FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to _______________________.
Commission File Number 0-265520
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CALIFORNIA INDEPENDENT BANCORP
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(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0349947
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1227 BRIDGE ST., SUITE C, YUBA CITY, CALIFORNIA 95991
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(Address of principal executive offices)
(Zip Code)
(916) 674-4444
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Outstanding at
Class September 30, 1997
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Common stock, no par value 1,634,621 Shares
This report contains a total of 23 pages
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1
PART I- FINANCIAL INFORMATION
ITEM 1 PAGE
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS 4
CONSOLIDATED STATEMENTS OF INCOME FOR NINE MONTHS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-21
PART II- OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8K 22
SIGNATURES 23
2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS
Cash and due from banks $ 18,521 $ 22,928
Federal funds sold 29,700 41,300
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Total Cash and Equivalents 48,221 64,228
Investment securities:
Available-for-sale securities, at fair value 14,256 11,374
Held-to-maturity securities, at amortized cost
(fair value of $23,963 and $23,511 respectively) 23,839 23,289
Loans:
Commercial 98,612 73,620
Consumer 2,237 2,984
Real Estate-mortgage 14,801 28,564
Real Estate-construction & land development 34,832 29,916
Leases and Other 32,752 16,016
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Total loans 183,234 151,100
Less allowance for possible loan losses (4,146) (4,053)
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Net Loans 179,088 147,047
Premises and equipment, net 8,091 7,420
Accrued interest receivable and other assets 9,242 9,244
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Total other assets 17,333 16,664
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TOTAL ASSETS $ 282,737 $ 262,602
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $ 55,348 $ 55,117
Demand, interest bearing 36,573 33,659
Savings and Money Market 67,278 67,756
Time certificates 97,795 81,360
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Total deposits 256,994 237,892
Accrued interest payable and other liabilities 3,660 2,824
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TOTAL LIABILITIES 260,654 240,716
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized;
1,634,621 and 1,546,032 shares issued and outstanding at
September 30, 1997 and at December 31, 1996,
respectively 12,116 11,088
Retained earnings 9,974 10,816
Net unrealized gains (losses) on available-for-sale
securities (7) (18)
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Total shareholders' equity 22,083 21,886
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 282,737 $ 262,602
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See accompanying notes to consolidated financial statements
3
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------------------
Interest income:
Interest and fees on loans $ 5,395 $ 4,805
Interest on investment securities 573 404
Interest on federal funds sold 194 103
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Total interest income 6,162 5,312
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Interest expense:
Demand, interest bearing 326 280
Savings 627 596
Time certificates 1,447 993
Other 6 15
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Total interest expense 2,406 1,884
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Net interest income 3,756 3,428
Provision for possible loan losses - (80)
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Net interest income after provision for
possible loan losses 3,756 3,348
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Other income:
Service charges 274 190
Net gain (loss) on securities transactions - 1
Other 1,184 485
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Total other income 1,458 676
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Other expenses:
Salaries and benefits 1,988 1,336
Occupancy 203 137
Equipment 331 250
Advertising and promotion 85 56
Stationery and supplies 63 54
Legal and professional fees 95 83
Other operating expenses 811 667
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Total other expenses 3,576 2,583
Earnings before income taxes 1,638 1,441
Income taxes 650 537
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Net Income $ 988 $ 904
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Primary earnings per share $ 0.63 $ 0.62
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Weighted average shares outstanding 1,571,498 1,461,760
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Fully Diluted:
Earnings per share $ 0.55 $ 0.54
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Weighted average shares outstanding 1,809,409 1,683,448
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Cash dividend paid per share of common stock $ 0.11 $ 0.11
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See accompanying notes to consolidated financial statements
4
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
----------------------------------------
Interest income:
Interest and fees on loans $ 14,646 $ 12,753
Interest on investment securities 1,867 1,325
Interest on federal funds sold 1,026 924
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Total interest income 17,539 15,002
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Interest expense:
Demand, interest bearing 1,038 775
Savings 1,945 1,799
Time certificates 3,975 2,772
Other 18 27
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Total interest expense 6,976 5,373
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Net interest income 10,563 9,629
Provision for possible loan losses (3,336) (180)
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Net interest income after provision
for possible loan losses 7,227 9,449
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Other income:
Service charges 760 673
Net gain (loss) on securities transactions - 5
Other 2,853 1,226
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Total other income 3,613 1,904
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Other expenses:
Salaries and benefits 5,585 3,758
Occupancy 527 415
Equipment 941 716
Advertising and promotion 309 270
Stationery and supplies 242 191
Legal and professional fees 232 189
Other operating expenses 2,081 1,751
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Total other expenses 9,917 7,290
Earnings before income taxes 923 4,063
Income taxes 311 1,585
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Net Income $ 612 $ 2,478
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Primary earnings per share $ 0.39 $ 1.70
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Weighted average shares outstanding 1,556,873 1,453,404
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Fully Diluted:
Earnings per share $ 0.34 $ 1.47
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Weighted average shares outstanding 1,798,145 1,688,438
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Cash dividend paid per share of common stock $ 0.33 $ 0.33
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See accompanying notes to consolidated financial statements
5
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 612 $ 2,187
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 718 513
Provision for possible loan losses 3,336 775
Provision for deferred taxes 9 (1,023)
(Increase) decrease in assets-
Interest receivable (455) (616)
Other assets 336 1,050
Increase (decrease) in liabilities-
Interest payable 329 638
Other liabilities 507 (60)
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Net cash provided by operating activities 5,392 3,464
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (35,444) (9,015)
Purchase of investments (18,100) (11,660)
Proceeds from maturity of HTM Securities 11,406 5,965
Proceeds from sales/maturity of AFS Securities 3,273 14,605
Proceeds from sales of other real estate owned 178 543
Purchases of premises and equipment (1,388) (791)
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Net cash used for investing activities (40,075) (353)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest bearing deposits 231 (7,734)
Net increase in interest bearing deposits 18,871 12,334
Cash dividends (512) (457)
Stock options exercised 101 122
Cash paid in lieu of fractional shares (15) (9)
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Net cash provided by financing activities 18,676 4,256
NET INCREASE (DECREASE) (16,007) 7,367
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 64,228 22,579
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CASH AND CASH EQUIVALENTS, END OF PERIOD 48,221 29,946
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6
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the Company, the unaudited consolidated financial
statements, prepared on the accrual basis of accounting, contain all
adjustments (consisting of only normal recurring adjustments) which are
necessary to present fairly the financial position of the Company and its
subsidiaries at September 30, 1997 and December 31, 1996, and the results
of its operations for the periods ended September 30, 1997 and 1996,
respectively.
Certain information and footnote disclosures normally presented in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The results of operations for
the period ended September 30, 1997 are not necessarily indicative of the
operating results for the full year ending December 31, 1997.
NOTE 2 - CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Feather River State Bank, and EPI Leasing
Company Inc., a subsidiary of Feather River State Bank. All material
intercompany accounts and transactions have been eliminated in
consolidation.
.
NOTE 3 - LOANS TO DIRECTORS
In the ordinary course of business, the Company makes loans to directors
of the Company, which on September 30, 1997, amounted to a total of
approximately $7,419,636.
NOTE 4 - COMMITMENTS & CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to extend
credit and letters of credit, which are not reflected in the financial
statements. Management does not anticipate any material loss as a result
of these transactions.
NOTE 5 - NET INCOME PER SHARE
Net Income per share is computed using the weighted average number of
shares of common stock outstanding (as adjusted retroactively to reflect
the 5% stock dividends paid on August 16, 1996 and September 12, 1997).
7
NOTE 6 - CASH DIVIDENDS
The Company paid an eleven cent per share dividend in February 1997, May
1997 and August 1997, respectively.
NOTE 7- EARNINGS PER SHARE
Effective December 31, 1997, the Bank is required to adopt Financial
Accounting Standards Board No. 128, Earnings Per Share (EPS). Among other
things, the new standard requires replacement of primary EPS with basic
EPS. Basic EPS is computed by dividing reported earnings available to
common stockholders by weighted average shares outstanding. No dilution
for any potentially dilutive securities is included. Fully diluted EPS,
now called diluted EPS, is still required. The Bank has not quantified
the effect of applying the new standard.
8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
Net income for the third quarter was $988,000 for fully-diluted earnings of $.55
per share, representing an increase of 9.3% over the third quarter 1996, which
saw net income of $904,000, or $.54 per share on a fully-diluted basis.
Year-to-date, the nine months ending September 30, 1997, saw net income of
$612,000, or $.34 per share on a fully-diluted basis as compared to the same
period in 1996, at which time the Company reported net year-to-date earnings of
$2,478,000, or $1.47 per share on a fully-diluted basis.
During the second quarter of 1997, the Company determined that additional
contributions to Loan Loss Reserves were required in order to recognize the
increased risk exposure for a small number of sizable loans in its portfolio.
Management's action resulted in a one -time $3,200,000 contribution to Loan Loss
Reserves. As a result, the second quarter operating results showed a loss and
year-to-date net income for 1997 over 1996 shows a decline.
Total assets at September 30,1997, were $282,737,000, an increase of 7.7% over
December 31, 1996, total assets of $262,602,000.
Outstanding net loans were $179,088,000 at September 30, 1997, compared to
$147,047,000 at December 31, 1996, an increase of $32,041,000 or 21.8%.
The Company's investment portfolio at September 30, 1997, was $38,095,000, or
13.5% of total assets, an increase from $34,663,000 or 13.2% of total assets at
December 31, 1996, as the Company shifted assets from overnight Federal Funds to
longer term, higher yielding investments. At September 30, 1997, Federal Funds
Sold were $29,700,000 as compared to $41,300,000 at December 31, 1996.
Total deposits at September 30, 1997, were $256,994,000 compared to
$237,892,000 at December 31, 1996, an increase of 8.0%. At September 30, 1997,
interest-bearing deposits were $201,646,000, as compared to $182,775,000 at
December 31, 1996, an increase of 10.3%. This increase was primarily due to an
increase of $16,435,000 or 20.2% from December 31, 1996, to September 30, 1997,
in Time Certificates of Deposit. This growth is attributed to the opening of
the new Wheatland Branch and the Bank's aggressive marketing efforts and
competitive rates.
The total loan-to-deposit ratio was 71.3% at September 30, 1997, compared to
63.5% at December 31, 1996. This increase is the result of normal lending
cycles of agricultural loans, real estate loans and the purchase of leases.
9
LOANS
Total gross loans outstanding as of September 30, 1997 were $183,234,000
representing an increase of $32,134,000 or 21.27% over December 31, 1996.
The increase is attributable to three principal events.
1. The Company's lease portfolio increased from $16,016,000 on December 31,
1996 to $32,752,000 on September 30, 1997 representing growth of 104.5%.
The Company originates commercial and industrial equipment leases through
its subsidiary EPI Leasing Company (EPI) located in Sacramento. EPI was
acquired by the Company during the fourth quarter of 1996 and lease
origination volume has increased substantially during the first nine
months of 1997. One of the Company's loan portfolio management strategies
has been to increase the lease portfolio in order to increase net interest
margin and diversify the portfolio.
2. Agricultural and Commercial loans have increased $24,992,000 or 33.9% as
of September 30, 1997, over December 31 1996. The Company provides a wide
range of loan products to farmers and agri-businesses throughout its trade
area. Agricultural loans are reported under the "Commercial Loans"
category in the consolidated balance sheet. The increase is ascribed to
increased market penetration in the Sacramento and San Joaquin Valleys.
Agricultural and Commercial loan volume increased in concentration between
September 30, 1997 and December 31, 1996. Agricultural loans as a percent
of the Company's total loan portfolio increased from 49% to 62% between
these two time periods. These two periods however, represent the highest
point of the agricultural loans outstanding which occurs in September, and
the lowest point of agricultural loans outstanding typically occurring in
December. The fourth quarter is customarily the time when revenue for
numerous crops are received and applied to loans outstanding. Despite the
reflected increase due to timing, Management has made a conscious effort
to minimize portfolio risk concentrations.
3. Real estate construction loans increased by $4,916,000 or 16.4% from
December 31, 1996, nine months prior. The Company extends construction
loans primarily to builders of single family houses. Loans are made to
individual borrowers and to real estate developers. As a strategy to
increase loan volume, the Company has attempted to diversify its
construction loan activity into several new market areas. The Company
originates construction loans from its Real Estate Department in Yuba City
and its loan production offices in Chico, Roseville and Madera. The
Company's efforts have resulted in increased market share in the Davis,
Chico and greater Sacramento area markets. Construction loan growth has
occurred primarily in these regions.
10
The Company lends primarily to small and medium sized businesses, small to large
sized farmers and consumers within its market area, which is comprised
principally of Sutter, Yuba, Colusa and Yolo counties and secondarily Butte,
Glenn, Sacramento, Placer, Madera and Fresno counties.
LOAN QUALITY
The Company places loans on nonaccrual status if (1) principal or interest has
been in default for 90 days or more, unless the loan is both well secured and in
the process of collection; (2) payment in full of principal or interest is not
expected; or (3) the financial condition of the borrower has significantly
deteriorated.
The table set forth below summarizes the composition of nonperforming loans as
of September 30, 1997, December 31, 1996 and September 30, 1996.
--------------------------------------------------------------------------------------------------
ACCRUING LOANS PAST $ Amt. Change % of $ Amt. Change % of $ Amt. % of
DUE 90 DAYS 9/30/97 Prior Per. Class 12/31/96 Prior Per. Class 9/30/96 Class
OR MORE: --------------------------------------------------------------------------------------------------
Commercial 428.0 (57.5%) 1.5% 1,006 100.0% 3.9% 62 .2%
Agricultural (-0-) (100.0%) 0.0% 981 509.3% 2.0% -0- 0.0%
Real Estate 379.0 100.0% .7% (-0-) 220 .4%
Leases 260.0 23.8% .8% 210 500.0% 1.3% 116 .6%
Consumer 54.0 +100.0% 2.2%
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TOTAL 1,121 (49%) .6% 2,197 1020.9% 1.5% 399 .3%
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NONACCRUAL LOANS
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Commercial 1,221 692.8% 4.1% 154 340.0% 0.5% 192 .7%
Agricultural 3,480 9842.9% 5.6% 35 (96.3%) 0.0% 417 .7%
Real Estate 2,258 243.7% 4.0% 657 731.6% 1.2% 773 1.5%
Leases (-0-) 0.0% 0.0% (-0-) 0.0% 0.0% -0- 0.0%
Consumer (-0-) 0.0% 0.0% (-0-) 0.0% 0.0% -0- 0.0%
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TOTAL 6,959 722.6% 3.8% 846 (20.9%) 0.6% 1382 .9%
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TOTAL NON-
PERFORMING 8,080 165.5% 4.4% 3,043 140.6% 2.1% 1781 1.1%
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The trend in nonperforming loans has clearly escalated over the past year as
nonperforming loans increased from 1.1% of the portfolio on September 30, 1996
to 4.4% of the portfolio on September 30, 1997. This trend is attributable to
increased risk exposure present in five loan relationships. During the second
quarter of 1997, the Company identified increased credit risk exposure in four
large loan relationships and thirteen leases. Management elected to entirely
charge off twenty assets with a book value of $1,144,077 and write-down four
other assets in the aggregate
11
amount of $1,980,435. The partially charged-off loans have been written down
to an estimate of the remaining collateral value.
For the nine months ending September 30, 1997, the Company charged off
$3,200,000 while the total charge-offs for all of 1996 were $327,000. As a
result, Management believes that a low loss exposure rests in the remaining
nonperforming loans. Progress has been made during the first nine months of
1997. Many of the nonperforming loans are now operating under either Workout
Agreements, Restructure Agreements or Liquidation Agreements. All of these
loans are in the process of collection. Management projects some progress
toward the reduction of nonperforming assets by year end 1997. However, the
Company is posed with lengthy solutions with a number of their larger workout
loans due to the complex nature of the credits. The overall duration of
these workouts is therefore difficult to predict. As a result, Management
projects a higher level of nonperforming loans (compared to historical
amounts) in the forthcoming two to three quarters.
Management's decision to charge down nonperforming loans, during the second
quarter, significantly reduced the Company's Allowance for Loan Loss
Reserves. Instead of rebuilding the reserve account over a period of time,
Management elected to make a contribution to Loan Loss Reserves of $3,200,000
during the second quarter of 1997. As a result, the Company posted second
quarter 1997 losses of $1,193,000 and six month year to date net loss of
$375,000. Third quarter profitability of $988,000 has restored the nine month
year to date net income to $612,000. The Company uses the allowance method
in providing for possible loan losses. Loan losses are charged to the
allowance for possible loan losses and recoveries are credited to it. The
allowance for loan losses at September 30, 1997 was $4,146,000, an increase
of $93,000 from December 31, 1996. The allowance equates to 2.3% of the
Bank's outstanding loans at September 30, 1997. Management believes that the
total allowance for loan losses is adequate to cover potential losses in the
loan portfolio. While Management uses available information to provide for
loan losses, future additions to the allowance may be necessary based on
changes in economic conditions and other factors. The allowances and loss
estimates are reviewed constantly, and adjustments, as necessary, are charged
to operations in the period in which they become known.
Additions to the allowance for loan losses are made by provisions for
possible loan losses. The provision for possible loan losses is charged to
operating expense and is based upon past loan loss experience and estimates
of potential loan losses which, in Management's judgment, deserve current
recognition. Other factors considered by Management include growth,
composition and overall quality of the loan portfolio, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to repay the loan. Actual losses may vary from current estimates.
The estimates are reviewed constantly, and
12
adjustments, as necessary, are charged to operations in the period in which
they become known.
In addition to the above, the Company holds real estate properties as "Other
Real Estate Owned" (OREO) recorded at $927,000 at September 30, 1997. In all
cases, the amount recorded on the books is the lesser of the loan balance or the
fair market value obtained from a current appraisal. Therefore, any identified
losses have already been recognized. The Bank is in the process of marketing
the OREO properties.
13
RESULTS OF OPERATIONS
Three months ended September 30, 1997
compared with
Three months ended September 30, 1996
During the three-month period ending September 30, 1997, the Company showed a
net income of $988,000, an increase of $84,000 over the same period in 1996.
Net interest income before provisions for loan losses increased from
$3,428,000 for the three months ended September 30, 1996, to $3,756,000 for
the same period in 1997, an increase of $328,000 or 9.6%. This additional
income is partially due to an increase of 15.3% in average outstanding loans
during the third quarter of 1997 over the same period in 1996. In addition,
the average prime rate was .25% higher in the third quarter of 1997 over the
same period in 1996.
Other income increased by $782,000 over the same period in 1996, mostly as
the result of increased commission and fees on leases earned by the Bank's
subsidiary, EPI Leasing Company. In addition the Company recognized an
increase in loan servicing fee income, brokered loan fee income and fee
income generated from the bank's alternative financial investment services.
Other expenses for the three months ended September 30, 1997, were
$3,576,000, an increase of $993,000 over the same period in 1996, mostly due
to increases in salaries and benefits. A major contributor to this increase
was the purchase of EPI Leasing Company and the opening of a new branch in
Wheatland, California, in March 1997. In addition, the Bank opened a new
loan production office in Madera, California, in March 1997.
The yield on average earning assets for the three-month period ended
September 30, 1997, compared to the same period in 1996, is set forth in the
following table (in thousands except for percentages):
Three months ended Three months ended
September 30, 1997 September 30, 1996
Average loans
outstanding $ 195,101 $ 169,271
Average yields 11.06% 11.35%
Amount of interest
& fees earned $ 5,395 $ 4,805
Average prime rate 8.50% 8.25%
14
A large portion of the Company's loan portfolio is based upon the Bank's
reference rate, adjusted on a daily basis so that rate changes have an
immediate effect on the loan interest yield. The Bank's reference rate closely
tracks the prime rate.
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three-month period ended September 30, 1997, compared to the
same period in 1996, are set forth in the following table (in thousands except
for percentages):
Three months ended Three months ended
September 30, 1997 September 30,1996
Average deposits
outstanding $ 250,167 $ 199,898
Average rates paid 3.84% 3.74%
Amount of interest
paid or accrued $ 2,400 $ 1,869
The following table summarizes the principal elements of operating expenses and
discloses the increases (decreases) and percent of increases (decreases) for the
three-month period ended September 30, 1997 and 1996 (in thousands except for
percentages):
Three months ended September 30, 1997 Increase (Decrease)
1997 over 1996
1997 1996
-------------------------------------------------------------
Salaries and benefits $ 1,988 $ 1,336 $ 652 48.8%
Occupancy 203 137 66 48.2%
Equipment 331 250 81 32.4%
Advertising and promotion 85 56 29 51.8%
Stationery & supplies 63 54 9 16.7%
Legal and professional fees 95 83 12 14.5%
Other operating expenses 811 667 144 21.6%
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Total other expenses $ 3,576 $ 2,583 $ 993 38.4%
-------------------------------------------------------------
-------------------------------------------------------------
Applicable income taxes for the three-month period ended September 30, 1997,
were $650,000, as compared to the September 30, 1996 amount of $537,000.
15
RESULTS OF OPERATIONS
Nine months ended September 30, 1997
compared with
Nine months ended September 30, 1996
Year-to-date, the nine months ending September 30, 1997, saw net income of
$612,000, or $.34 per share on a fully-diluted basis as compared to the same
period in 1996, at which time the Company reported net year-to-date earnings of
$2,478,000, or $1.47 per share on a fully-diluted basis.
During the second quarter, the Bank determined that additional contributions to
loan loss reserves were required to recognize the increased risk exposure for a
small number of sizable loans in its portfolio. This action resulted in a
second quarter loss of ($1,193,440), which, despite improved first and third
quarter earnings, depressed earnings for the nine months ending September 30,
1997.
Net interest income before provisions for loan losses increased from $9,629,000
for the nine months ended September 30, 1996 to $10,563,000 for the same period
in 1997, an increase of $934,000. This additional income is partially due
to an increase of 19.3% in average outstanding loans during the third quarter of
1997 over the same period in 1996. In addition, the average prime rate was .17%
higher at the end of the third quarter of 1997 over the same period in 1996.
Other income increased by $1,709,000 over the same period in 1996, mostly as the
result of increased commission and fees on leases earned by the Bank's
subsidiary, EPI Leasing Company. In addition the Company recognized an increase
in loan servicing fee income, brokered loan fee income and fee income generated
from the bank's alternative financial investment services.
Other expenses for the nine months ended September 30, 1997, were $9,917,000, an
increase of $2,627,000 over the same period in 1996, mostly due to increases in
salaries and benefits and occupancy and equipment. A major contributor to this
increase was the purchase of EPI Leasing Company and the opening of a new branch
in Wheatland, California, in March 1997. In addition, the Bank opened a new
loan production office in Madera, California in March 1997.
16
The yield on average earning assets for the nine-month period ended September
30, 1997, compared to the same period in 1996, is set forth in the following
table (in thousands except for percentages):
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
Average loans outstanding $ 175,596 $ 147,214
Average yields 11.12% 11.55%
Amount of interest
& fees earned $ 14,646 $ 12,753
Average prime rate 8.42% 8.25%
A large portion of the Company's loan portfolio is based upon the Bank's
reference rate, adjusted on a daily basis so that rate changes have an
immediate effect on the loan interest yield. The Bank's reference rate closely
tracks the prime rate.
Rates and amounts paid on average deposits, including noninterest bearing
deposits for the nine-month period ended September 30, 1997, compared to the
same period in 1996, are set forth in the following table (in thousands except
for percentages):
Nine months ended Nine months ended
September 30, 1997 September 30,1996
Average deposits
outstanding $ 243,566 $ 194,702
Average rates paid 3.82% 3.66%
Amount of interest
paid or accrued $ 6,976 $ 5,346
17
The following table summarizes the principal elements of operating expenses and
discloses the increases (decreases) and percent of increases (decreases) for the
nine- month periods ended September 30, 1997 and 1996, respectively (in
thousands except for percentages):
Nine months ended September 30, Increase (Decrease)
1997 over 1996
1997 1996
---------------------------------------------------
Salaries and benefits $ 5,585 $ 3,758 $ 1,827 48.6%
Occupancy 527 415 112 27.0%
Equipment 941 716 225 31.4%
Advertising and promotion 309 270 39 14.4%
Stationery & supplies 242 191 51 26.7%
Legal and professional fees 232 189 43 22.8%
Other operating expenses 2,081 1,751 330 18.8%
---------------------------------------------------
Total other expenses $ 9,917 $ 7,290 $ 2,627 36.0%
---------------------------------------------------
---------------------------------------------------
The increases in salaries and benefits resulted from normal salary increases and
increased staffing for the opening of the new Wheatland Branch and the addition
of the employees at EPI Leasing Company, the Bank's subsidiary. Additional
staff has also been added to the new office location in Marysville, California
and new loan production office in Madera, California.
The Company employed 191 full-time equivalent employees on September 30, 1997,
compared to 179 on December 31, 1996, and 153 on September 30, 1996.
The increase in occupancy and equipment expense over 1996 is attributable to the
purchase, relocation and remodeling of a new building for the Bank's Marysville
Branch which opened in the second quarter of 1996, the opening of the Bank's new
Wheatland Branch, and the addition of the Bank's subsidiary, EPI Leasing
Company. In addition, the Company purchased Automated Teller Machines (ATM's)
for each of its seven branches. The Bank also purchased a bank building in Yuba
City to provide much needed space for its Residential and Ag Real Estate
Departments and also installed walk-up and drive-up ATM's at the new Real
Estate Loan Center. In addition, during the second quarter of 1997, the Company
remodeled and relocated its Administrative Office to a complex owned by the
Company.
Applicable income taxes for the nine-month period ended September 30, 1997, were
$311,000 as compared to the September 30, 1996, amount of $1,585,000. The
decrease of $1,274,000 was attributed to a tax credit during the second quarter
of 1997 as a result of a loss recognized during that quarter.
18
LIQUIDITY
During the first two quarters and in to the third quarter of each year, the Bank
tends to have excess liquidity. The Bank's seasonal agricultural loan demand
tends to challenge the Bank's liquidity position beginning in the second
quarter and continuing into the third quarter of each year. The Bank's liquid
assets consist of cash and due from banks, federal funds sold and investment
securities with maturities of one year or less (exclusive of pledged
securities).
The Bank has formal and informal borrowing arrangements with the Federal Reserve
Bank and its correspondent bank to meet unforeseen deposit outflows or seasonal
loan funding demands. As of September 30, 1997, and December 31, 1996,
respectively, the Bank had no balances outstanding on these lines.
The Bank has also entered into an agreement with Lehman Brothers for a standby
short-term loan secured by U.S. Government and Agency Obligations in the Bank's
investment portfolio, in order to fund any liquidity needs not met by other
sources of funding as warranted by loan demand.
RATE SENSITIVITY
On a monthly basis, the Bank tracks its RSA's (Rate Sensitive Assets) and RSL's
(Rate Sensitive Liabilities) and calculates the difference between the two (GAP)
as a percentage of total assets for various time horizons.
The Bank's goal is to maintain a cumulative one year GAP of between -10% and
+10%. The September 30, 1997 one-year GAP was -3.8%.
Since this figure is negative, it means that when interest rates change, more
RSL's will reprice than RSA's over a one-year period. If interest rates go up,
the Bank's net interest margin will decrease, if interest rates go down, it will
increase.
On September 30, 1997, the Bank's cumulative 90-day GAP was +5.7% which means
that an increase in rates would have a positive effect on earnings and a
decrease in interest rates in the next 90 days would have a negative effect on
earnings.
19
CAPITAL RESOURCES
Total shareholders' equity on September 30, 1997, increased by $197,000 over
December 31, 1996, total shareholders' equity of $21,886,000.
The Company is subject to capital adequacy guidelines issued by federal
regulators. These guidelines are intended to reflect the degree of risk
associated with both on and off-balance sheet items.
Financial institutions are expected to comply with a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, at least half of which must be in
Tier 1 Capital.
In addition, federal agencies have adopted a minimum leverage ratio of Tier 1
Capital to total assets of 4%, which is intended to supplement risk-based
capital requirements and to ensure that all financial institutions continue to
maintain a minimum level of core capital.
As can be seen by the following tables, the Company exceeded all regulatory
capital ratios on September 30, 1997, and on December 31, 1996:
RISK-BASED CAPITAL RATIO
AS OF SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
Tier 1 Capital $ 21,866 8.90% $ 21,736 8.85%
Tier 1 Capital
minimum requirement 9,823 4.00% 9,820 4.00%
-----------------------------------------------
Excess $ 12,043 4.90% $ 11,916 4.85%
-----------------------------------------------
-----------------------------------------------
Total Capital 24,949 10.16% 24,818 10.11%
Total Capital
minimum requirement 19,647 8.00% 19,639 8.00%
-----------------------------------------------
Excess $ 5,302 2.16% $ 5,179 2.11%
-----------------------------------------------
Risk-adjusted assets $245,586 $245,488
-----------------------------------------------
-----------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 21,866 7.91% $ 21,736 7.87%
average total assets
Minimum leverage requirement 11,060 4.00% 11,051 4.00%
-----------------------------------------------
Excess $ 10,806 3.91% $ 10,685 3.87%
-----------------------------------------------
-----------------------------------------------
Total quarterly average assets $276,509 $276,269
-------- --------
-------- --------
20
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1996
- -------------------------------------------------------------------------------
Company Bank
(Dollars in thousands)
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
Tier 1 Capital $ 21,813 11.31% $ 21,804 11.32%
Tier 1 Capital
minimum requirement 7,713 4.00% 7,708 4.00%
-----------------------------------------------
Excess $ 14,100 7.31% $ 14,096 7.32%
-----------------------------------------------
-----------------------------------------------
Total Capital 22,918 11.89% 24,225 12.57%
Total Capital minimum
requirement 15,426 8.00% 15,415 8.00%
-----------------------------------------------
Excess $ 7,492 3.89% $ 8,810 4.57%
-----------------------------------------------
Risk-adjusted assets $192,825 $192,693
-----------------------------------------------
-----------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 21,813 8.82% $ 21,804 8.82%
average total assets
Minimum leverage requirement 9,891 4.00% 9,890 4.00%
-----------------------------------------------
Excess $ 11,922 4.82% $ 11,914 4.82%
-----------------------------------------------
-----------------------------------------------
Total quarterly average assets $247,274 $247,255
-------- --------
-------- --------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The future results of the Company's operations, the necessity of further
provisions for its loan loss reserves, quality of its loan portfolio, and
ability to pay future dividends constitute "forward-looking" information as
defined by: (1) the Private Litigation Reform Act of 1995 ("Act"); and (2)
releases made by the Securities and Exchange Commission ("SEC"). This
cautionary statement is being made pursuant to the provisions of the Act with
the express intention of obtaining the benefits of the "safe harbor" provisions
of the Act. Investors are cautioned that any forward-looking statements made by
the Company and its Management are not guarantees of future performance and that
actual results may differ materially from those in the forward-looking
statements as a result of, but not limited to, the following factors: the
economic environment, particularly in the region in which the Company operates;
competitive products and pricing; fiscal and monetary policies of the federal
government; changes in government regulations affecting financial institutions,
including regulatory fees and capital requirements; changes in prevailing
interest rates; acquisitions and the integration of acquired businesses; credit
risk management and asset/liability management; the financial and securities
markets; and the availability of and costs associated with sources of liquidity.
21
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
10.1 Change in control compensation agreement.
(b) Reports on Form 8K
No reports on Form 8K were filed during the quarter.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Independent Bancorp
Date November 2, 1997 /S/ Robert J. Mulder
--------------------- --------------------------
Robert J. Mulder
President/CEO
Date November 2, 1997 /S/ Annette Bertolini
--------------------- --------------------------
Annette Bertolini
Chief Financial Officer
23