secured by real
estate. The value of the Bank's real estate collateral has been, and could in
the future continue to be, adversely affected by any economic recession and any
resulting adverse impact on the real estate market in Northern California such
as that experienced during the early years of this decade. See "-Economic
Conditions and Geographic Concentration."
-11-
The Bank's primary lending focus has historically been commercial (including
agricultural), construction and real estate mortgage. At December 31, 1999, real
estate mortgage and construction loans comprised approximately 26% and 21%,
respectively, of the total loans in the Bank's portfolio. At December 31, 1999,
all of the Bank's real estate mortgage and construction loans and approximately
33% of its commercial loans were secured fully or in part by deeds of trust on
underlying real estate. The Bank's dependence on real estate increases the risk
of loss in both the Bank's loan portfolio and its holdings of other real estate
owned if economic conditions in Northern California deteriorate in the future.
Deterioration of the real estate market in Northern California would have a
material adverse effect on the Bank's business, financial condition and results
of operations. See "-Economic Conditions and Geographic Concentration."
Interest Rate Risk
The income of the Bank depends to a great extent on "interest rate
differentials" and the resulting net interest margins (i.e., the difference
between the interest rates earned on the Bank's interest-earning assets such as
loans and investment securities, and the interest rates paid on the Bank's
interest-bearing liabilities such as deposits and borrowings). These rates are
highly sensitive to many factors which are beyond the Bank's control, including
general economic conditions and the policies of various governmental and
regulatory agencies, in particular, the FRB. The Bank is generally adversely
affected by declining interest rates. In addition, changes in monetary policy,
including changes in interest rates, influence the origination of loans, the
purchase of investments and the generation of deposits and affect the rates
received on loans and investment securities and paid on deposits, which could
have a material adverse effect on the Bank's business, financial condition and
results of operations. See "Quantitative and Qualitative Disclosure About Market
Risk."
Potential Volatility of Deposits
At December 31, 1999, 13% of the dollar value of the Bank's total deposits was
represented by time certificates of deposit in excess of $100,000. As such,
these deposits are considered volatile and could be subject to withdrawal.
Withdrawal of a material amount of such deposits would adversely impact the
Bank's liquidity, profitability, business prospects, results of operations and
cash flows.
Dividends
The ability of the Bank to pay cash dividends in the future depends on the
Bank's profitability, growth and capital needs. In addition, the California
Financial Code restricts the ability of the Bank to pay dividends. No assurance
can be given that the Bank will pay any dividends in the future or, if paid,
such dividends will not be discontinued. See "-Supervision and
Regulation-Restrictions on Dividends and Other Distributions."
Competition
In California generally, and in the Bank's primary market area specifically,
major banks dominate the commercial banking industry. By virtue of their larger
capital bases, such institutions have substantially greater lending limits than
those of the Bank. In obtaining deposits and making loans, the Bank competes
with these larger commercial banks and other financial institutions, such as
savings and loan associations and credit unions, which offer many services which
traditionally were offered only by banks. In addition, the Bank competes with
other institutions such as money market funds, brokerage firms, and even retail
stores seeking to penetrate the financial services market. During periods of
declining interest rates, competitors with lower costs of capital may solicit
the Bank's customers to refinance their loans. Furthermore, during periods of
economic slowdown or recession, the Bank's borrowers may face financial
difficulties and be more receptive to offers from the Bank's competitors to
refinance their loans. No assurance can be given that the Bank will be able to
compete with these lenders. See "-Competition."
-12-
Government Regulation and Legislation
The Bank is subject to extensive state and federal regulation, supervision and
legislation which govern almost all aspects of the operations of the Bank. The
business of the Bank is particularly susceptible to being affected by the
enactment of federal and state legislation which may have the effect of
increasing or decreasing the cost of doing business, modifying permissible
activities or enhancing the competitive position of other financial
institutions. Such laws are subject to change from time to time and are
primarily intended for the protection of consumers, depositors and the deposit
insurance funds and not for the protection of shareholders of the Bank. The Bank
cannot predict what effect any presently contemplated or future changes in the
laws or regulations or their interpretations would have on the business and
prospects of the Bank, but it could be material and adverse. See "-Supervision
and Regulation."
Economic Conditions and Geographic Concentration
The Bank's operations are located and concentrated primarily in Northern
California, particularly the counties of Placer, Sacramento, Solano and Yolo,
and are likely to remain so for the foreseeable future. At December 31, 1999,
approximately 61% of the Bank's loan portfolio consisted of real estate related
loans, all of which were related to collateral located in Northern California.
The performance of these loans may be adversely affected by changes in
California's economic and business conditions. A deterioration in economic
conditions could have a material adverse effect on the quality of the Bank's
loan portfolio and the demand for its products and services. In addition, during
periods of economic slowdown or recession, the Bank may experience a decline in
collateral values and an increase in delinquencies and defaults. A decline in
collateral values and an increase in delinquencies and defaults increase the
possibility and severity of losses. California real estate is also subject to
certain natural disasters, such as earthquakes, floods and mud slides, which are
typically not covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may make it difficult or impossible for borrowers
to repay loans made by the Bank. The occurrence of adverse economic conditions
or natural disasters in California could have a material adverse effect on the
Bank's financial condition, results of operations, cash flows and business
prospects.
Reliance on Key Employees and Others
The Bank is dependent upon the continued services of its key employees,
including Owen J. Onsum, President and Chief Executive Officer, Robert M.
Walker, Senior Vice President and Branch Administrator, Donald J. Fish, Senior
Vice President and Senior Credit Officer, and Louise A. Walker, Senior Vice
President and Cashier. The loss of the services of any such employee, or the
failure of the Bank to attract and retain other qualified personnel, could have
a material adverse effect on the Bank's business, financial condition and
results of operations.
Adequacy of Allowance for Loan and Other Real Estate Losses
The Bank's allowance for estimated losses on loans was approximately $7.8
million, or 4.6% of total loans, and 1,476% of total nonperforming loans at
December 31, 1999. Material future additions to the allowance for estimated
losses on loans may be necessary if material adverse changes in economic
conditions occur and the performance of the Bank's loan portfolio deteriorates.
In addition, future additions to the Bank's allowance for losses on other real
estate owned may also be required in order to reflect changes in the markets for
real estate in which the Bank's other real estate owned is located and other
factors which may result in adjustments which are necessary to ensure that the
Bank's foreclosed assets are carried at the lower of cost or fair value, less
estimated costs to dispose of the properties. Moreover, the FDIC and the DFI, as
an integral part of their examination process, periodically review the Bank's
allowance for estimated losses on loans and the carrying value of its assets.
Increases in the provisions for estimated losses on loans and foreclosed assets
would adversely affect the Bank's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Summary of Loan Loss Experience."
-13-
Shares Eligible for Future Sale
As of February 29, 2000, the Bank had 3,082,640 shares of Common Stock
outstanding, all of which are eligible for sale in the public market without
restriction. Future sales of substantial amounts of the Bank's Common Stock, or
the perception that such sales could occur, could have a material adverse effect
on the market price of the Common Stock. In addition, options to acquire up to
six percent of the outstanding shares of Common Stock at exercise prices ranging
from $11.11 to $13.51 have been issued to directors and certain employees of the
Bank under the Bank's 1997 Stock Option Plan and Outside Directors 1997
Nonstatutory Stock Option Plan, and options to acquire up to an additional 17%
of the outstanding shares of Common Stock are reserved for issuance under such
plans. No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Bank's Common Stock. See "Market for the Bank's Common Stock and
Related Stockholder Matters."
Absence of Public Market; Volatility in Stock Price
There currently is no active trading market for the Bank's Common Stock. No
assurance can be given that an active public trading market will develop or
that, if developed, it will be sustained. As a result of the lack of a trading
market, the market price of the Bank's Common Stock may experience fluctuations
that are unrelated to the operating performance of the Bank. In particular, the
price of the Bank's Common Stock may be affected by general market price
movements as well as developments specifically related to the financial services
sector, including interest rate movements, quarterly variations, or changes in
financial estimates by securities analysts and a significant reduction in the
price of the stock of another participant in the financial services industry.
Technology and Computer Systems
Advances and changes in technology can significantly impact the business and
operations of the Bank. The Bank faces many challenges including the increased
demand for providing computer access to bank accounts and the systems to perform
banking transactions electronically. The Bank's merchant processing services
require the use of advanced computer hardware and software technology and
rapidly changing customer and regulatory requirements. The Bank's ability to
compete depends on its ability to continue to adapt its technology on a timely
and cost-effective basis to meet these requirements. In addition, the Bank's
business and operations are susceptible to negative impacts from computer system
failures, communication and energy disruption and unethical individuals with the
technological ability to cause disruptions or failures of the Bank's data
processing systems.
Many computer programs were designed and developed utilizing only two digits in
the date field, thereby creating the inability to recognize the year 2000 or
years thereafter. This year 2000 issue creates risks for the Bank from
unforeseen or unanticipated problems in its internal computer systems as well as
from computer systems of the Federal Reserve Bank of San Francisco,
correspondent banks, customers and vendors. Failures of these systems or
untimely corrections could have a material adverse impact on the Bank's ability
to conduct its business and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Year 2000."
Environmental Risks
The Bank, in its ordinary course of business, acquires real property securing
loans that are in default, and there is a risk that hazardous substances or
waste, contaminants or pollutants could exist on such properties. The Bank may
be required to remove or remediate such substances from the affected properties
at its expense, and the cost of such removal or remediation may substantially
exceed the value of the affected properties or the loans secured by such
properties. Furthermore, the Bank may not have adequate remedies against the
prior owners or other responsible parties to recover its costs. Finally, the
Bank may find it difficult or impossible to sell the affected properties either
prior to or following any such removal. In addition, the Bank may be considered
liable for environmental liabilities in connection with its borrowers'
properties, if, among other things, it participates in the management of its
borrowers' operations. The occurrence of such an event could have a material
adverse effect on the Bank's business, financial condition, results of
operations and cash flows.
-14-
Dilution
As of February 29, 2000, the Bank had outstanding options to purchase an
aggregate of 196,665 shares of Common Stock at exercise prices ranging from
$11.11 to $13.51 per share, or a weighted average exercise price per share of
$13.11. To the extent such options are exercised, shareholders of the Bank will
experience dilution. See "Market for the Bank's Common Stock and Related
Stockholder Matters."
Competition
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments have offered new investment vehicles
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market. The enactment of the FSA is the latest evidence of this trend, and it is
anticipated that this trend will continue as financial services institutions
combine to take advantage of the FSA's elimination of the barriers against such
affiliations.
In order to compete with major financial institutions and other competitors in
its primary service areas, the Bank relies upon the experience of its executive
and senior officers in serving business clients, and upon its specialized
services, local promotional activities and the personal contacts made by its
officers, directors, and employees.
For customers whose loan demand exceeds the Bank's legal lending limit, the Bank
may arrange for such loans on a participation basis with correspondent banks.
The seasonal swings discussed earlier have, in the past, had some impact on the
Bank's liquidity. The management of investment maturities, sale of loan
participations, federal fund borrowings, qualification for funds under the
Federal Reserve Bank's seasonal credit program, and the ability to sell
mortgages in the secondary market have allowed the Bank to satisfactorily manage
its liquidity.
The enactment of the Interstate Banking and Branching Act in 1994 and the
California Interstate Banking and Branching Act of 1995 have increased
competition within California. It is believed that the recent enactment of the
FSA will further increase competition within California. Moreover, regulatory
reform, as well as other changes in federal and California law will also affect
competition. While the impact of these changes, and of other proposed changes,
cannot be predicted with certainty, it is clear that the business of banking in
California will remain highly competitive.
-15-
ITEM 2 - PROPERTIES
Dixon Branch - Consists of a two-story building with approximately 16,600 square
feet of space situated in the central business district in the city of Dixon in
northern Solano County. This property is owned by the Bank with no encumbrances.
Vacaville Branch - Approximately 5,000 square feet of space situated in a
shopping center in the city of Vacaville in north central Solano County. The
property is subject to a lease expiring in December 2005. The term of the lease
is fifteen years with options to extend this lease for an additional nineteen
years.
Fairfield Branch - Approximately 3,800 square feet of space situated in an
office complex in the city of Fairfield in western Solano County. Property is
subject to a lease expiring in December 2001.
Operations Center - Consists of a one-story building with approximately 33,500
square feet of space situated in the central business district in the city of
Dixon in northern Solano County. The property is owned by the Bank with no
encumbrances.
Future Bank Site - Vacant lot situated in the city of Dixon in northern Solano
County. The property is owned by the Bank with no encumbrances.
Winters Branch - Consists of a two-story building with approximately 2,800
square feet of space situated in the central business district in the city of
Winters in southern Yolo County. The property is owned by the Bank with no
encumbrances.
Davis Branch - Approximately 5,000 square feet of space situated in the central
business district in the city of Davis in southern Yolo County. The property is
subject to a lease expiring in March 2004.
Real Estate Department - Approximately 2,200 square feet of space situated in
the central business district in the city of Davis in southern Yolo County. The
property is subject to a month-to-month lease.
West Sacramento Branch - Consists of a one-story building with approximately
5,000 square feet of space situated in the Port of Sacramento industrial park in
the city of West Sacramento in southern Yolo County. The property is owned by
the Bank with no encumbrances.
Woodland Branch - Approximately 3,800 square feet of space situated in the
central business district in the city of Woodland in central Yolo County. The
property is subject to a lease expiring in April 2002. The Bank has options to
extend this lease an additional fifteen years.
El Dorado Hills Loan Production Office - Approximately 800 square feet of space
situated in an office complex in the city of El Dorado Hills in El Dorado
County. The property is subject to a month-to-month lease.
SBA Loan Production Office - Approximately 800 square feet of space situated in
the central business district, in an office complex, in the city of Sacramento
in Sacramento County. Property is subject to a lease expiring in April 2000. The
term of the lease is one year.
ITEM 3 - LEGAL PROCEEDINGS
The Bank is not a party to or the subject of, nor is any of the property of the
Bank the subject of any material pending legal proceedings, other than ordinary
routine litigation incidental to the Bank's business.
-16-
ITEM 4 - SUBMISSION OF MATTERS TO A VOATE OF SECURITY HOLDERS
Not Applicable.
-17-
PART II
-------
ITEM 5 - MARKET FOR THE BANK'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS
The Bank's common stock is not listed on any exchange, nor is it included on
NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
symbol "FDIX". The Bank is aware that Hoefer & Arnett, Inc., Sutro & Co. and
PaineWebber, Inc. all make a market in the Bank's common stock. Management is
aware that there are also private transactions in the Bank's common stock
although the data set forth below may not reflect all such transactions.
The following table summarizes the range of sales prices of the Bank's Common
Stock for each quarter during the last two fiscal years and is based on
information provided by Hoefer & Arnett, Inc. The quotations reflect the price
that would be received by the seller without retail mark-up, mark-down or
commissions and may not have represented actual transactions:
QUARTER/YEAR HIGH LOW
------------ ---- ---
4th Quarter 1999 $14.00 $13.50
3rd Quarter 1999 $14.50 $13.25
2nd Quarter 1999 $14.00 $12.75
1st Quarter 1999 $13.50 $11.75
4th Quarter 1998* $15.00 $13.00
3rd Quarter 1998 $30.50 $26.00
2nd Quarter 1998 $29.38 $27.63
1st Quarter 1998 $30.00 $27.68
* On September 30, 1998, the Board of Directors authorized a two-for-one
stock split of the Bank's common stock in which each share of the
Bank's stock was converted into two shares.
As of February 29, 2000, there were approximately 868 holders of record of the
Bank's common stock, no par value, which is the only class of equity securities
authorized or issued.
In the last two years the Bank has declared the following stock dividends:
Shareholder Dividend Date
Record Date Percentage Payable
----------- ---------- -------
February 26, 1999 5% March 31, 1999
February 27, 1998 5% March 31, 1998
The Bank has not paid a cash dividend in the past five years and does not expect
to pay a cash dividend in the foreseeable future.
There are regulatory limitations on cash dividends that may be paid by the Bank
under state and federal laws. See "Supervision and Regulation - Restrictions on
Dividends and Other Distributions."
-18-
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data below have been derived from the Bank's
audited financial statements. The selected consolidated financial data set forth
below as of December 31, 1996, and 1995 have been derived from the Bank's
historical financial statements not included in this Report. The financial
information for 1999, 1998 and 1997 should be read in conjunction "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
is in Part I (Item 7) of this Report and with the Bank's audited financial
statements and the notes thereto, which are included in Part II (Item 8) of this
Report.
Summary of Operations for the year ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Interest Income
and Loan Fees $ 25,916,802 $ 24,308,654 $ 22,021,809 $ 20,797,132 $ 21,396,091
Interest Expense (7,835,726) (8,497,727) (8,100,283) (7,431,902) (6,914,349)
--------------- --------------- --------------- ---------------- ---------------
Net Interest Income 18,081,076 15,810,927 13,921,526 13,365,230 14,481,742
Recovery of (Provision for)
Loan Losses 800,000 (760,000) (2,115,500) (8,331,900) (2,820,700)
--------------- --------------- --------------- ---------------- ---------------
Net Interest Income after
Recovery of (Provision for)
Loan Losses 18,881,076 15,050,927 11,806,026 5,033,330 11,661,042
Other Operating Income 1,963,997 1,971,965 1,718,789 1,759,424 1,339,779
Other Operating Expense (14,640,645) (12,797,185) (11,369,002) (12,233,188) (10,658,175)
--------------- --------------- --------------- ---------------- ---------------
Earnings (Loss) before Taxes 6,204,428 4,225,707 2,155,813 (5,440,434) 2,342,646
(Provision) Benefit for Taxes (2,121,443) (1,224,864) (426,144) 2,703,100 (467,421)
--------------- --------------- --------------- ---------------- ---------------
Net Earnings (Loss) $ 4,082,985 $ 3,000,843 $ 1,729,669 $ (2,737,334) $ 1,875,225
=============== =============== =============== ================ ===============
Basic Earnings
(Loss) Per Share * $1.25 $0.92 $0.53 ($0.84) $0.57
=============== =============== =============== ================ ===============
Diluted Earnings
(Loss) Per Share * $1.24 $0.91 $0.53 ($0.84) $0.57
=============== =============== =============== ================ ===============
Total Assets $ 370,990,606 $ 343,308,775 $ 305,935,629 $ 264,620,686 $ 258,154,994
=============== =============== =============== ================ ===============
Weighted Average Shares of Common
Stock outstanding Used for Basic
Earnings Per Share Computation 3,276,362 3,276,230 3,267,942 3,267,942 3,267,942
=============== =============== =============== ================ ===============
Weighted Average Shares of Common
Stock outstanding Used for
Diluted Earnings Per Share
Computation 3,289,199 3,284,258 3,272,006 3,267,942 3,267,942
=============== =============== =============== ================ ===============
Return on Average Total Assets 1.16% 0.96% 0.62% (1.05%) 0.76%
Net Earnings/Average Equity 12.83% 10.49% 6.70% (9.71%) 6.96%
Net Earnings/Average Deposits 1.29% 1.06% 0.69% (1.19%) 0.85%
Average Loans/Average 51.04% 49.12% 55.98% 66.85% 68.60%
Average Equity to Average
Total Assets 9.08% 9.18% 9.18% 10.78% 10.87%
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Earnings per share have been restated as required by the Bank's adoption of SFAS No. 128, Earnings Per Share, which replaces
APB Opinion 15, Earnings Per Share.
</FN>
-19-
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Bank set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," estimate," "consider," or similar expressions are used. 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
risks discussed under "Risk Factors That May Affect Results" on pages 10 through
15 herein other risk factors discussed elsewhere in this Report.
-20-
The following statistical information and discussion should be read in
conjunction with the Selected Financial Data included in Part I (Item 6) and the
audited financial statements and accompanying notes included in Part II (Item 8)
of this Annual Report on Form 10-K.
Distribution of Assets, Liabilities and Shareholders' Equity;
-------------------------------------------------------------
Interest Rates and Interest Differential
----------------------------------------
The following table summarizes the distribution, by amount (in thousands of
dollars) and percentage, of the daily average assets, liabilities, and
shareholders' equity of the Bank for 1999, 1998 and 1997. Average balances have
been computed using daily balances. Tax exempt income is not shown on a tax
equivalent basis.
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
Average Average Average
Balance Percent Balance Percent Balance Percent
----------- ------------- ------------ ------------ ------------ ------------
ASSETS
- ------
Cash and Due From Banks $ 18,115 5.17% $ 16,514 5.30% $ 14,011 4.99%
Investment Securities:
U.S. Government Securities 32,904 9.38% 33,389 10.71% 27,829 9.91%
Obligations of States &
Political
Subdivisions 66,096 18.84% 61,351 19.68% 45,458 16.18%
Other Securities 27,179 7.75% 18,851 6.05% 6,773 2.41%
Federal Funds Sold 30,198 8.61% 30,719 9.85% 29,033 10.34%
Loans 1 161,246 45.97% 139,467 44.73% 141,036 50.21%
Other Assets 15,000 4.28% 11,522 3.70% 16,736 5.96%
----------- ------------- ------------ ------------ ------------ --------------
Total Assets $ 350,738 100.00% $ 311,813 100.00% $ 280,876 100.00%
=========== ============= ============ ============ ============ ==============
LIABILITIES &
- -------------
SHAREHOLDERS' EQUITY
- --------------------
Deposits:
Demand $ 77,663 22.14% $ 64,957 20.83% $ 52,920 18.84%
Interest-Bearing Transaction
Deposits 35,620 10.16% 31,259 10.03% 24,133 8.59%
Savings & MMDAs 93,058 26.53% 78,816 25.28% 72,592 25.85%
Time Certificates 109,581 31.24% 108,873 34.92% 102,315 36.43%
Borrowed Funds 1,020 0.29% 1,006 0.32% 1,139 0.41%
Other Liabilities 1,962 0.56% (1,712) -0.55% 1,979 0.71%
Shareholders' Equity 31,834 9.08% 28,614 9.18% 25,798 9.19%
----------- ------------- ------------ ------------ ------------ --------------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 350,738 100.00% $ 311,813 100.00% $ 280,876 100.00%
=========== ============= ============ ============ ============ =============
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
1. Average Balances for Loans include nonaccrual loans and are net of the
allowance for loan losses.
</FN>
-21-
Net Interest Earnings
---------------------
Average Balances, Yields and Rates
----------------------------------
(In thousands of dollars)
1999 1998 1997
------------------------------- ---------------------------- -----------------------------
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Average Income/ Rates Average Income/ Rates Average Income/ Rates
Assets Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ------
--------- ---------- ------ --------- ------- ------- --------- -------- ------
Securities:
U.S. Government $ 32,904 $ 1,942 5.90% $ 33,389 $ 1,993 5.97% $ 27,829 $ 1,746 6.27%
Obligations of
States and
Political
Subdivisions(1) 66,096 4,128 6.25% 61,351 3,915 6.38% 45,458 3,014 6.63%
Other Securities 27,179 1,630 6.00% 18,851 1,133 6.01% 6,773 428 6.32%
--------- ---------- ------ --------- ------- ------- --------- -------- ------
Total Investment 126,179 7,700 6.10% 113,591 7,041 6.20% 80,060 5,188 6.48%
Securities
Federal Funds Sold 30,198 1,498 4.96% 30,719 1,636 5.33% 29,033 1,570 5.41%
Loans(2) 161,246 14,787 9.17% 139,467 13,518 9.69% 141,036 13,845 9.82%
Loan Fees - 1,932 1.20% - 2,114 1.52% - 1,419 1.01%
--------- ---------- ------ --------- ------- ------- --------- -------- ------
Total Loans, Including
Loan Fees 161,246 16,719 10.37% 139,467 15,632 11.21% 141,036 15,264 10.82%
--------- ---------- ------ --------- ------- ------- --------- -------- ------
Total Earning Assets 317,623 $ 25,917 8.16% 283,777 $ 24,309 8.57% 250,129 $ 22,022 8.80%
========== ====== ======= ======= ======== ======
Cash and Due
from Banks 18,115 16,514 14,011
Premises and
Equipment 6,215 6,481 6,361
Interest Receivable
and Other Assets 8,785 5,041 10,375
--------- --------- ---------
Total Assets $ 350,738 $ 311,813 $ 280,876
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Interest income and yields on tax exempt securities are not presented on a
tax equivalent basis.
(2) Average Balances for Loans include nonaccrual loans and are net of the
allowance for loan losses, but nonaccrued interest thereon is excluded.
</FN>
-22-
Continuation of
---------------
Net Interest Earnings
---------------------
Average Balances, Yields and Rates
----------------------------------
(In thousands of dollars)
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Liabilities and Average Income/ Rates Average Income/ Rates Average Income/ Rates
Shareholders' Equity Balance Expense Paid Balance Expense Paid Balance Expense Paid
- -------------------- ------- ------- ----- ------- ------- ----- ------- ------- ----
Interest-Bearing Deposits:
Interest-Bearing
Transaction $ 35,620 $ 526 1.48% $ 31,259 $ 597 1.91% $ 24,133 $ 486 2.01%
Deposits
Savings & MMDAs 93,058 2,347 2.52% 78,816 2,236 2.84% 72,592 2,064 2.84%
Time Certificates 109,581 4,915 4.49% 108,873 5,604 5.15% 102,315 5,500 5.38%
--------- ------- ------- --------- -------- ------ --------- ------- -------
Total Interest-Bearing
Deposits 238,259 7,788 3.27% 218,948 8,437 3.85% 199,040 8,050 4.04%
Borrowed Funds 1,020 48 4.71% 1,006 61 6.06% 1,139 50 4.39%
--------- ------- ------- --------- -------- ------ --------- ------- -------
Total Interest-Bearing
Deposits and Funds 239,279 7,836 3.27% 219,954 8,498 3.86% 200,179 8,100 4.05%
Demand Deposits 77,663 - - 64,957 - - 52,920 - -
--------- ------- ------- --------- -------- ------ --------- ------- -------
Total Deposits and
Borrowed Funds 316,942 $ 7,836 2.47% 284,911 $ 8,498 2.98% 253,099 $ 8,100 3.20%
--------- ======= ======= --------- ======== ====== --------- ======= =======
Accrued Interest and
Other Liabilities 1,962 (1,712) 1,979
Shareholders' Equity 31,834 28,614 25,798
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 350,738 $ 311,813 $ 280,876
========= ========= =========
Net Interest Income and
Net Interest Margin(1) $ 18,081 5.69% $ 15,811 5.57% $ 13,922 5.57%
======= ======== =======
Net Interest Spread(2) 4.89% 4.71% 4.75%
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
(2) Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
</FN>
-23-
Analysis of Changes
-------------------
in Interest Income and Interest Expense
---------------------------------------
(In thousands of dollars)
Following is an analysis of changes in interest income and expense (in thousands
of dollars) for 1999 over 1998 and 1998 over 1997. Changes not solely due to
rate or volume have been allocated proportionately to rate and volume.
1999 Over 1998 1998 Over 1997
-------------------------------------- -------------------------------------
Volume Rate Change Volume Rate Change
Increase (Decrease) in
Interest Income:
Loans & Banker's
Acceptances $ 1,933 $ (664) $ 1,269 $ (149) $ (178) $ (327)
Investment Securities 772 (113) 659 2,066 (213) 1,853
Federal Funds Sold (27) (111) (138) 88 (22) 66
Loan Fees (182) - (182) 695 - 695
---------- --------- ---------- ---------- --------- ---------
$ 2,496 $ (888) $ 1,608 $ 2,700 $ (413) $ 2,287
========== ========= ========== ========== ========= =========
Increase (Decrease) in
Interest Expense:
Deposits:
Interest-Bearing
Transaction Deposits $ 116 $ (187) $ (71) $ 133 $ (22) $ 111
Savings & MMDAs 295 (184) 111 172 - 172
Time Certificates 36 (725) (689) 311 (207) 104
Borrowed Funds 1 (14) (13) (5) 16 11
---------- --------- ---------- ---------- --------- ---------
$ 448 $ (1,110) $ (662) $ 611 $ (213) $ 398
========== ========= ========== ========== ========= =========
Increase (Decrease) in
Net Interest Income: $ 2,048 $ 222 $ 2,270 $ 2,089 $ (200) $ 1,889
========== ========= ========== ========== ========= =========
-24-
INVESTMENT PORTFOLIO
--------------------
Composition of Investment Securities
------------------------------------
The mix of investment securities at December 31, for the previous three fiscal
years is as follows (amounts in thousands of dollars):
1999 1998 1997
--------------- -------------- ---------------
Investment securities available for sale:
U.S. Treasury Securities $ 14,986 28,646 26,614
Securities of U.S. Government
Agencies and Corporations 20,867 8,254 4,844
Obligations of State &
Political Subdivisions 65,950 66,945 -
Mortgage Backed Securities 9,995 9,707 1,032
Other Bonds, Notes and
Debentures 23,654 13,997 8,663
Investment securities held to maturity:
Obligations of State &
Political Subdivisions - - 60,141
--------------- -------------- ---------------
Total Investments $ 135,452 127,549 101,294
=============== ============== ===============
Maturities of Investment Securities
The following table is a summary of the relative maturities (in thousands of
dollars) and yields of the Bank's investment securities as of December 31, 1999.
The yields on tax exempt securities are not shown on a tax equivalent basis.
Period to Maturity
------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years
--------------------------- ----------------------------- -----------------------
Security Amount Yield Amount Yield Amount Yield
- -------- ------ ----- ------ ----- ------ -----
U.S. Treasury Securities $ 6,510 5.89% $ 8,476 6.06% $ - -
Securities of U.S. Government
Agencies and Corporations 995 5.64% 15,029 5.94% 4,843 5.92%
Obligations of State &
Political Subdivisions 4,810 7.00% 21,512 6.85% 26,362 6.05%
Mortgage Backed Securities 2,205 5.27% 3,312 6.58% 2,056 6.85%
Other Bonds, Notes and
Debentures 2,000 6.60% 16,348 6.37% 3,129 7.20%
-------------- ---------- --------------- ---------- ------------ --------
TOTAL $ 16,520 6.20% $ 64,677 6.40% $ 36,390 6.18%
============== ========== =============== ========== ============ ========
After Ten Years Total
--------------------------- -----------------------------
Security Amount Yield Amount Yield
- -------- ------ ----- ------ -----
U.S. Treasury Securities $ - - $ 14,986 5.99%
Securities of U.S. Government
Agencies and Corporations - - 20,867 5.92%
Obligations of State &
Political Subdivisions 13,266 5.90% 65,950 6.35%
Mortgage Backed Securities 2,422 6.37% 9,995 6.30%
Other Bonds, Notes and
Debentures 2,177 6.68% 23,654 6.53%
-------------- ---------- --------------- ----------
TOTAL $ 17,865 6.06% $ 135,452 6.27%
============== ========== =============== ==========
Securities Exceeding Ten Percent of Stockholders' Equity
--------------------------------------------------------
The Bank holds no investment securities of a single issuer which had an
aggregate book value which exceeded ten percent of stockholder's equity at
December 31, 1999.
-25-
LOAN PORTFOLIO
--------------
Composition of Loans
--------------------
The mix of loans, net of deferred origination fees and allowance for loan losses
at December 31, for the previous five fiscal years is as follows (amount in
thousands of dollars) includes loans held for sale:
December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------- -----------------------------
Balance Percent Balance Percent Balance Percent
-------------- -------------- ------------- -------------- ------------- -------------
Commercial $ 57,799 35.5% $ 42,659 28.1% $ 43,885 34.5%
Agricultural 21,951 13.5% 21,709 14.3% 21,612 17.0%
Real Estate Mortgage 42,796 26.3% 41,458 27.3% 24,450 19.3%
Real Estate Construction 34,235 21.0% 40,059 26.4% 30,628 24.1%
Personal 6,150 3.7% 5,774 3.9% 6,429 5.1%
-------------- -------------- ------------- -------------- ------------- -------------
TOTAL $ 162,931 100.0% $ 151,659 100.0% $ 127,004 100.0%
============== ============== ============= ============== ============= =============
1996 1995
-------------------------------- -------------------------------
Balance Percent Balance Percent
-------------- -------------- ------------- --------------
Commercial $ 68,249 47.1% $ 70,825 47.9%
Agricultural 24,453 16.9% 27,599 18.7%
Real Estate Mortgage 22,638 15.7% 16,900 11.4%
Real Estate Construction 22,979 15.9% 25,890 17.5%
Personal 6,311 4.4% 6,726 4.5%
-------------- -------------- ------------- --------------
TOTAL $ 144,630 100.0% $ 147,940 100.0%
============== ============== ============= ==============
Commercial loans are primarily for financing the needs of a diverse group of
businesses located in the Bank's market area. The Bank also makes loans to
individuals for investment purposes. Most of these loans are substantially
short-term and secured by various types of collateral. Real estate construction
loans are generally for financing the construction of single family residential
homes for well-qualified individuals and builders. These loans are secured by
real estate and have short maturities.
As shown in the comparative figures for loan mix during 1999, the amount of
commercial loans and real estate mortgage loans has increased and the amount of
real estate construction loans has decreased. Total loans increased in 1998
compared to 1997 as a result of increases in real estate mortgage and real
estate construction loans, which were partially offset by decreases in
commercial and personal loans.
Maturities and Sensitivities of Loans to Changes in Interest Rates
------------------------------------------------------------------
Loan maturities of the loan portfolio at December 31, 1999 are as follows
(amounts in thousands of dollars):
Fixed Variable
Maturing Rate Rate Total
- ---------------------------------------- ---------------- ---------------- ----------------
Within one year $ 6,154 $ 88,740 $ 94,894
After one year through five years 13,400 15,121 28,521
After five years 48,128 - 48,128
---------------- ---------------- ----------------
Total $ 67,682 $ 103,861 $ 171,543
================ ================ ================
Nonaccrual, Past Due and Restructured Loans
-------------------------------------------
It is the Bank's policy to recognize interest income on an accrual basis.
Accrual of interest is suspended when a loan has been in default as to principal
or interest for 90 days, unless well secured by collateral believed by
management to have a fair market value that at least equals the book value of
the loan plus accrued interest receivable and in the process of collection. Real
estate acquired through foreclosure is written down to its estimated fair market
value at the time of acquisition and is carried as a nonearning asset until
sold. Any write-down at the time of acquisition is charged against the allowance
for loan losses; subsequent write-downs or gains or losses upon disposition are
credited or charged to noninterest income/expense. The Bank has made no foreign
loans.
The following table shows the aggregate amounts of assets (in thousands of
dollars) in each category at December 31, for the years indicated:
1999 1998 1997 1996 1995
-------------- -------------- ------------- ------------- --------------
Nonaccrual Loans $ 528 $ 1,702 $ 2,064 $ 5,085 $ 7,004
90 Days Past Due But Still Accruing 2 330 983 535 42
-------------- -------------- ------------- ------------- --------------
Total Nonperforming Loans 530 2,032 3,047 5,620 7,046
Other Real Estate Owned, Net - 906 1,821 1,698 5,318
-------------- -------------- ------------- ------------- --------------
Total Nonperforming Assets $ 530 $ 2,938 $ 4,868 $ 7,318 $ 12,364
============== ============== ============= ============= ==============
Performing Restructured Loans $ - $ - $ - $ 1,257 $ 1,819
============== ============== ============= ============= ==============
If interest on nonaccrual loans had been accrued, such income would have
approximated $32,000, $133,000, and $199,000 during the years ended December 31,
1999, 1998 and 1997, respectively. Income actually recognized for these loans
approximated $50,000, $64,000 and $115,000 for the years ended December 31,1999,
1998 and 1997, respectively.
There was a $2,408,000 decrease in nonperforming assets for 1999 over 1998. At
December 31, 1999, nonperforming assets included four nonaccrual agricultural
loans totaling $451,000 and one nonaccrual commercial loan totaling $77,000.
Additional nonperforming assets included one loan past due more than 90 days
totaling $2,000. There were no Other Real Estate Owned ("OREO") properties at
December 31, 1999.
-26-
Potential Problem Loans
-----------------------
In addition to the nonperforming assets described above, the Bank's Branch
Managers each month submit to the Loan Committee of the Board of Directors a
report detailing the status of classified loans and those loans that are past
due over sixty days. Also included in the report are those loans that are not
necessarily past due, but the branch manager is aware of problems with these
loans which may result in a loss.
In addition, the Monthly Allowance for Loan Loss Analysis Report is prepared
based on Problem Loan/Possible Loss Reports, internal loan grading, regulatory
classifications and loan review classifications and is reviewed by the
Management Loan Committee of the Bank. The report, dated December 31, 1999, was
reviewed by the Management Loan Committee of the Bank on February 1, 2000. This
report included any nonperforming loan reported in the table on the previous
page, if that loan continued to be considered a problem loan or had some
potential for loss. A total of twenty-seven loans with an aggregate balance of
$5,059,000 was reported. Ten of the twenty-seven loans with an aggregate balance
of $690,000 were deemed by management to be fully collectable. Seventeen of the
loans totaling $4,369,000 may have some loss potential which management believes
is sufficiently covered by the Bank's existing loan loss reserve (Allowance for
Loan Losses). The ratio of the Allowance for Loan Losses to total loans at
December 31, 1999 was 4.56%.
SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
The Allowance for Loan Losses is maintained at a level believed by management to
be adequate to provide for losses that can be reasonably anticipated. The
allowance is increased by provisions charged to operating expense and reduced by
net charge-offs. The Bank makes credit reviews of the loan portfolio and
considers current economic conditions, loan loss experience, and other factors
in determining the adequacy of the reserve balance. The allowance for loan
losses is based on estimates and actual losses may vary from current estimates.
Analysis of the Allowance for Loan Losses
-----------------------------------------
(In Thousands of Dollars)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -------------
Balance at Beginning of Period $ 8,144 $ 7,356 $ 8,403 $ 4,308 $ 2,553
(Recovery of) Provision for Loan Losses (800) 760 2,116 8,332 2,821
Loans Charged-Off:
Commercial (106) (635) (2,634) (844) (1,496)
Real Estate Mortgage (40) (47) (968) (3,634) (6)
Real Estate Construction - - - - -
Installment Loans to Individuals (11) (100) (24) (38) (74)
----------- ----------- ----------- ----------- -------------
Total Charged-Off (157) (782) (3,626) (4,516) (1,576)
----------- ----------- ----------- ----------- -------------
Recoveries:
Commercial 171 786 127 263 500
Real Estate Mortgage 438 6 330 7 -
Real Estate Construction - - - - -
Installment Loans to Individuals 29 18 6 9 10
----------- ----------- ----------- ----------- -------------
Total Recoveries 638 810 463 279 510
----------- ----------- ----------- ----------- -------------
Net Recoveries (Charge-Offs) 481 28 (3,163) (4,237) (1,066)
Balance at End of Period $ 7,825 $ 8,144 $ 7,356 $ 8,403 $ 4,308
=========== =========== =========== =========== =============
Ratio of Net Recoveries (Charge-Offs)
During the period to Average Loans
Outstanding During the Period 0.30% 0.02% (2.24%) (2.75%) (0.71%)
=========== =========== =========== =========== =============
-27-
Allocation of the Allowance for Loan Losses
-------------------------------------------
The Allowance for Loan Losses (the "Reserve") has been established as a general
reserve available to absorb possible future losses throughout the Loan
Portfolio. The following table is an allocation of the Reserve balance on the
dates indicated (amounts in thousands of dollars):
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Allocation of Loans as a % Allocation of Loans as a % Allocation of Loans as a %
Reserve Balance of Total Loans Reserve Balance of Total Loans Reserve Balance of Total Loans
------------------------------- ---------------- --------------- ---------------- ------------
Loan Type:
Commercial $ 3,233 48.95% $ 3,697 42.45% $ 3,418 51.56%
Real Estate Mortgage 3,272 26.27% 3,083 27.33% 2,695 19.25%
Real Estate Construction - 21.01% - 26.41% - 24.12%
Installment 146 3.69% 142 3.61% 140 4.79%
Other Loans - 0.08% - 0.20% - 0.28%
Unallocated 1,174 - 1,222 - 1,103 -
-------- ----------- --------- ---------- -------- ----------
Total $ 7,825 100.00% $ 8,144 100.00% $ 7,356 100.00%
======== =========== ========= ========== ======== ==========
December 31, 1996 December 31, 1995
----------------- -----------------
Allocation of Loans as a % Allocation of Loans as a %
Reserve Balance of Total Loans Reserve Balance of Total Loans
------------------------------ ---------------- --------------
Loan Type:
Commercial $ 3,356 64.10% $ 3,262 66.53%
Real Estate Mortgage 3,474 15.65% 56 11.42%
Real Estate Construction - 15.89% 4 17.50%
Installment 313 4.23% 340 4.39%
Other Loans - 0.13% - 0.16%
Unallocated 1,260 - 646 -
-------- ----------- --------- ---------
Total $ 8,403 100.00% $ 4,308 100.00%
======== =========== ========= =========
The Bank believes that any breakdown or allocation of the Reserve into loan
categories lends an appearance of exactness which does not exist, because the
Reserve is available for all loans. The Reserve breakdown shown above is
computed taking actual experience into consideration but should not be
interpreted as an indication of the specific amount of actual charge-offs that
may ultimately occur.
-28-
DEPOSITS
--------
The following table sets forth the average amount and the average rate paid on
each of the listed deposit categories (amounts in thousands of dollars):
1999 1998 1997
------------------------- ------------------------- --------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------------ ----------- ----------- ---------- ----------- -----------
Deposit Type:
Noninterest-Bearing Demand $ 77,663 - $ 64,957 - $ 52,290 -
Interest-Bearing Demand (NOW) $ 35,620 1.48% $ 31,259 1.91% $ 24,133 2.01%
Savings and MMDAs $ 93,058 2.52% $ 78,816 2.84% $ 75,592 2.84%
Time $ 109,581 4.49% $ 108,873 5.15% $ 102,315 5.38%
The following table sets forth by time remaining to maturity the Bank's time
deposits in the amount of $100,000 or more (in thousands of dollars) as of
December 31, 1999:
1999
-----------
Three months or less $ 21,663
Over three months through twelve months 19,872
Over twelve months 1,691
-----------
Total $ 43,226
===========
RETURN ON EQUITY AND ASSETS
---------------------------
The following table shows key financial ratios for the years indicated:
1999 1998 1997 1996 1995
---------- ---------- ---------- ----------- -----------
Return on Average Total Assets 1.16% 0.96% 0.62% (1.05%) 0.76%
Return on Average Shareholders' Equity 12.83% 10.49% 6.70% (9.71%) 6.96%
Dividend Payout Ratio - - - - -
Average Equity to Average Total Assets 9.08% 9.18% 9.18% 10.78% 10.87%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
1. No Cash Dividends Paid
</FN>
SHORT-TERM BORROWINGS
---------------------
The Bank had no short-term borrowings at December 31, 1999.
-29-
Results of Operations
---------------------
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net income for the year ended December 31, 1999, was $4,083,000, representing an
increase of $1,082,000, or 36% over net income of $3,001,000 for the year ended
December 31, 1998. The increase in net income is principally attributable to a
$2,270,100 increase in net interest income and a $1,560,000 decrease in the
provision for loan losses, which increases were partially offset by a $896,000
increase in salaries and employee benefits expenses, a $340,000 increase in
occupancy and equipment expenses and a $666,000 increase in other expense.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net income for the year ended December 31, 1998, was $3,001,000, representing an
increase of $1,271,000, or 57% over net income of $1,730,000 for the year ended
December 31, 1997. The increase in net income is principally attributable to a
$1,889,000 increase in net interest income and a $1,356,000 decrease in the
provision for loan losses, which increases were partially offset by a $1,431,000
increase in salaries and employee benefits expenses and a $178,000 increase in
occupancy and equipment expenses.
Net Interest Income
-------------------
Net interest income is the excess of interest and fees earned on the Bank's
loans, investment securities, federal funds sold and banker's acceptances over
the interest expense paid on deposits, mortgage notes and other borrowed funds.
It is primarily affected by the yields on the Bank's interest-earning assets and
loan fees and interest-bearing liabilities outstanding during the period. The
$2,270,000 increase in the Bank's net interest income in 1999 from 1998, and the
$1,889,000 increase in 1998 from 1997 were due to the combined effects of rates,
volume and mix of loans and deposits. The "Analysis of Changes in Interest
Income and Interest Expense" set forth on Page 24 of this Annual Report on Form
10-K identifies the effects of rate and volume. Another significant factor that
contributed to the increase in net interest income was the earning asset to
total asset ratio. This ratio was 90.6% in 1999, 91.0% in 1998 and 89.1% in
1997.
Interest income on loans (including loan fees) was $16,719,000 for 1999,
representing an increase of approximately $1,087,000, or 7.0% from $15,632,000
for 1998. This compared to an increase in 1998 of approximately $368,000 or 2.4%
more than loan interest income earned in 1997. The increased interest income on
loans in 1999 over 1998 was the result of a decrease of approximately $182,000
in loan fees, which was partially offset by a 15.62% increase in loan volume and
a .52% decrease in loan interest rates. As noted, loan fee comparisons were
impacted by a net increase in deferred loan fees of $37,000 in 1998 and a net
increase in deferred loan fees of $204,000 in 1999.
Average outstanding federal funds sold fluctuated slightly during this period,
ranging from $29,033,000 in 1997 to $30,719,000 in 1998 and $30,198,000 in 1999
(at year end 1999 federal funds sold were $37,300,000). Federal funds are used
primarily as a short term investment to provide liquidity for funding of loan
commitments or to accommodate seasonal deposit fluctuations. Interest rates on
federal funds sold in 1999 generally provided lower yields, compared to
investment securities rates, than in 1998. This rate spread between federal
funds and investment securities went from (1.07%) in 1997 to (0.87%) in 1998 and
to (1.14%) in 1999.
The average total level of investment securities increased $12,588,000 from 1998
to 1999 with increases in all categories. The level of securities interest
income attributable to investment securities increased from $7,041,000 for 1998
to $7,700,000 for 1999, primarily because of the larger volume of investments.
The Bank's strategy for this period has emphasized the use of the investment
portfolio to maintain the Bank's overall level of income in an expected
environment of stable to increasing loan demand. The Bank continues to reinvest
maturing securities to provide future liquidity and to attempt to maximize the
rate of return considering the current yield curve.
The average total level of investment securities increased $33,531,000 from 1997
to 1998, with increases in all categories. The level of securities interest
income attributable to investment securities increased from $5,188,000 for 1997
to $7,041,000 for 1998, primarily because of the larger volume of investments.
-30-
Total interest expense decreased from $8,498,000 in 1998 to $7,836,000 in 1999,
and increased to $8,498,000 in 1998 from $8,100,000 in 1997, representing a 7.8%
decrease in 1999 over 1998 and a 5.0% increase in 1998 over 1997. The decrease
in total interest expense from 1998 to 1999 is primarily due to a decrease in
interest rates in 1999, which was partially offset by an increase in deposits.
The increase in total interest expense from 1997 to 1998 was primarily due to an
increase in deposits in 1998, which was partially offset by a decrease in
interest rates paid on deposits. Changes in interest expense resulted primarily
from changes in rates and volume of total deposits, and changes in the mix of
deposits. The mix of deposits for the previous three years is as follows
(amounts are in thousands of dollars):
1999 1998 1997
------------------------- --------------------------- --------------------------
Average Average Average
Balance Percent Balance Percent Balance Percent
----------- ---------- ----------- ---------- ----------- ---------
Noninterest-Bearing Demand $ 77,663 24.5% $ 64,957 22.9% $ 52,920 21.0%
Interest-Bearing Demand (NOW) 35,620 11.3% 31,259 11.0% 24,133 9.6%
Savings and MMDAs 93,058 29.5% 78,816 27.8% 72,592 28.8%
Time 109,581 34.7% 108,873 38.3% 102,315 40.6%
----------- ---------- ----------- ---------- ----------- ---------
Total $ 315,922 100.0% $ 283,905 100.0% $ 251,960 100.0%
=========== ========== =========== ========== =========== =========
===================================================================================================================================
The period from 1997 to 1999 has been characterized by fluctuating interest
rates. Loan rates and deposit rates both increased in 1997, while loan rates and
deposit rates both decreased in 1998 and 1999. The net spread between the rate
for total earning assets and the rate for total deposits and borrowed funds
decreased 4 basis points in the period from 1997 to 1998 and increased 18 basis
points in the period from 1998 to 1999.
The Bank's net interest margin (net interest income divided by average earning
assets) was 5.69% in 1999, 5.57% in 1998 and 5.57% in 1997.
Provision for Loan Losses
-------------------------
The provision for loan losses is established by charges to earnings based on
management's overall evaluation of the collectibility of the loan portfolio.
Based on this evaluation the provision for loan losses was adjusted in 1999. The
provision for loan losses decreased from $760,000 in 1998 to ($800,000) in 1999,
primarily as a result of an adjustment made because of improved market
conditions and loan quality in the Bank's loan portfolio. The amount of loans
charged-off decreased in 1999 to $157,000 from $782,000 in 1998 and recoveries
decreased to $638,000 in 1999 from $810,000 in 1998. The ratio of the allowance
for loan losses to total loans at December 31, 1999 was 4.56%. The ratio of the
allowance for loan losses to total nonaccrual loans and loans past due 90 days
or more at December 31, 1999 was 1,476.4% compared to 400.8% at December 31,
1998.
The provision for loan losses decreased from $2,115,000 in 1997 to $760,000 in
1998, primarily as a result of decreased problem assets. The amount of loans
charged-off decreased in 1998 to $782,000 from $3,626,000 in 1997, and
recoveries increased to $810,000 in 1998 from $463,000 in 1997. The ratio of the
allowance for loan losses to total loans at December 31, 1998 was 5.08%. The
ratio of the allowance for loan losses to total nonaccrual loans and loans past
due 90 days or more at December 31, 1998 was 400.8% compared to 241.4% at
December 31, 1997.
Other Income and Expenses
-------------------------
Other income consisted primarily of service charges on deposit accounts. Service
charges on deposit accounts increased $59,000 in 1999 over 1998, and decreased
$96,000 in 1998 over 1997. The decrease in 1998 was due, for the most part, to
decreased nonsufficient funds and overdraft fees.
The Bank sold investment securities at gains of $62,000 in 1999, $49,000 in
1998, and $13,000 in 1997.
-31-
Other operating expenses consist of salaries and employee benefits, occupancy
and equipment expense and other operating expenses. Other operating expenses
increased from $12,797,000 in 1998 to $14,641,000 in 1999, and increased from
$11,369,000 in 1997 to $12,797,000 in 1998, representing an increase of
$1,844,000, or 14.4% in 1999 over 1998, and an increase of $1,428,000, or 12.6%
in 1998 over 1997. As detailed below, the increases in other operating expenses
from 1998 to 1999 was primarily attributable to a combination of increases in
salaries and employee benefits; occupancy and equipment; and other miscellaneous
expenses. The increase in other operating expenses from 1997 to 1998 was
primarily the result of the opening of the Woodland Branch and the SBA
Department.
Following is an analysis of the increase or decrease in the components of other
operating expenses (amounts are in thousands of dollars):
1999 over 1998 1998 over 1997
------------------------------- ---------------------------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
Salaries and Employee Benefits $ 896 11.7% $ 1,431 23.0%
Occupancy and Equipment 341 17.1% 178 9.8%
Data Processing 88 25.1% 51 17.1%
Stationery and Supplies 29 8.9% 12 3.8%
Advertising (90) (24.5%) 73 24.7%
Directors Fees (7) (5.9%) (13) (9.8%)
Other Real Estate Owned (78) (100.0%) (113) (59.2%)
Other Expense 665 35.2% (191) (9.2%)
---------- ----------- ---------- -----------
Total 1,844 14.4% 1,428 12.6%
========== =========== ========== ===========
In 1999, salaries and employee benefits increased $896,000 to $8,562,000 from
$7,666,000 for 1998. This increase was due, for the most part, to increases in
number of employees, commissions paid for real estate loans and increases in
profit sharing distributions and incentive compensation. Occupancy and equipment
expense increased $341,000 to $2,341,000 in 1999 from $2,000,000 for 1998. This
increase was due to charges to depreciation for obsolete computer hardware and
software. The increases in other miscellaneous expenses were due to increased
consulting fees, in-house training and a credit to miscellaneous expense, in
1998, to reverse items expensed in 1996 for litigation contingencies.
In 1998, salaries and employee benefits increased $1,431,000 to $7,666,000 from
$6,235,000 for 1997. This increase was due, for the most part, to the opening of
the Woodland Branch and the SBA department during the second half of 1997 and
increased real estate mortgage referral fees, profit sharing distributions and
incentive compensation. Occupancy and equipment expense increased $178,000 to
$2,000,000 in 1998 from $1,822,000 for 1997. This increase was also due to the
opening of the Woodland Branch and the SBA Department during the second half of
1997. Also, in 1998, other real estate owned (OREO) expense decreased $113,000
to $78,000 from $191,000 for in 1997. This decrease was due, for the most part,
to decreases in OREO properties. OREO reserves totaled $-0- and $1,930,000 at
December 31, 1998 and 1997, respectively. Other expenses decreased $203,000 to
$1,779,000 in 1998, from $1,983,000 for 1997. This decrease was primarily due to
a reduction in legal expenses.
-32-
Income Taxes
------------
The provision for income taxes is primarily affected by the tax rate, the level
of earnings before taxes and the amount of tax shelter provided by nontaxable
earnings. In 1999, taxes increased $896,000 to $2,121,000 from $1,225,000 for
1998. In 1998, taxes increased $799,000 to $1,225,000 from 426,000 for 1997. The
effective tax rate was 34%, 29% and 20% for the years ended December 31, 1999,
1998 and 1997, respectively. Nontaxable municipal bond income was $1,447,000,
$1,689,000 and $1,533,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Liquidity and Capital Resources
-------------------------------
The Bank needs to maintain appropriate liquidity and adequate capital. Liquidity
is measured by various ratios, the most common of which is the ratio of loans to
deposits. This ratio was 48.5% on December 31, 1999, 49.0% on December 31, 1998,
and 46.0% on December 31, 1997.
As discussed in Part 1(Item 1) of this Annual Report of Form 10-K, the Bank does
experience seasonal swings in deposits which impact liquidity. Management has
adjusted to this seasonal swing by scheduling investment maturities and
developing seasonal credit arrangements with the Federal Reserve Bank and
Federal Fund lines of credit with correspondent banks. In addition, the ability
of the Bank's real estate department to originate and sell loans into the
secondary market has provided another tool for the management of liquidity.
The capital of the Bank historically has been maintained at a level that is in
excess of regulatory guidelines. The policy of annual stock dividends has
allowed the Bank to, over time, match capital and asset growth through retained
earnings and a managed program of geographic growth.
Year 2000 Compliance
--------------------
The Bank previously recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the Year 2000 and began
taking corrective action as required pursuant to the interagency statements
issued by the Financial Institutions Examination Council. Management believes
the Bank has completed all of the activities within their control to ensure that
the Bank's systems are Year 2000 compliant.
The Bank's Year 2000 readiness costs were approximately $400,000. The Bank does
not currently expect to apply any further funds to address Year 2000 issues.
The Bank has not experienced any material disruptions of internal computer
systems for software applications due to the start of the Year 2000 nor has it
experienced any problems with the computer systems or software applications of
their third party vendors, suppliers or service providers. The Bank will
continue to monitor these third parties to determine the impact, if any, on the
business of the Bank and the actions either must take, if any, in the event of
non-compliance by any of these third parties. Based on the Bank's assessment of
compliance by third parties there does not appear to be any material business
risk posed by any such non-compliance.
Although the Bank's Year 2000 rollover did not present any material business
disruption, there are some remaining Year 2000 related risks. Management
believes that appropriate actions have been taken to address these remaining
Year 2000 issues and contingency plans are in place to minimize the financial
impact to the Bank. Management, however, cannot be certain that Year 2000 issues
affecting customers, suppliers or service providers of the Bank will not have a
material adverse impact on the Bank.
-33-
Financial Statements and Financial Statement Schedules Filed:
Independent Auditor's Report Page 35
Balance Sheets as of December 31, 1999 and Page 36
Statements of Operations for years ended December 31, 1999, 1998, and Page 37
Statements of Stockholders' Equity and Comprehensive Income for years ended
December 31, 1999, 1998, and 1997 Page 38
Statements of Cash Flows for years ended December 31, 1999, 1998, and 1997 Page 39
Notes to Financial Statements Page 40-60
Schedules not included:
Schedule I - Securities: See Investment Portfolio (page 25)
Schedule II - Loans to Officers, Directors, Principal Security Holders,
and any
Associates of the Foregoing Persons: See Note 9 of Notes to Financial
Statements (page
Schedule III - Loans: See Note 4 of Notes to Financial Statements
(page 46).
Schedule IV - Bank Premises and Equipment: See Note 5 of Notes to Financial
Statements (page 47)
Schedule V - Investments in, Income From Dividends, and Equity in Earnings
or Losses of Subsidiaries and Associated Companies: Not Applicable
Schedule VI - Allowance for Possible Loan Losses: See Note 4 of Notes to
Financial Statements (page 47).
-34-
LOGO
400 Capitol Mail Telephone 916 448 4700
Sacramento, CA 95814 Fax 916 554 1199
Independent Auditors' Report
The Board of Directors
First Northern Bank of Dixon:
We have audited the accompanying balance sheets of First Northern Bank of Dixon
as of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1999. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Northern Bank of Dixon as
of December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 21, 2000
-35-
LOGO
FIRST NORTHERN BANK OF DIXON
Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
----------------------- ------------------------
Cash and due from banks $ 19,806,022 23,784,700
Federal funds sold 37,300,000 25,400,000
Investment securities - available for sale 135,451,683 127,549,279
Loans, net 152,273,772 122,637,549
Loans held for sale 10,656,803 29,020,827
Premises and equipment, net 6,031,711 6,373,621
Other assets 9,470,615 8,542,799
----------------------- ------------------------
Total assets $ 370,990,606 343,308,775
======================= ========================
Liabilities and Stockholders' Equity
Deposits:
Demand $ 86,123,941 77,214,242
Interest-bearing transaction deposits 36,284,409 36,393,544
Savings and MMDAs 102,517,387 85,786,486
Time, under $100,000 67,478,374 68,462,027
Time, $100,000 and over 43,225,823 41,446,791
----------------------- ------------------------
Total deposits 335,629,934 309,303,090
Accrued interest payable and other liabilities 3,287,969 2,222,023
----------------------- ------------------------
Total liabilities 338,917,903 311,525,113
----------------------- ------------------------
Stockholders' Equity:
Common stock, no par value; 8,000,000 shares authorized; 3,092,273 shares
issued and outstanding in 1999; 2,943,874 shares issued and outstanding
in 1998 23,322,001 21,260,388
Additional paid-in capital 976,850 976,850
Retained earnings 9,513,151 7,490,878
Accumulated other comprehensive (loss) income, net (1,739,299) 2,055,546
----------------------- ------------------------
Total stockholders' equity 32,072,703 31,783,662
----------------------- ------------------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 370,990,606 343,308,775
======================= ========================
See accompanying notes to financial statements.
-36-
FIRST NORTHERN BANK OF DIXON
Statements of Operations
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997
----------------- ------------------ ------------------
Interest income:
Interest and fees on loans $ 16,719,346 15,631,647 15,264,220
Federal funds sold 1,497,961 1,635,539 1,570,062
Investment securities:
Taxable 6,252,576 5,352,643 3,654,975
Nontaxable 1,446,919 1,688,825 1,532,552
----------------- ------------------ ------------------
Total interest income 25,916,802 24,308,654 22,021,809
Interest expense:
Time deposits $100,000 and over 2,146,492 2,301,017 2,141,673
Other deposits 5,641,060 6,135,881 5,908,977
Other borrowings 48,174 60,829 49,633
----------------- ------------------ ------------------
Total interest expense 7,835,726 8,497,727 8,100,283
----------------- ------------------ ------------------
Net interest income 18,081,076 15,810,927 13,921,526
Provision for (recovery of) loan losses (800,000) 760,000 2,115,500
----------------- ------------------ ------------------
Net interest income after provision for
(recovery of) loan losses 18,881,076 15,050,927 11,806,026
Other operating income:
Service charges on deposit accounts 1,154,148 1,094,758 1,190,798
Net realized gains on held-to-maturity securities -- 73,355 13,300
Net realized gains (losses) on available-for-sale securities 61,533 (24,056) --
Other income 748,316 827,908 514,691
----------------- ------------------ ------------------
Total other operating income 1,963,997 1,971,965 1,718,789
----------------- ------------------ ------------------
Other operating expenses:
Salaries and employee benefits 8,561,921 7,666,086 6,234,743
Occupancy and equipment 2,340,653 2,000,316 1,821,941
Data processing 438,379 350,112 298,542
Stationery and supplies 355,907 326,573 314,577
Advertising 277,756 368,480 295,423
Directors fees 111,800 119,200 131,800
Other real estate owned -- 77,717 191,160
Other 2,554,229 1,888,701 2,080,816
----------------- ------------------ ------------------
Total other operating expenses 14,640,645 12,797,185 11,369,002
----------------- ------------------ ------------------
Income before income tax expense 6,204,428 4,225,707 2,155,813
Provision for income tax expense 2,121,443 1,224,864 426,144
----------------- ------------------ ------------------
Net income $ 4,082,985 3,000,843 1,729,669
================= ================== ==================
Basic income per share $ 1.25 0.92 0.53
================= ================== ==================
Diluted income per share $ 1.24 0.91 0.53
================= ================== ==================
See accompanying notes to financial statements.
-37-
FIRST NORTHERN BANK OF DIXON
Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
Accumulated
Additional Other
Common Stock Comprehensive Paid-in Retained Comprehensive
Description Shares Amounts Income Capital Earnings (Loss)Income Total
----------- ----------- ----------- ------------ ----------- ----------- ----------------------
Balance at December 31, 1996 2,688,474 $ 17,848,671 976,850 6,079,140 68,252 24,972,913
Comprehensive income:
Net income $ 1,729,669 1,729,669 1,729,669
------------
Other comprehensive income:
Unrealized holding gains arising during the current
period, net of tax effect of $92,039 138,057
------------
Total other comprehensive income 138,057 138,057 138,057
------------
Comprehensive income $ 1,867,726
============
4% stock dividend 106,790 1,281,480 (1,281,480) --
Stock options exercised 1,200 14,700 14,700
Cash in lieu of fractional shares (8,987) (8,987)
--------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1997 2,796,464 19,144,851 976,850 6,518,342 206,309 26,846,352
Comprehensive income:
Net income $ 3,000,843 3,000,843 3,000,843
------------
Other comprehensive income:
Unrealized holding gains arising during the current
period, net of tax effect of $1,223,203 1,834,803
Reclassification adjustment due to losses realized,
net of tax effect of $9,622 14,434
------------
Total other comprehensive income, net
of tax effect of $1,232,825 1,849,237 1,849,237 1,849,237
------------
Comprehensive income $ 4,850,080
============
5% stock dividend 139,122 2,017,269 (2,017,269) --
Cash in lieu of fractional shares (11,038) (11,038)
Stock options exercised 1,200 14,700 14,700
Common shares issued 7,088 83,568 83,568
----------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1998 2,943,874 21,260,388 976,850 7,490,878 2,055,546 31,783,662
Comprehensive income:
Net income $ 4,082,985 4,082,985 4,082,985
------------
Other comprehensive income:
Unrealized holding losses arising during the current
period, net of tax effect of $2,505,283 (3,757,925)
Reclassification adjustment due to gains realized,
net of tax effect of $24,613 (36,920)
------------
Total other comprehensive income, net
of tax effect of $2,529,896 (3,794,845) (3,794,845) (3,794,845)
------------
Comprehensive income $ 288,140
============
5% stock dividend 146,820 2,055,480 (2,055,480) --
Cash in lieu of fractional shares (5,232) (5,232)
Common shares issued 7,725 89,104 89,104
Stock repurchase and retirement (6,146) (82,971) (82,971)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 3,092,273 $ 23,322,001 976,850 9,513,151 (1,739,299) 32,072,703
=========== =========== =========== =========== =========== ==========
-38-
FIRST NORTHERN BANK OF DIXON
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ---------------
Cash flows from operating activities:
Net income $ 4,082,985 3,000,843 1,729,669
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for (recovery of) loan losses (800,000) 760,000 2,115,500
Depreciation 1,085,770 863,978 777,390
Accretion and amortization, net 291,654 317,987 48,231
Net realized gains on held-to-maturity securities -- (73,355) (13,300)
Net realized (gains) losses on available-for-sale securities (61,533) 24,056 --
Gain on sale of OREO (90,878) (180,594) --
Provision for deferred income taxes 601,306 436,897 521,033
Proceeds from sales of loans held for sale 54,550,621 45,519,795 30,409,688
Originations and purchases of loans held for sale (65,409,597) (65,453,411) (36,196,899)
Increase in deferred loan origination fees 204,054 36,623 11,652
(Increase) decrease in accrued interest
receivable and other assets 95,140 (423,372) 1,466,040
(Decrease) increase in accrued interest payable and other
liabilities 1,065,946 (1,037,392) 569,014
------------------ ------------------ ---------------
Net cash provided by operating activities (4,384,532) (16,207,945) 1,438,018
------------------ ------------------ ---------------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 19,289,989 13,587,080 11,580,000
Proceeds from sales of available for sale securities 7,103,751 -- --
Purchase of available for sale securities (40,851,006) (36,324,461) (24,272,805)
Proceeds from maturities of held-to-maturity securities -- 5,130,535 4,029,901
Purchase of held-to-maturity securities -- (5,834,931) (25,598,009)
Net (increase) decrease in loans 182,723 (6,711,726) 19,823,989
Purchases of bank premises and equipment, net (743,860) (912,261) (551,683)
Proceeds from sale of other real estate owned 996,512 2,290,536 1,339,021
------------------ ------------------ ---------------
Net cash used in investing activities (14,021,891) (28,775,228) (13,649,586)
------------------ ------------------ ---------------
Cash flows from financing activities:
Net increase in deposits 26,326,844 33,473,228 38,872,490
Cash dividends paid in lieu of fractional shares (5,232) (11,038) (8,987)
Common stock issued 89,104 98,268 14,700
Repurchase of common stock (82,971) -- --
------------------ ------------------ ---------------
Net cash provided by financing activities 26,327,745 33,560,458 38,878,203
------------------ ------------------ ---------------
Net change in cash and cash equivalents 7,921,322 (11,422,715) 26,666,635
Cash and cash equivalents at beginning of year 49,184,700 60,607,415 33,940,780
------------------ ------------------ ---------------
Cash and cash equivalents at end of year $ 57,106,022 49,184,700 60,607,415
================== ================== ===============
See accompanying notes to financial statements.
-39-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Accounting Policies
First Northern Bank of Dixon (the Bank) is a California state chartered
bank. The accounting and reporting policies of the Bank conform with
generally accepted accounting principles and general practices within the
banking industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet and
revenue and expenses for the period. Actual results could differ from
those estimates applied in the preparation of the accompanying financial
statements. A summary of the significant accounting policies applied in
the preparation of the accompanying financial statements follows.
(a) Cash Equivalents
For purposes of the statement of cash flows, the Bank
considers due from banks, federal funds sold for one-day periods and
short-term bankers acceptances to be cash equivalents.
(b) Investment Securities
Investment securities consist of U.S. Treasury securities,
U.S. Agency securities, obligations of states and political
subdivisions, obligations of U.S. Corporations, mortgage backed
securities and other securities. At the time of purchase of a
security the Bank designates the security as held-to-maturity or
available-for-sale, based on its investment objectives, operational
needs and intent to hold. The Bank does not purchase securities with
the intent to engage in trading activity.
Held-to-maturity securities are recorded at amortized cost, adjusted
for amortization or accretion of premiums or discounts. Available-
for-sale securities are recorded at fair value with unrealized
holding gains and losses, net of the related tax effect, reported as
a separate component of stockholders' equity until realized.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary
results in a charge to earnings and the corresponding establishment
of a new cost basis for the security. No such declines have occurred.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity or available-for-sale security as an
adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and held-to-
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
The Bank adopted Statement of Financial Accounting Standards (SFAS)
No.133, "Accounting for Derivative Instruments and Hedging Activity,"
effective October 1, 1998. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, inch ding certain
derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Bank does not hold any derivatives at
December 31, 1999.
Under SFAS No. 133, a one-time transfer of held-to-maturity
securities to available-for-sale or held-for-sale is permitted.
During the year ended December 31, 1998, the Bank transferred
$60,890,726 of held-to-maturity securities to available-for-sale and
as a result recorded a cumulative increase of $2,853,904 in
unrealized gains, which is a component of accumulated other
comprehensive income.
-40-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31,1999, 1998 and 1997
(c) Loans
Loans are reported at the principal amount outstanding, net of
deferred loan fees and the allowance for loan losses. A loan is
considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement, including
scheduled interest payments. For a loan that has been restructured,
the contractual terms of the loan agreement refer to the contractual
terms specified by the original loan agreement, not the contractual
terms specified by the restructuring agreement. An impaired loan is
measured based upon the present value of future cash flows discounted
at the loan's effective rate, the loan's observable market price, or
the fair value of collateral if the loan is collateral dependent.
Interest on impaired loans is recognized on a cash basis. If the
measurement of the impaired loan is less than the recorded investment
in the loan, an impairment is recognized by a charge to the allowance
for loan loss.
Unearned discount on installment loans is recognized as income over
the terms of the loans by the interest method. Interest on other loans
is calculated by using the simple interest method on the daily balance
of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which represent
an adjustment to interest yield are deferred and amortized over the
contractual term of the loan using the interest method.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal or when a loan becomes
contractually past due by ninety days or more with respect to interest
or principal. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current
period interest income. Interest accruals are resumed on such loans
only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
Restructured loans are loans on which concessions in terms have been
granted because of the borrowers' financial difficulties. Interest is
generally accrued on such loans in accordance with the new terms.
(d) Loans Held for Sale
Loans originated and held for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are
recognized through a valuation allowance by charges to income.
(e) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. Loans are charged off against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb losses inherent in existing loans,
standby letters of credit, overdrafts and commitments to extend credit
based on evaluations of collectibility and prior loss experience. The
evaluations take into consideration such factors as changes in the
nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current and
anticipated economic conditions that may affect the borrowers' ability
to pay. While management uses these evaluations to recognize the
provision for loan losses, future provisions may be necessary based on
changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance for
loan losses are particularly susceptible to significant change in the
near term. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, the Federal
Deposit Insurance Corporation (FDIC), as an integral part of its
examination process, periodically reviews the Bank's allowance for
loan losses. The FDIC may require the Bank to recognize additions to
the allowance based on their judgment about information available to
them at the time of their examination.
-41-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(f) Premises and equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed substantially by the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are depreciated over the estimated
useful lives of the improvements or the terms of the related leases,
whichever is shorter. The useful lives used in computing deprecation
are as follows:
Buildings and improvements 15 to 50 years
Furniture and equipment 3 to 10 years
(g) Other Real Estate Owned
Other real estate acquired by foreclosure, is carried at the lower of
the recorded investment in the property or its fair value less
estimated selling costs. Prior to foreclosure, the value of the
underlying loan is written down to the fair value of the real estate
to be acquired by a charge to the allowance for loan losses, if
necessary. Fair value of other real estate owned is generally
determined based on an appraisal of the property. Any subsequent
operating expenses or income, reduction in estimated values and gains
or losses on disposition of such properties are included in other
operating expenses.
Revenue recognition on the disposition of real estate is dependent
upon the transaction meeting certain criteria relating to the nature
of the property sold and the terms of the sale. Under certain
circumstances, revenue recognition may be deferred until these
criteria are met.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(i) Gain or Loss on Sale of Loans and Servicing Rights
Servicing assets and other retained interests in transferred assets
are measured by allocating the previous carrying amount of the
transferred assets between the assets sold, if any and retained
interests, if any, based on their relative fair value at the date of
transfer. Servicing assets and liabilities are amortized in proportion
to and over the period of estimated net servicing income or loss and
assessed for asset impairment or increased obligation based on fair
value. Fair values are estimated using discounted cash flows based on
a current market interest rate.
The Bank recognizes a gain and a related asset for the fair value of
the rights to service loans for others when loans are sold. In
accordance with SFAS No. 125, the fair value of the servicing assets
is estimated based upon the present value of the estimated expected
future cash flows. The Bank measures the impairment of the servicing
asset based on the difference between the carrying amount of the
servicing asset and its current fair value. As of December 31, 1999
and 1998, there was no impairment in mortgage servicing asset.
A sale is recognized when the transaction closes and the proceeds are
other than beneficial interest in the assets sold. A gain or loss is
recognized to the extent that the sales proceeds and the fair value of
the servicing asset exceed or are less than the book value of the
loan. Additionally, a normal cost for servicing the loan is considered
in the determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at the
closing date to the extent that the sales proceeds, less costs to
complete the sale, exceed or are less than the carrying value of the
servicing rights held.
-42-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(j) Income Taxes
The Bank accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Stock Option Plan
The Bank accounts for stock-based compensation using the intrinsic
value method, under which compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeds the exercise price.
(l) Earnings Per Share (EPS)
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of
an entity.
(m) Comprehensive Income
Components of comprehensive income are net income and all other
non-owner changes in equity. The Bank has chosen to disclose
comprehensive income in the statement of stockholders' equity and
comprehensive income, in which the components of comprehensive income
are displayed net of income taxes.
(n) Year 2000
For the year ended December 31, 1999, the Bank bad expended $175,000
on the Year 2000 project which included $74,000 of staff salaries that
were shifted to Year 2000 project, $69,000 for system upgrades or
replacements, $16,000 for customer communications, and $16,000 for
lawyer and consultant fees and other miscellaneous costs.
(2) Cash and Due From Banks
The Bank is required to maintain reserves with the Federal Reserve
Bank based on a percentage of deposit liabilities. Aggregate reserves
of $0 and $6,767,000 were required at December 31, 1999 and 1998,
respectively. The Bank has met its average reserve requirements during
1999 and 1998 and the minimum required balance at December 31, 1999
and 1998.
-43-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(3) Investment Securities
The amortized cost and estimated market values of investments in debt
and equity securities at December 31, 1999 are summarized as follows:
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------------ ------------- -------------
Investment securities available
for sale:
U.S. Treasury securities $ 15,007,037 29,708 (50,895) 14,985,850
Securities of U.S.
government agencies
and corporations 21,529,693 - (662,663) 20,867,030
Obligations of U.S.
corporations 22,008,003 4,366 (535,027) 21,477,342
Obligations of states and
political subdivisions 67,460,149 466,866 (1,976,821) 65,950,194
Mortgage backed
securities 10,168,828 125 (174,486) 9,994,467
------------------ ------------------ ------------- -------------
Total debt securities 136,173,710 501,065 (3,399,892) 133,274,883
Other securities 2,176,800 - 2,176,800
------------------ ------------------ ------------- -------------
$ 138,350,510 501,065 (3,399,892) 135,451,683
================== ================== ============= ==============
During the year ended December 31, 1999, the Bank became a member of
the Federal Home Loan Bank (FHLB). To become a member, the Bank had to
purchase FHLB stock which is carried at cost and had a balance of
$1,066,800 as of December 31, 1999.
-44-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(3) Investment Securities
The amortized cost and estimated market values of investments in debt
securities at December 31, 1998 are summarized as follows:
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------- --------------- ----------- ----------------
Investment securities available
for sale:
U.S. Treasury securities $ 28,103,062 542,943 - 28,646,005
Securities of U.S.
government agencies
and corporations 8,183,401 70,473 - 8,253,874
Obligations of U.S.
corporations 12,698,444 241,899 (2,778) 12,937,565
Obligations of states and
political subdivisions 64,322,726 2,696,813 (75,003) 66,944,536
Mortgage backed
securities 9,755,732 18,857 (67,290) 9,707,299
-------------------- --------------- ----------- ----------------
Total debt securities 123,063,365 3,570,985 (145,071) 126,489,279
Other securities 1,060,000 - - 1,060,000
-------------------- --------------- ----------- ----------------
$ 124,123,365 3,570,985 (145,071) 127,549,279
==================== =============== =========== ================
The amortized cost and estimated market value of debt securities at
December 31, 1999 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
--------------------- -------------------
Due in one year or less $ 16,517,106 16,519,844
Due after one year through five years 65,525,353 64,676,453
Due five years through ten years 37,604,005 36,390,057
Due after ten years 18,704,046 17,865,329
--------------------- ------------------
Total debt and equity securities $ 138,350,510 135,451,683
===================== ==================
Investment securities carried at $17,464,268 and $13,655,752 at December
31, 1999 and 1998, respectively, were pledged to secure public deposits or for
other purposes as required or permitted by law.
-45-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(4) Loans
The composition of the Bank's loan portfolio at December 31, is as
follows:
1999 1998
--------------- ----------------
Commercial 83,970,454 68,069,088
Real estate:
Mortgage 34,404,344 14,818,975
Construction 36,044,291 42,363,493
Installment 6,327,989 5,794,366
Other loans 139,182 319,256
--------------- ----------------
160,886,260 131,365,178
Allowance for loan losses (7,825,255) (8,144,450)
Net deferred origination fees (787,233) (583,179)
--------------- ----------------
Loans, net $ 152,273,772 122,637,549
=============== ================
The Bank's customers are primarily located in Solano and Yolo Counties. As
of December 31, 1999, approximately 22% of the Bank's loans are for real
estate construction. Additionally 21% of the Bank's loans are mortgage type
loans which are secured by both commercial and residential real estate.
Approximately 52% of the Bank's loans are for general commercial uses
including professional, retail, agricultural and small businesses.
Generally, real estate loans are secured by real and commercial property
and other loans are secured by funds on deposit, business or personal
assets. Repayment is generally expected from the proceeds of the sales of
property for real estate construction loans, and from cash flows of the
borrower for other loans. The Bank's access to this collateral is through
foreclosure and/or judicial procedures. The Bank's exposure to credit loss
if the real estate or other security proved to be of no value is the
outstanding loan balance.
Loans which were sold and were being serviced by the Bank totaled
approximately $54,550,621 and $45,519,795 at December 31,1999 and 1998,
respectively. The Bank's servicing assets related to sold loans were
immaterial at December 31, 1999 and 1998.
Effective July 1, and October 1, 1999, the Bank transferred $25,567,000 and
$3,656,000, respectively, held for sale portfolio to their loans held to
maturity portfolio.
Nonaccrual loans totaled approximately $528,000, $1,702,000 and $2,064,000
at December 31, 1999, 1998 and 1997, respectively. If interest on these
nonaccrual loans had been accrued, such income would have approximated
$32,000, $133,000 and $199,000 during the years ended December 31, 1999,
1998 and 1997, respectively.
The Bank did not restructure any loans in 1999 or 1998.
-46-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Impaired loans are loans for which it is probable that the Bank will not be
able to collect all amounts due. Impaired loans totaled approximately
$528,000 and $1,702,000 at December 31, 1999 and 1998, respectively, and
had valuation allowances of $141,000 and $347,000 at December 31, 1999 and
1998, respectively. The average outstanding balance of impaired loans was
$1,131,000, $2,139,000 and $5,385,000, on which $50,000, $64,000 and
$115,000 of interest income was recognized for the years ended December 31,
1999, 1998 and 1997, respectively.
Loans in the amount of $1,145,852 and $1,341,300 at December 31, 1999 and
1998, respectively, were pledged to secure potential borrowings from the
Federal Reserve Bank.
Changes in the allowance for loan losses for the years ended December 3 1,
are summarized as follows:
1999 1998 1997
------------- ------------ -------------
Balance, beginning of year $ 8,144,450 7,355,536 8,403,253
Provision (recovery credited)
charged to operations (800,000) 760,000 2,115,500
Loans charged-off (156,945) (782,399) (3,625,674)
Recoveries of loans
previously charged-off 637,750 811,313 462,457
------------- ------------ -------------
Balance, end of year $7,825,255 8,144,450 7,355,536
============= ============ =============
(5) Premises and Equipment
Premises and equipment consist of the following at December 31:
1999 1998
-------------- ---------------
Land $ 1,394,455 1,370,455
Buildings 4,527,074 4,274,175
Furniture and equipment 7,840,540 7,681,763
Leasehold improvements 567,194 557,123
--------------- ---------------
14,329,263 13,883,516
Less accumulated depreciation 8,297,552 7,509,895
--------------- ---------------
$ 6,031,711 6,373,621
=============== ===============
Depreciation expense included in occupancy and equipment expense, is
$1,085,770, $863,978 and $777,390 for the years ended December 31, 1999,
1998 and 1997, respectively.
-47-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(6) Other Assets
Other assets consisted of the following at December 31:
1999 1998
------------ ---------------
Accrued interest $ 3,582,710 3,317,056
Other real estate owned, net - 905,634
Software, net of amortization 429,331 373,846
Prepaid and other 1,714,306 2,130,585
Deferred tax assets, net 3,744,268 1,815,678
------------ ---------------
$ 9,470,615 8,542,799
============ ===============
The Bank amortizes capitalized software costs on a straight-line basis
using a useful life from three to five years.
Changes in the allowance for losses on other real estate owned at December
31 are summarized as follows:
1999 1998 1997
----------- ------------- -------------
Balance, beginning of year $ -- 1,929,992 2,651,622
Provision charged to operations -- -- --
Charge-offs, net of recoveries -- (1,929,992) (721,630)
----------- ------------- -------------
Balance, end of year $ -- -- 1,929,992
=========== ============= =============
(7) Income Taxes
The provision for income tax expense consists of the following for the
years ended December 31
1999 1998 1997
---------------- -------------- -------------
Current:
Federal $ 1,017,760 514,831 (56,866)
State 502,377 273,136 (38,023)
---------------- -------------- -------------
1,520,137 787,967 (94,889)
---------------- -------------- -------------
Deferred:
Federal 456,893 277,736 249,320
State 144,413 159,161 271,713
---------------- -------------- -------------
601,306 436,897 521,033
---------------- -------------- -------------
$ 2,121,443 1,224,864 426,144
================ ============== =============
-48-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 consist of:
1999 1998
----------------- -------------
Deferred tax assets:
Allowance for loan losses $ 2,196,918 2,747,637
Allowance for write-downs of other real estate
owned - 31,923
Deferred compensation 105,509 119,208
Alternative minimum tax carryover 695,603 978,079
Current state franchise taxes 178,228 92,866
Other - 144,674
Investment securities unrealized losses 1,159,531 -
----------------- -------------
Deferred tax assets 4,335,789 4,114,387
Less valuation allowance - (192,000)
----------------- -------------
Total deferred tax assets 4,335,789 3,922,387
Deferred tax liabilities:
Fixed assets 276,986 371,798
State franchise taxes 190,713 285,712
Other 123,822 78,834
Investment securities unrealized gains - 1,370,365
----------------- -------------
Total deferred tax liabilities 591,521 2,106,709
----------------- -------------
Net deferred tax assets $ 3,744,268 1,815,678
================= ============
The valuation allowance for deferred tax assets decreased by $192,000 in
1999. The reduction was the result of net changes in temporary differences,
improved operating results in 1999 and projected operating results in 2000.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Bank will
realize the benefits of these deductible differences.
-49-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
A reconciliation of income taxes computed at the federal statutory rate of
34% and the provision for income taxes is as follows:
1999 1998 1997
------------- ------------- --------------
Income tax expense at statutory rates $ 2,109,506 1,436,740 732,976
Reduction for tax exempt interest (475,051) (548,693) (484,308)
State franchise tax, net of federal
income tax benefit 426,881 285,316 154,235
Change in beginning of year valuation.
allowance (192,000) - -
Other 252,107 51,501 23,241
------------- ------------- --------------
$ 2,121,443 1,224,864 426,144
============= ============= ==============
(8) Outstanding Shares and Earnings Per Share
On September 30, 1998, the Board of Directors authorized a two-for-one
stock split of the Bank's common stock in which each share of the Bank's
common stock was converted into two shares. Consequently, all related
information in this report has been restated to reflect the effect of the
stock split.
On January 20, 2000, the Board of Directors of the Bank declared a 6% stock
dividend payable as of March 31, 2000. All income per share amounts have
been adjusted to give retroactive effect to the stock dividend.
Earnings Per Share (EPS)
Basic and diluted earnings per share for the years ended December 31, 1999,
1998 and 1997 were computed as follows:
1999 1998 1997
----------- ------------ -----------
Basic earnings per share:
Net income $ 4,082,985 3,000,843 1,729,669
----------- ------------ -----------
Weighted average common shares
outstanding 3,276,362 3,276,230 3,267,942
----------- ------------ -----------
Basic EPS $ 1.25 0.92 0.53
=========== ============ ===========
Diluted earnings per share:
Net income $ 4,082,985 3,000,843 1,729,669
----------- ------------ -----------
Denominator:
Weighted average common stock
outstanding 3,276,362 3,276,230 3,267,942
Weighted average options
outstanding 12,837 8,028 4,064
----------- ------------ -----------
3,289,199 3,284,258 3,272,006
----------- ------------ -----------
Diluted EPS $ 1.24 0.91 0.53
=========== ============ ============
-50-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(9) Related Party Transactions
The Bank, in the ordinary course of business, has loan and deposit
transactions with directors and executive officers. In management's
opinion, these transactions were on substantially the same terms as
comparable transactions with other customers of the Bank. The amount of
such deposits totaled approximately $918,000 and $938,000 at December 31,
1999 and 1998, respectively.
The following is an analysis of the activity of loans to executive officers
and directors for the years ended December 31:
1999 1998 1997
----------- ------------ ------------
Outstanding balance, beginning of year $ 586,000 2,100,000 4,388,000
Credit granted 341,000 377,000 1,886,000
Repayments (639,000) (1,891,000) (4,174,000)
----------- ------------ ------------
Outstanding balance, end of year $ 288,000 586,000 2,100,000
=========== ============ ============
(10) Profit Sharing Plan
The Bank maintains a profit sharing plan for the benefit of its employees.
Employees who have completed 12 months and 1,000 hours of service are
eligible. Under the terms of this plan, a portion of the Bank's profits, as
determined by the Board of Directors, will be set aside and maintained in a
trust fund for the benefit of qualified employees. Contributions to the
plan, included in salaries and employee benefits in the statements of
income, were $653,915, $579,197 and $123,122 in 1999, 1998 and 1997,
respectively.
(11) Stock Compensation Plans
At December 31, 1999, the Bank has three stock-based compensation plans,
which are described below. Had compensation cost for the Bank's three
stock-based compensation plans been determined consistent with the fair
value method, the Bank's net income and income per share would have been
reduced to pro forma amounts indicated below:
Net income:
As reported $ 4,082,985 3,000,843 1,729,669
=========== =========== ===========
Pro forma under SFAS No. 123 $ 3,906,110 2,854,677 1,636,746
=========== =========== ===========
Basic earnings per share:
As reported $ 1.25 0.92 0.53
=========== =========== ===========
Pro forma under SFAS No. 123 $ 1.19 0.87 0.50
=========== =========== ===========
Diluted earnings per share:
As reported $ 1.24 0.91 0.53
=========== =========== ===========
Pro forma under SFAS No. 123 $ 1.19 0.87 0.50
=========== =========== ===========
Fixed Stock Option Plans
The Bank has two fixed option plans. Under the 1997 Employee Stock Option
Plan, the Bank may grant options to an employee for an amount up to 25,000
shares of common stock each year. There arc 551,250 shares authorized under
the plan. The plan will terminate February 27, 2007. The Compensation
Committee of the Board of Directors is authorized to prescribe the terms
and conditions of each option, including exercise price, vestings or
duration of the option.
Under the 1997 Outside Directors Nonstatutory Stock Option Plan, the Bank
may grant options to an outside director for an amount up to 6,615 shares
of common stock. There are 165,375 shares authorized under the Plan. The
Plan will terminate February 27, 2007. The exercise price of each option
equals the market price of the Bank's stock on the date of grant, and an
option's maximum term is five years. Options vest at the rate of 20% per
year beginning on the grant date. Other than a grant of 6,615 shares to a
new director, any future grants require shareholder approval.
-51-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The weighted average fair value at date of grant for options granted during
years ended December 31, 1999, 1998 and 1997, was $6.66, $4.36 and $4.78
per share, respectively. The fair value of each option grant was estimated
on the date of the grant using Black-Scholes option-pricing model with the
following assumptions:
1999 1998 1997
----------- ----------- -----------
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 23.00% 22.89% 15.26%
Risk-free interest rate 6.39% 4,73% 5.42%
Expected term in years 10 5.5 3
Stock option activity for the outside directors stock option plan and the
employee stock option plan during the periods indicated is as follows:
Outside Directors Employee Stock
Stock Option Plan Option Plan
-------------------------------- ----------------------------------
Weighted- Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
-------------- ----------------- --------------- ------------------
Balance at December 31, 1996 - $ - - $ -
Granted 72,765 11.11 39,690 12.70
Exercised (1,323) 11.11 - -
Forfeited (5,292) 11.11 - -
Expired - - - -
----------- --------------- ------------ ---------------
Balance at December 31, 1997 66,150 11.11 39,690 12.70
Granted - - 64,050 13.51
Exercised (1,323) 11.11 - -
Forfeited - - -
Expired - - - -
----------- --------------- ------------ ---------------
Balance at December 31, 1998 64,827 11.11 103,740 13.19
Granted - - 33,390 12.86
Exercised - -
Forfeited (5,292) 11.11 - -
Expired - - -
----------- --------------- ------------ ---------------
Balance at December 31, 1999 59,535 $ 11.11 137,130 $ 13.11
=========== =============== ============ ================
At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of all outstanding options was $11.11 - $13.51
and 5.43 years, respectively.
Options exercisable as of December 31 were 91,833 shares in 1999, 45,160
shares in 1998 and 19,200 shares in 1997, at a weighted-average exercise
price of $12.32, 12.57 and $12.91, respectively.
-52-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan, the Bank is authorized to
issue to an eligible employee shares of common stock. There are 551,250
shares authorized under the plan. The plan will terminate February 27,
2007. An eligible employee is one who has been continually employed for at
least ninety (90) days prior to commencement of a participation period.
Under the terms of the Plan, employees can choose to have up to 10 percent
of their compensation withheld to purchase the Bank's common stock each
participation period. The purchase price of the stock is 85 percent of the
lower of the fair market value on the last trading day before the Date of
Participation or the fair market value on the last trading day during the
participation period. Approximately 50 percent of eligible employees are
participating in the Plan in the current participation period, which began
November 24, 1999. At the end of the participation period, which began
November 24, 1998 and ended November 23, 1999, there were $89,622 in
contributions, and 7,725 shares were purchased at $11.53 totaling $89,104.
(12) Commitments and Contingencies
The Bank is obligated for rental payments under certain operating lease
agreements, some of which contain renewal options. Total rental expense for
all leases included in net occupancy and equipment expense amounted to
approximately $464,403, $471,251 and $407,206 for the years ended December
31, 1999, 1998 and 1997, respectively. At December 31, 1999, the future
minimum payments under noncancelable operating leases with initial or
remaining terms in excess of one year are as follows:
Year Ended
December 31:
------------
2000 $ 274,375
2001 295,160
2002 251,155
2003 194,340
2004 158,380
Thereafter 140,400
-----------------
$ 1,313,810
=================
-53-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999,1998 and 1997
At December 31, 1999, the aggregate maturities for time deposits are as
follows:
Year Ended
December 31:
------------
2000 $ 103,915,893
2001 5,038,751
2002 1,212,769
2003 414,693
2004 122,091
----------------
$ 110,704,197
================
The Bank is subject to various legal proceedings in the normal course of
its business. In the opinion of management, after having consulted with
legal counsel, the outcome of the legal proceedings should not have a
material effect on the financial condition or results of operations of the
Bank.
(13) Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the
form of loans or through standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the balance sheet. The contract amounts
of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1999 are as follows:
Undisbursed loan commitments $ 76,100,895
Standby letters of credit 3,600,611
---------------
$ 79,701,506
===============
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inve itory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
Commitments to extend credit and standby letters of credit bear similar
credit risk characteristics as outstanding loans. As of December 31, 1999,
the Bank has no off-balance sheet derivatives requiring additional
disclosure.
-54-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(14) Capital Adequacy and Restriction on Dividends
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below).
First, a bank must meet a minimum Tier I Capital ratio (as defined in the
regulations) ranging from 3% to 5% based upon the bank's CAMELS (capital
adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk) rating.
Second, a bank must meet minimum Total Risk-Based Capital to risk-weighted
assets ratio of 8%. Riskbased capital and asset guidelines vary from Tier I
capital guidelines by redefining the components of capital, categorizing
assets into different risk classes, and including certain off-balance sheet
items in the calculation of the capital ratio. The effect of the risk-based
capital guidelines is that banks with high exposure will be required to
raise additional capital while institutions with low risk exposure could,
with the concurrence of regulatory authorities, be permitted to operate
with lower capital ratios. In addition, a bank must meet minimum Tier I
Capital to average assets ratio.
Management believes, as of December 31, 1999, that the Bank meets all
capital adequacy requirements to which it is subject. As of December 31,
1999, the most recent notification from the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must meet the minimum ratios as set forth above.
There are no conditions or events since that notification that management
believes have changed the institution's category.
-55-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The Bank's actual capital amounts and ratios as of December 31, 1999 are as
follows:
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions:
-------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ------- ------- ------
Total Risk-Based Capital (to
Risk Weighted Assets) $ 35,454,000 14.9% $ 19,027,000 8.0% $ 23,784,000 10.0%
Tier I Capital (to Risk
Weighted Assets) 32,421,000 13.6% 9,514,000 4.0% 14,270,000 6.0%
Tier I Capital (to Average
Assets) 32,421,000 8.7% 14,962,000 4.0% 18,703,000 5.0%
The Bank's actual capital amounts and ratios as of December 31, 1998 are as
follows:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
-------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Risk-Based Capital (to
Risk Weighted Assets) $ 32,300,000 16.0% $ 16,159,000 8.0% $ 20,199,000 10.0%
Tier I Capital (to Risk
Weighted Assets) 29,706,000 14.7% 8,079,000 4.0% 12,119,000 6.0%
Tier I Capital (to Average
Assets) 29,706,000 8.9% 13,374,000 4.0% 16,717,000 5.0%
Cash dividends are restricted under California state banking laws to the
lesser of the Bank's retained earnings or the Bank's net income for the
latest three fiscal years, less dividends previously declared during that
period.
-56-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(15) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and
short-term instruments are a reasonable estimate of fair value.
Investment securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
Loans receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans (e.g., commercial real estate
and rental property mortgage loans, commercial and industrial loans,
and agricultural loans) are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest receivable approximates its fair value.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligation with the
counterparties at the reporting date.
Deposit liabilities
The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts)
are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The fair values for
fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits. The carrying amount of accrued interest
payable approximates its fair value.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market
exists for a significant portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or
liabilities include deferred tax liabilities, property, plant,
equipment and goodwill. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in may of the estimates.
-57-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The estimated fair values of the Bank's financial instruments are
approximately as follows:
1999
-----------------------------------
Carrying Fair
Amount Value
Financial assets:
Cash and federal funds sold 57,106,000 57,106,000
Investment securities 135,452,000 135,452,000
Loans:
Fixed rate:
Commercial and construction 11,187,000 10,818,000
Mortgage 40,485,000 37,017,000
Consumer 5,353,000 5,109,000
--------------- ------------
Total fixed rate 57,025,000 52,944,000
Variable rate 103,861,000 104,296,000
Less allowance for loan losses (7,825,000) (7,825,000)
Net deferred origination fees (787,000) (787,000)
--------------- ------------
Net loans $ 152,274,000 148,628,000
=============== ============
Loans hold for sale $ 10,657,000 10,667,000
=============== ============
Financial liabilities:
Deposits:
Demand $ 224,926,000 224,926,000
Certificate of deposits 110,704,000 110,404,000
--------------- ------------
Total deposits $ 335,630,000 335,330,000
=============== ============
Contract Carrying Fair
Amount Amount Value
-------------- -------------- ------------
Unrecognized financial instruments:
Commitments to extend credit $ 76,101,000 -- 571,000
=============== ========= =========
Standby letters of credit $ 3,600,000 -- 36,000
=============== ========= =========
-58-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The estimated fair values of the Bank's financial instruments are
approximately as follows:
1998
---------------------------------------
Carrying Fair
Amount Value
---------------------------------------
Financial assets:
Cash and federal funds sold $ 49,185,000 49,185,000
================ ===========
Investment securities $ 127,549,000 127,549,000
================ ===========
Loans:
Fixed rate:
Commercial and construction $ 17,426,000 17,275,000
Mortgage 2,676,000 2,691,000
Consumer 4,683,000 4,684,000
--------------- -----------
Total fixed rate 24,785,000 24,650,000
Variable rate 106,580,000 103,368,000
Less allowance for loan losses (8)44,000) (8,144,000)
Net deferred origination fees (583,000) (583,000)
--------------- -----------
Net loans $ 122,638,000 119,291,000
================ ===========
Loans held for sale $ 29,021,000 29,596,000
================ ===========
Financial liabilities:
Deposits:
Demand $ 199,394,000 199,394,000
Certificate of deposits 109,909,000 110,410,000
--------------- -----------
Total deposits $ 309,303,000 309,804,000
================ ===========
Contract Carrying Fair
Amount Amount Value
--------------- ------------- --------------
Unrecognized financial instruments:
Commitments to extend credit $ 63,853,000 -- 479,000
=============== ============= ==============
Standby letters of credit $ 713,000 -- 7,000
=============== ============= ==============
-59-
FIRST NORTHERN BANK OF DIXON
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(16) Supplemental Statements of Cash Flows Information
Supplemental disclosures to the Statements of Cash Flows for the years
ended December 31, are as follows:
1999 1998 1997
---------- ---------- ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 7,923,311 8,436,720 7,996,605
============= =========== ============
Income taxes $ 1,779,000 1,705,100 34,000
============= =========== ============
Supplemental disclosure of noncash investing and
financing activities:
Loans transferred to other real estate -- 1,194,758 1,461,935
============= =========== ============
Stock dividend distributed $ 2,055,480 2,017,269 1,281,480
============= =========== ============
Loans held for sale transferred to loans $ 29,223,000 -- --
============= =========== ============
(17) Subsequent Event
On January 6, 2000, the Board of Directors of the Bank approved the
creation of a bank holding company to be called "First Northern Community
Bancorp" to be effected through a corporate reorganization in which the
Bank will become a wholly-owned subsidiary of First Northern Community
Bancorp.
-60-
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
(a) Directors of the Bank
The information called for by this item with respect to director information is
incorporated herein by reference from the sections of the Bank's proxy statement
for the 2000 Annual Meeting of Shareholders entitled "Security Ownership of
Management" and "Nomination and Election of Directors".
(b) Principal Officers of the Bank
Name of Officer/Position Held Age* Position Held Since
----------------------------- --- -------------------
Owen J. Onsum / President, CEO 55 01/01/97
Robert M. Walker / Sr. VP, Branch Administrator 49 09/01/91
Donald J. Fish / Sr. VP, Senior Credit Officer 60 01/06/97
Louise A. Walker / Sr. VP, Cashier 39 01/01/97
<FN>
* as of February 29, 2000.
</FN>
Owen J. Onsum is President and Chief Executive Officer of the Bank. Prior to
that appointment on January 1 1997, Mr. Onsum served as the Bank's Executive
Vice President for 15 years.
Robert M. Walker is Senior Vice President and Branch Administrator of the Bank.
Prior to that appointment on September 1, 1991, Mr. Walker was a Branch Manger
at the Bank's West Sacramento Branch.
Donald J. Fish is Senior Vice President and Senior Credit Officer of the Bank.
Prior to that appointment on January 6, 1997, Mr. Fish was Executive Vice
President and Senior Credit Officer with Valliwide Bank for ten years.
Louise A. Walker is Senior Vice President and Cashier of the Bank. Prior to that
appointment on January 1, 1997, Mrs. Walker was the Bank's Vice President and
Cashier for eight years.
None of the principal officers was selected pursuant to any arrangement or
understanding other than with the directors and officers of the Bank acting in
their capacities as such.
(c) Family Relationships and Involvement in certain Legal Proceedings.
NONE
-61-
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference herein to
the sections of the Bank's proxy statement for the 2000 Annual Meeting of
Shareholders entitled "Nomination and Election of Directors" and "Executive
Compensation."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference from
the sections of the Bank's proxy statement for the 2000 Annual Meeting of
Shareholders entitled "Security Ownership of Management" and "Nomination and
Election of Directors".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference from
the sections of the Bank's proxy statement for the 2000 Annual Meeting of
Shareholders entitled "Report of Compensation Committee of the Board of
Directors on Executive Compensation" "Indebtedness of Management," "Indebtedness
of Certain Directors" and "Transactions with Management."
-62-
PART IV
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Financial Statements and Financial Statement Schedules filed:
Reference is made to the Index to Financial Statements under Item 8 in
Part II of this Form 10-K
(B) Reports on Form 8-K:
The Bank did not file any reports on Form 8-K during the last quarter of
the year ended December 31,1999.
(C) Exhibits:
The following is a list of all exhibits filed as part of this Annual Report
on Form 10-K.
Exhibit
Number Exhibit
------- -------
3.1(1) Articles of Incorporation of the Bank, as amended.
3.2(2) Certificate of Amendment to Articles of Incorporation.
3.3(3) By-laws of the Bank, as amended.
4.1(4) Form of Common Stock Certificate
10.1(5) First Northern Bank of Dixon 1997 Stock Option Plan.
10.2(6) Amended and Restated First Northern Bank of Dixon Outside Directors 1997 Nonstatutory
Stock Option Plan.
10.3(5) First Northern Bank of Dixon 1997 Employee Stock Purchase Plan.
10.4(4) First Northern Bank of Dixon 1997 Stock Option Plan Forms "Incentive Stock Option Agreement." and
"Notice of Exercise of Stock Option"
10.5(4) First Northern Bank of Dixon Amended and Restated Outside Directors 1997 Nonstatutory
Stock Option Plan Forms "Nonstatutory Stock Option Agreement" and "Notice of Exercise of
Stock Option"
10.6(4) First Northern Bank of Dixon 1997 Employee Stock Purchase Plan Forms "Participation Agreement" and
"Notice of Withdrawal"
11 Statement of Computation of Per Share Earnings (See Page 43 of this Form 10-K)
21(7) Subsidiaries of the Bank
24 Power of Attorney (See Page 64) of this Form 10-K)
- -------------------------------------------------------------------------------------------------------------------------
<FN>
1. Filed with the Bank's Annual Report on Form F-1 for the fiscal
year ended December 31, 1986.
2. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended
December 31, 1989.
3. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended
December 31, 1993.
4. Filed with the Bank's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
5. Filed with the Bank's definitive proxy statement for the 1997 Annual
Meeting of Shareholders.
6. Filed with the Bank's definitive proxy statement for the Special Meeting of
Shareholders held on September 11, 1997.
7. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended
December 31, 1996.
</FN>
-63-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Bank has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 16, 2000.
FIRST NORTHERN BANK OF DIXON
By: /s/ Owen J. Onsum
----------------------------
Owen J. Onsum
President/Chief Executive Officer/Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes a
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the Bank
and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Owen J. Onsum President/Chief Executive Officer 3/16/00
- -------------------------------------------------------- ------------------
Owen J. Onsum (Principal Executive Officer) and Director
/s/ Louise A. Walker Senior Vice President/Cashier 3/16/00
- -------------------------------------------------------- ------------------
Louise A. Walker (Principal Financial Officer)
/s/ Stanley R. Bean Vice President/Controller 3/16/00
- -------------------------------------------------------- ------------------
Stanley R. Bean
/s/ Lori J. Aldrete Director 3/16/00
- -------------------------------------------------------- ------------------
Lori J. Aldrete
/s/ Frank J. Andrews, Jr. Director 3/16/00
- -------------------------------------------------------- ------------------
Frank J. Andrews, Jr.
/s/ John M. Carbahal Director 3/16/00
- -------------------------------------------------------- ------------------
John M. Carbahal
/s/ Gregory DuPratt Director 3/16/00
- -------------------------------------------------------- ------------------
Gregory DuPratt
/s/ John F. Hamel Director 3/16/00
- -------------------------------------------------------- ------------------
John F. Hamel
/s/ Diane P. Hamlyn Director 3/16/00
- -------------------------------------------------------- ------------------
Diane P. Hamlyn
/s/ William H. Jones, Jr. Director 3/16/00
- -------------------------------------------------------- ------------------
William H. Jones, Jr.
/s/ Foy S. McNaughton Director 3/16/00
- -------------------------------------------------------- ------------------
Foy S. McNaughton
/s/ David W. Schulze Director 3/16/00
- -------------------------------------------------------- ------------------
David W. Schulze
/s/ Thomas S. Wallace Director 3/16/00
- -------------------------------------------------------- ------------------
Thomas S. Wallace
-64-