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 JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________to _____________________.
Commission File Number 0-265520
CALIFORNIA INDEPENDENT BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0349947
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1227 BRIDGE ST., SUITE C, YUBA CITY, CALIFORNIA 95991
(Address of principal executive offices)
(Zip Code)
(530) 674-4444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class June 30, 1998
----- --------------
Common stock, no par value 1,656,506 shares
This report contains a total of 20 PAGES
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 SIX MONTHS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-19
PART II- OTHER INFORMATION
ITEM 4 19
ITEM 6 19
SIGNATURES 20
2
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, December 31,
1998 1997
-------------- --------------
ASSETS
Cash and due from banks $ 17,497 $ 18,425
Federal funds sold -- 35,600
-------------- --------------
Total Cash and Equivalents 17,497 54,025
Investment securities:
Available-for-sale securities, at fair value 47,061 38,042
Held-to-maturity securities, at amortized cost
(fair value of $13,445 and 19,245 respectively) 13,417 19,156
-------------- --------------
Total investments 60,478 57,198
Loans:
Commercial and agricultural 88,694 79,385
Consumer 2,263 1,956
Real Estate 82,010 51,959
Lease financing 32,602 33,465
Other 413 1,022
-------------- --------------
Total loans 205,982 167,787
Less allowance for possible loan losses (5,411) (5,514)
-------------- --------------
Net Loans 200,571 162,273
Premises and equipment, net 7,997 8,178
Interest receivable 4,042 2,671
Other real estate owned 105 918
Other assets 4,923 6,267
-------------- --------------
Total assets 295,613 291,530
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $ 51,789 $ 62,224
Demand, interest bearing 44,591 40,133
Savings and Money Market 60,645 68,790
Time certificates 91,745 95,784
-------------- --------------
Total deposits 248,770 266,931
Interest payable 1,542 1,814
Federal funds purchased and other borrowings 21,951 --
Other liabilities 677 1,415
-------------- --------------
Total liabilities 272,940 270,160
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized;
1,656,506 and 1,651,131 shares outstanding June 30, 1998
and December 31, 1997, respectively 13,571 13,587
Retained earnings 9,164 7,864
Debt guarantee of ESOP (80) (80)
Net unrealized gains (losses) on available-for-sale securities 18 (1)
-------------- --------------
Total shareholders' equity 22,673 21,370
-------------- --------------
Total liabilities and shareholders' equity $ 295,613 $ 291,530
-------------- --------------
-------------- --------------
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
June 30, 1998 June 30, 1997
------------- -------------
Interest income:
Interest and fees on loans $ 5,334 $ 4,928
Interest on investment securities 976 671
Interest on federal funds sold 31 305
------------- -------------
Total interest income 6,341 5,904
------------- -------------
Interest expense:
Demand, interest bearing 412 358
Savings 386 657
Time certificates 1,294 1,338
Other 97 6
------------- -------------
Total interest expense 2,189 2,359
------------- -------------
Net interest income 4,152 3,545
Provision for possible loan losses (290) (3,296)
------------- -------------
Net interest income after provision for
possible loan losses 3,862 249
------------- -------------
Other income:
Service charges 220 250
Net gain (loss) on securities transactions -- --
Real Estate Brokered loan fees 237 143
Lease Commissions and fees 532 368
Other 413 332
------------- -------------
Total other income 1,402 1,093
------------- -------------
Other expenses:
Salaries and benefits 2,107 1,888
Occupancy 185 180
Equipment 343 328
Advertising and promotion 74 139
Stationery and supplies 77 78
Telephone expenses 78 104
Legal and professional fees 328 60
Other operating expenses 701 607
------------- -------------
Total other expenses 3,893 3,384
Earnings before income taxes 1,371 (2,042)
Income taxes 520 (849)
------------- -------------
Net Income (Loss) $ 851 $ (1,193)
------------- -------------
------------- -------------
Basic earnings per share $ 0.51 $ (0.73)
------------- -------------
------------- -------------
Weighted average shares outstanding 1,653,139 1,630,448
------------- -------------
Diluted:
Earnings per share $ 0.50 $ (0.63)
------------- -------------
------------- -------------
Weighted average shares outstanding 1,712,551 1,881,606
------------- -------------
Cash dividend paid per share of common stock $ 0.11 $ 0.11
------------- -------------
------------- -------------
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)
Six months Six months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Interest income:
Interest and fees on loans $ 9,941 $ 9,251
Interest on investment securities 1,946 1,294
Interest on federal funds sold 420 832
------------- -------------
Total interest income 12,307 11,377
------------- -------------
Interest expense:
Demand, interest bearing 816 712
Savings 812 1,318
Time certificates 2,630 2,528
Other 102 12
------------- -------------
Total interest expense 4,360 4,570
------------- -------------
Net interest income 7,947 6,807
Provision for possible loan losses (686) (3,336)
------------- -------------
Net interest income after provision for
possible loan losses 7,261 3,471
------------- -------------
Other income:
Service charges 460 486
Net gain (loss) on securities transactions -- --
Real Estate Brokered loan fees 470 265
Lease Commissions and fees 1,091 706
Other 731 698
------------- -------------
Total other income 2,752 2,155
------------- -------------
Other expenses:
Salaries and benefits 4,070 3,597
Occupancy 372 324
Equipment 691 610
Advertising and promotion 172 224
Stationery and supplies 152 179
Telephone expenses 171 189
Legal and professional fees 489 137
Other operating expenses 1,231 1,081
------------- -------------
Total other expenses 7,348 6,341
Earnings before income taxes 2,665 (715)
Income taxes 1,002 (339)
------------- -------------
Net Income (Loss) $ 1,663 $ (376)
------------- -------------
------------- -------------
Basic earnings per share $ 1.01 $ (0.23)
------------- -------------
------------- -------------
Weighted average shares outstanding 1,652,141 1,626,911
------------- -------------
Diluted:
Earnings per share $ 0.97 $ (0.20)
------------- -------------
------------- -------------
Weighted average shares outstanding 1,711,553 1,882,040
------------- -------------
Cash dividend paid per share of common stock $ 0.22 $ 0.22
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements
5
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
June 30, JUNE 30,
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) $ 1,663 $ (376)
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 552 463
Provision for possible loan losses 686 40
Write-down of other real estate owned 38 0
Provision for deferred taxes 15 5
(Increase) decrease in assets-
Interest receivable (1,371) (1,103)
Other assets 1,328 233
Increase (decrease) in liabilities-
Interest payable (272) 123
Other liabilities 21,214 (481)
----------- ------------
Net cash provided by operating activities 23,853 (1,096)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (38,983) (45,062)
Purchase of investments (20,442) (11,204)
Proceeds from maturity of HTM Securities 8,126 5,541
Proceeds from sales/maturity of AFS Securities 9,055 564
Proceeds from sales of other real estate owned 774 51
Purchases of premises and equipment (371) (1,001)
----------- ------------
Net cash used for investing activities (41,841) (51,111)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in noninterest bearing deposits (10,436) (5,024)
Net increase (decrease) in interest bearing deposits (7,725) 17,469
Cash dividends (363) (341)
Stock options exercised (16) 76
Cash paid in lieu of fractional shares 0 0
----------- ------------
Net cash provided by (used in) financing activities (18,540) 12,180
NET INCREASE (DECREASE) (36,528) (40,027)
----------- ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,025 64,291
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 17,497 24,264
----------- ------------
----------- ------------
See accompanying notes to consolidated financial statements
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 June 30, 1998 and December 31, 1997, and the results of its
operations for the periods ended June 30, 1998 and 1997, 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 June 30, 1998, are not necessarily indicative of the operating
results for the full year ending December 31, 1998.
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. ("EPI"), 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 June 30,1998, amounted to a total of approximately
$6,069,000.
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 - CASH DIVIDENDS
In February and May of 1997 and 1998, the Company paid an eleven cent per
share cash dividend.
7
NOTE 6 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 128, "Earnings per Share," which establishes standards for
computing and presenting earnings per share (EPS). It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. The statement is effective for financial statements issued
for periods ending after December 15, 1997, and requires restatement for
all periods presented. The implementation of this statement did not have a
material effect on the Company's reported financial position or net income.
NOTE 7- COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners. Total
comprehensive income (loss) for the six months ended June 30, 1998, and
June 30, 1997, is $1,681,000 and $(387,000), respectively.
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 six month period ending June 30, 1998, was $1,663,000 for
diluted earnings of $.88 per share. This represents a significant increase over
the same period in 1997, which saw a net loss of $(376,000), or $(.20) per share
on a diluted basis. The 1997 net loss was primarily the result of a
contribution to the Allowance for Loan Losses of $3,336,000 as compared to
$686,000 during the same period in 1998.
Total assets at June 30, 1998, were $295,613,000, an increase of 1.4% over
December 31, 1997, total assets of $291,530,000.
The Company's outstanding net loans were $200,571,000 at June 30, 1998, compared
to $162,273,000 at December 31, 1997, an increase of $38,298,000 or 23.6%. This
rise was primarily due to an increase of 57.8% or $30,051,000 in Real Estate
Loans.
The Company's investment portfolio at June 30, 1998, was $60,478,000, or 20.5%
of total assets, an increase from $57,198,000 or 19.6% of total assets at
December 31, 1997. At June 30, 1998, the Company had no overnight Federal Funds
Sold as compared to $35,600,000 at December 31, 1997. The decrease in Federal
Funds Sold was due to the need to fund an increased loan demand.
Deposits at June 30, 1998, were $248,770,000 compared to $266,931,000 at
December 31, 1997, a decrease of 6.8%.
The total loan-to-deposit ratio was 82.8% at June 30, 1998, compared to 62.9% at
December 31, 1997. This increase was the result of normal lending cycles of
agriculture and real estate loans.
LOANS
Due to the seasonal nature of the Company's lending activities, outstanding loan
balances historically increase during the second and third quarters of the year
and peak during the late third quarter.
The following table illustrates the increase (decrease) in the Company's loan
portfolio for June 30, 1998 over 1997.
June 30, June 30, Increase (Decrease)
1998 1997 1998 over 1997
-------- -------- -------------------
Loans:
Commercial and Agricultural $ 88,694 $ 96,674 $ (7,980) -8.3%
Consumer 2,263 2,723 (460) -16.9%
Real Estate 82,010 65,240 16,770 25.7%
Leases 32,602 29,894 2,708 9.1%
Other 413 1,740 (1,327) -76.3%
-------------------------------------------
Total Loans $205,982 $196,271 $ 9,711 4.9%
9
Total loans outstanding as of June 30, 1998 were $205,982,000 representing an
increase of $9,711,000 or 4.9% over June 30, 1997.
The increase was attributable to the Company's 25.7% increase in real estate
loans outstanding between June 30, 1997 and June 30, 1998. This increase was
influenced primarily by a rise in real estate construction loans which grew by
$15.4 million or 35.9% from June 30, 1997. The Company extends construction
loans primarily to builders and developers of single family houses and to
individual borrowers. The rise in real estate construction loans was accredited
to the Company's strong business development efforts and a general increase in
residential real estate activity in the Company's market area.
One other significant factor influenced the loan totals as of June 30, 1998.
The Company's Commercial and Agricultural loan portfolio decreased from
$96,674,000 on June 30, 1997 to $88,694,000 on June 30, 1998 representing a
decrease of 8.3%. This category represents a broad range of loans. However,
most of the decrease was sustained in the agricultural loan category as this
particular segment declined by 14% over the past year. The decline was
attributed to an unusually wet weather year, increased competition in the market
and the Company divesting certain lower quality agricultural loans.
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. In addition, the Company
originates commercial and industrial equipment leases through its subsidiary EPI
located in Sacramento.
During the first quarter of 1998, the Company completed two changes to its
lending operations. First, Blaine Lauhon, who previously served as Senior Credit
Officer, was promoted to the position of Chief Lending Officer of Feather River
State Bank. As CLO, Mr. Lauhon will oversee and manage the entire lending
function of the Bank. Second, the agricultural lending unit was centralized in
the Bank's 1221 Bridge Street, Yuba City, branch. This change was instituted to
provide improved management and supervision, and to achieve certain efficiencies
to the loan origination and servicing processes. The Company continues to serve
the same agricultural lending area. Therefore, future agricultural loan volume
should not be adversely affected.
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.
10
The table shown below summarizes the composition of non-performing loans as of
June 30, 1998, December 31, 1997 and June 30, 1997 ($ in 000's).
-----------------------------------------------------
$ Amt. Change $ Amt. Change $ Amt.
6/30/98 Prior Per. 12/31/97 Prior Per. 6/30/97
-----------------------------------------------------
ACCRUING LOANS PAST DUE
90 DAYS OR MORE
Commercial 0 137 -206% 420
Agricultural 0 0.4 0
Real Estate 0 82 -656% 620
Leases 50 -118% 109 -322% 461
Consumer 0 0.2 0
-----------------------------------------------------
TOTAL 50 -558% 329 -356% 1,501
-----------------------------------------------------
NONACCRUAL LOANS
-----------------------------------------------------
Commercial 935 +25% 692 -145% 1,700
Agricultural 3,394 -47% 5,013 +22% 3,910
Real Estate 2,249 +32% 1,518 -26% 1,913
Leases 159 +19% 128 0
Consumer 0 0 0
-----------------------------------------------------
TOTAL 6,737 -9% 7,351 -2% 7,523
-----------------------------------------------------
TOTAL NONPERFORMING 6,787 -13% 7,680 -17% 9,024
-----------------------------------------------------
The Company reduced nonperforming loans by 13% during the first half of 1998 and
by 33% over the past twelve months. Nonperforming loans comprised 3.2% of the
portfolio on June 30, 1998, which was down from 4.5% of the portfolio on both
December 31, 1997 and on June 30, 1997.
From a historical perspective, nonperforming loans escalated significantly
during the first half of 1997. This increase in nonperforming loans was
attributable to heightened risk exposure in a limited number of large credit
relationships. Since that time, the Company has made a concerted effort to
reduce nonperforming loans. In 1997, Management assembled an experienced group
of loan collectors to aggressively collect the nonperforming and charged-off
loans. Additionally, a plan was adopted to reduce the level of nonperforming
and problem loans. This approach has been successful.
Most of the nonperforming loans are now operating under Workout Agreements,
Restructure Agreements or Liquidation Agreements. The specific terms of these
agreements vary depending upon the specific circumstances involved. Management
projects additional progress toward the resolution of these troubled loans
during the second half of 1998. All of these loans are in the process of
collection. However, due to particular factors surrounding specific
nonperforming loans, management projects that some of these loans will not be
collected prior to year end 1998.
The Company's nonperforming credits are concentrated in four credit
relationships, which comprise 83% of the total. One large agricultural credit
relationship comprises 47.8% of the total. This borrower sustained financial
difficulty stemming from a combination of factors. The debtor is currently in
bankruptcy which has slowed progress toward ultimate loan resolution. Ongoing
negotiations are occurring in an attempt to restructure the credit. Management
anticipates a conclusion to the restructuring during the third quarter of 1998.
11
Two of the three other nonperforming loans are to agricultural borrowers in the
livestock industry. These borrowers sustained financial difficulties due to
declining commodity prices and other factors. Significant progress was made on
one of these loans during the second quarter of 1998, and this loan is projected
to be retired in full during the third quarter of 1998. The other nonperforming
livestock loan is operating successfully under a workout agreement. Management
projects that this loan can be transferred out of nonaccrual status prior to the
end of the year.
The fourth large nonaccrual loan, comprising 21% of total nonperforming loans,
is to a real estate developer. The bank financed a subdivision that did not
proceed as scheduled. The borrower has sustained cash flow and solvency
problems. This credit has been restructured under a new development plan.
Progress was made during the second quarter as the real estate market improved
modestly. According to the terms of the plan, Management expects additional
loan reductions during the third and fourth quarters of 1998.
The Company's Allowance for Possible Loan Losses totaled $5,411,000 or 2.62% of
gross loans as of June 30, 1998. This amount is compared to $5,514,000 as of
December 31, 1997 and $4,202,000 as of June 30, 1997. 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.
Management believes that the total allowance for possible 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.
Additions to the allowance for possible 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, deserves 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 regularly, and adjustments, as necessary, are charged to operations in
the period in which they become known.
12
RESULTS OF OPERATIONS
Three and six months ended June 30, 1998
Compared with
Three and six months ended June 30, 1997
During the three month period ending June 30, 1998, the Company's net income was
$851,000, an increase of $2,044,000 over the same period in 1997. For the six
month period ending June 30, 1998, net income was $1,663,000, an increase of
$2,039,000 over the same period in 1997. During the first half of 1997, the
Bank chose to increase its allowance for possible loan losses which caused the
Company's net interest income after provision for possible loan losses to
decrease. Net interest income after provision for possible loan losses was
$3,862,000 for the three months ended June 30, 1998 as compared to $249,000 for
the same period in 1997. For the six month period ending June 30,1998, interest
income after provision for possible loan losses was $7,261,000 as compared to
$3,471,000 for the same six month period in 1997.
Additionally, during the three month period ending June 30, 1998, the Company
realized a 7.4% or $437,000 increase in total interest income for 1998 over
1997. Total Interest Income stood at $6,341,000 in 1998, as compared to the
1997 amount of $5,904,000. During the six month period the Company recognized
a 8.2% or $930,000 increase in 1998 over 1997 total interest income, which stood
at $12,307,000 in 1998, as compared to the 1997 amount of $11,377,000. The
growth in income can be attributed to a rise in the balance of average loans in
1998 over 1997. The increase in 1998 over 1997 amounted to 7.02% and 7.67% for
the three and six month periods, respectively.
The yield on average loans for the three and six month periods ended June 30,
1998, compared to the same periods in 1997, is set forth in the following table
(in thousands except for percentages):
Three months Three months Six months Six months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------------------------------------------------------
Average loans $ 188,915 $ 176,531 $ 178,437 $ 165,725
Outstanding
Average yields 11.29% 11.17% 11.14% 11.16%
Amount of interest
& fees earned $ 5,334 $ 4,928 $ 9,941 $ 9,251
Average prime rate 8.50% 8.50% 8.50% 8.50%
The Company also experienced a decrease in Total Interest Expense of 7.2% or
$170,000, for the three months ending June 30, 1998 over 1997, and 4.6% or
$210,000, for the six months ending June 30, 1998 over 1997. These decreases in
interest expense primarily reflect a lower average rate paid on deposits as the
Company adjusted its rates to levels consistent with the markets it serves.
13
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three and six month periods ended June 30, 1998, compared to
the same periods in 1997, are set forth in the following table (in thousands
except for percentages):
Three months Three months Six months Six months
ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-----------------------------------------------------------
Average deposits
Outstanding $ 250,290 $ 243,177 $ 255,664 $ 240,216
Average rates paid 3.34% 3.88% 3.33% 3.80%
Amount of interest
paid or accrued $ 2,092 $ 2,359 $ 4,258 $ 4,570
The Company also experienced an increase in Total Other Income of $309,000 or
28.3% for the three month period and $597,000 or 27.7% for the six month period
ended June 30, 1998 over the same period in 1997. The growth was primarily due
to increased lease commissions and fees amounting to $164,000 or 44.6% for the
three month period and $385,000 or 54.5% for the six month period. Another
source contributing to the growth in Total Other Income was a three month
increase in 1998 over 1997 of $94,000 or 65.7%, and six month increase of
$205,000 or 77.4%, in Real Estate Brokered Loan fees. Both increases are
attributed to the increased real estate loan volume.
Total Other Expenses for the three and six months ended June 30, 1998, were
$3,893,000 and $7,348,000, an increase of $509,000 and $1,007,000 over the same
periods in 1997, respectively. The increases were primarily due to higher
salaries and benefits expense and legal along with professional fees. Salaries
and benefits increased $219,000 or 11.6% for the 3 month period and $473,000 or
13.1% for the six month periods ending June 30, 1998. Aside from normal salary
raises, the additional expense was due to increased commissions earned due to
the higher volume of Real Estate lending. Legal and professional fees increased
$268,000 for the three month period and $352,000 for the six month periods
ending June 30, 1998, over the same period in 1997. This rise is attributed to
the escalated legal expense associated with collection and resolution of
nonperforming loans.
14
The following tables summarize the principal elements of operating expenses and
disclose the increases (decreases) and percent of increases (decreases) for the
three and six month periods ended June 30, 1998 and 1997 (in thousands except
for percentages):
Three months ended June 30, Increase (Decrease)
1998 1997 1998 over 1997
-------------------------------------------------
Salaries and benefits $ 2,107 $ 1,888 $ 219 11.6%
Occupancy 185 180 5 2.8%
Equipment 343 328 15 4.6%
Advertising and promotion 74 139 (65) -46.8%
Stationery & supplies 77 78 (1) -1.3%
Telephone expenses 78 104 (26) -25.0%
Legal and professional fees 328 60 268 446.7%
Other operating expenses 701 607 94 15.5%
-------------------------------------------------
Total other expenses $ 3,893 $ 3,384 $ 509 15.0%
-------------------------------------------------
Six months ended June 30, Increase (Decrease)
1998 1997 1998 over 1997
------------------------------------------------
Salaries and benefits $ 4,070 $ 3,597 $ 473 13.1%
Occupancy 372 324 48 14.8%
Equipment 691 610 81 13.3%
Advertising and promotion 172 224 (52) -23.2%
Stationery & supplies 152 179 (27) -15.1%
Telephone expenses 171 189 (18) -9.5%
Legal and professional fees 489 137 352 256.9%
Other operating expenses 1,231 1,089 150 13.9%
------------------------------------------------
Total other expenses $ 7,348 $ 6,341 $ 1,007 15.9%
------------------------------------------------
Applicable income taxes for the three and six month periods ended June 30, 1998,
were $520,000 and $1,002,000 as compared to the June 30, 1997 amounts of
$(849,000) and $(339,000), respectively.
LIQUIDITY
During the first two quarters of each year, the Bank historically has tended 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 to meet unforeseen deposit outflows or seasonal loan funding demands. 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. As of June 30, 1998, the Bank
had $21,951,000 outstanding on these lines and had no balances outstanding as of
December 31, 1997.
15
RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities than assets reprice in a given period (a
liability sensitive position), market interest rate changes will be reflected
more quickly in liability rates. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets reprice
more quickly than liabilities in a given period (an asset sensitive position), a
decline in market rates will have an adverse effect on net interest income.
Management's objective is to maintain the stability of the net interest margin
in times of fluctuating interest rates by maintaining an appropriate mix of
interest rate sensitive assets and liabilities.
Management does not manage its interest rate sensitivity to maximize income
based on its prediction of interest rates, but rather to minimize interest rate
risk to the Company by stabilizing the Company's Net Interest Margin in all
interest rate environments.
Additionally, the Company is subject to considerable competitive pressure in
generating deposits and loans at rates and terms prevailing in the Company's
market area.
Management has developed a matrix that calculates changes to the Net Interest
Margin in both an increasing rate environment and a decreasing rate environment.
A 200 basis point (2%) shock rate is used for this calculation. The matrix
calculates a one-year Interest Rate Risk taking into consideration the delays in
the timing of repricing based on actual experience.
The one-year Interest Rate Risk ratios at June 30, 1998, for an increasing rate
environment and a decreasing rate environment were 3.0% and 17.4%, respectively.
This means that if interest rates go up the Bank's Net Interest Margin will
increase; if interest rates go down it will decrease.
16
CAPITAL RESOURCES
Total shareholders' equity on June 30, 1998, increased by $1,303,000 to
$22,673,000 over December 31, 1997, total shareholders' equity of $21,370,000.
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 a result of the Bank's
1997 financial performance, the Bank's Board of directors has passed a
resolution that the Bank's minimum Tier 1 leverage ratio should not fall below
7%.
As can be seen by the following tables, the Company exceeded all regulatory
capital ratios on June 30, 1998, and on December 31, 1997:
RISK-BASED CAPITAL RATIO
AS OF JUNE 30, 1998
- ------------------------------------------------------------------------------
Company Bank
(Dollars in thousands)
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
Tier 1 Capital $ 22,442 8.26% $ 22,344 8.23%
Tier 1 Capital
Minimum requirement 10,865 4.00% 10,860 4.00%
---------------------------------------------
Excess $ 11,577 4.26% $ 11,484 4.23%
---------------------------------------------
---------------------------------------------
Total Capital 25,862 9.52% 25,763 9.49%
Total Capital
Minimum requirement 21,729 8.00% 21,720 8.00%
---------------------------------------------
Excess $ 4,133 1.52% $ 4,043 1.49%
---------------------------------------------
Risk-adjusted assets $271,618 $271,512
---------------------------------------------
---------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 22,442 7.93% $ 22,344 7.89%
Average total assets
Minimum leverage requirement 11,321 4.00% 11,322 4.00%
---------------------------------------------
Excess $ 11,121 3.93% $ 11,022 3.89%
---------------------------------------------
---------------------------------------------
Total quarterly average assets $283,033 $283,048
-------- --------
-------- --------
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RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------
Company Bank
(Dollars in thousands)
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------
Tier 1 Capital $ 21,151 8.99% $ 21,040 8.96%
Tier 1 Capital
Minimum requirement 9,413 4.00% 9,390 4.00%
---------------------------------------------
Excess $ 11,738 4.99% $ 11,650 4.96%
---------------------------------------------
---------------------------------------------
Total Capital 24,124 10.25% 24,006 10.23%
Total Capital minimum
Requirement 18,826 8.00% 18,780 8.00%
---------------------------------------------
Excess $5,298 2.25% $ 5,226 2.23%
---------------------------------------------
Risk-adjusted assets $235,330 $234,750
---------------------------------------------
---------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 21,151 7.43% $ 21,040 7.40%
Average total assets
Minimum leverage requirement 11,384 4.00% 11.377 4.00%
---------------------------------------------
Excess $ 9,767 3.43% $ 9,663 3.40%
---------------------------------------------
---------------------------------------------
Total quarterly average assets $284,598 $284,423
-------- --------
-------- --------
DIVIDENDS
Federal and State banking and corporate laws could limit the banks ability to
pay dividends to the Company. The Federal Reserve Board has issued a policy
statement that a bank holding company should not declare or pay a cash dividend
to its shareholders if the dividend would place undue pressure on the capital of
its subsidiary banks or if the dividend could be funded only through additional
borrowings or other arrangements that may adversely affect the financial
position of the holding company. In addition, a bank holding company may not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend, and its prospective rate of
earnings retention is sufficient to fully fund each dividend and appears
consistent with its capital needs, asset quality and overall financial
condition. As a result of the Bank's disappointing 1997 financial performance
and concerns disclosed during the Bank's December 31, 1997, joint regulatory
examination, the Bank's Board of Directors has passed a resolution which
requires the Bank to seek the written approval of the Federal Deposit Insurance
Corporation and California Department of Financial Institutions prior to the
payment of any cash dividends.
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
18
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.
PART II OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
California Independent Bancorp's Annual Meeting of Shareholders was held on May
20, 1998, in Yuba City, California. The following resolutions were distributed
to stockholders and adopted:
1. To elect the following nine (9) nominees to serve as directors until the
next Annual Meeting and until their successors are elected and have been
qualified:
For Abstain
--------- -------
Harold M. Eastridge 1,167,608 43,582
William H. Gilbert 1,127,666 83,524
Lawrence G. Harris 1,172,426 38,764
Robert J. Mulder 1,172,464 38,726
David A. Offutt 1,170,185 41,005
William K. Retzer 1,170,857 40,333
Ross D. Scott 1,171,657 39,533
Louis F. Tarke 1,172,833 38,357
Michael C. Wheeler 1,161,918 49,272
2. To ratify the appointment of Arthur Andersen LLP as the Company's
independent public accountants.
Vote: For 1,169,043
Against 36,454
Abstained 5,693
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
Reports on Form 8K
No reports on Form 8K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
California Independent Bancorp
Date: July 28, 1998 /S/ Robert J. Mulder
---------------------- ------------------------------
Robert J. Mulder
President
Date: July 28, 1998 /S/ Annette Bertolini
---------------------- ------------------------------
Annette Bertolini
Chief Financial Officer
20