FINANCIAL HIGHLIGHTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARY
AS OF YEARS ENDED DECEMBER 31,
FOR THE YEAR 1998 1997 1996 1995 1994
- ------------ ---------- ----------- ---------- ----------- -----------
Interest income $24,826,536 $23,392,573 $20,574,833 $19,002,834 $15,120,346
Interest expense 8,830,774 9,288,694 7,448,898 6,316,594 4,502,067
---------- ----------- ---------- ----------- -----------
Net interest income 15,995,762 14,103,879 13,125,935 12,686,240 10,618,279
Provision for loan losses 2,246,145 6,153,000 385,000 875,000 347,000
---------- ----------- ---------- ----------- -----------
Net interest income after
provision for loan losses 13,749,617 7,950,879 12,740,935 11,811,240 10,271,279
Noninterest income 5,601,176 5,057,284 3,136,423 2,226,967 1,878,349
Noninterest expense (14,756,017) (13,582,493) (10,269,529) (8,936,485) (8,189,991)
---------- ----------- ---------- ----------- -----------
Income before provision
for income taxes 4,594,776 (574,330) 5,607,829 5,101,722 3,959,637
Provision for income taxes 1,714,300 (412,900) 2,206,778 2,036,000 1,540,000
---------- ----------- ---------- ----------- -----------
Net income 2,880,476 $ (161,430) $ 3,401,051 $ 3,065,722 $ 2,419,637
---------- ----------- ---------- ----------- -----------
---------- ----------- ---------- ----------- -----------
Per Common Share Data
Basic earnings per share $ 1.72 $ (0.10) $ 2.09 $ 1.83 $ 1.38
Cash dividends $ 0.42 $ 0.40 $ 0.38 $ 0.37 $ 0.32
Book value $ 14.09 $ 12.90 $ 13.45 $ 11.03 $ 9.11
Dividend payout ratio 25.58% n/a 19.05% 21.70% 23.80%
Weighted Average Common
Shares Outstanding 1,679,436 1,656,111 1,626,550 1,710,948 1,668,318
Financial Ratios
Return on average assets 1.00% (0.06)% 1.51% 1.56% 1.33%
Return on average common
shareholders' equity 12.51% (0.71)% 16.71% 17.54% 15.92%
Net interest margin 5.39% 4.91% 5.64% 5.45% 4.96%
Net charge-offs to
average loans, net 0.91% 2.76% 0.16% 0.19% 0.12%
Allowance for loan loss
as a percent of net loans 3.32% 3.29% 2.68% 3.05% 2.57%
Efficiency ratio 68.32% 70.89% 63.05% 59.92% 65.54%
[GRAPH]
MANAGEMENT'S DISCUSSION & ANALYSIS
CALIFORNIA INDEPENDENT BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1998
Certain statements in the following Management Discussion and Analysis of
Financial Condition and Results of Operations (excluding statements of fact or
historical financial information) involve forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; the loss of key personnel; changes in the
regulatory environment; changes in business conditions; volatility of rate
sensitive deposits; operational risks including data processing system failures
or fraud; asset/liability matching risks and liquidity risks; and changes in the
securities markets.
The following discussion and analysis is designed to provide a better
understanding of the significant changes and trends related to the Company and
Bank's financial condition, operating results, asset and liability management,
liquidity and capital resources and should be read in conjunction with the
Consolidated Financial Statements of the Company and its accompanying Notes.
SUMMARY OF FINANCIAL RESULTS
California Independent Bancorp (the "Company") through its wholly owned
subsidiary, Feather River State Bank (the "Bank") engages in a broad range of
financial service activities. The Bank commenced operations in 1977. The Company
was formed in 1994 and, after receiving regulatory and shareholder approval,
became the holding company for the Bank in May 1995. In October 1996, the Bank
acquired E.P.I. Leasing Co., Inc. ("EPI") and operates it as a subsidiary.
In 1998, the Company regained its consistent profitability and recognized
earnings of $2,880,476, a substantial increase of $3,041,906 over 1997. In 1997,
the Company suffered a net loss of $161,430, representing a decrease in earnings
of $3,562,841 or 104.7% from 1996 earnings of $3,401,051. The decrease, after
fourteen consecutive annual increases, was the result of a provision for loan
and lease losses of $6,153,000, which was required to recognize the increased
risk exposure in a small number of sizeable loans in the Bank's portfolio.
The increase in the Company's net interest income after allocations for loan
losses from 1996 to 1998 (excluding the significant 1997 provision for loan and
lease losses) reflects an increase in the volume of interest-earning assets. The
yield on interest-earning assets was 9.61%, 9.59% and 10.22% in 1998, 1997 and
1996, respectively. Interest-earning assets consist of overnight Federal Funds
Sold, Investment Securities and Loans and Leases. These assets averaged
$258,392,000, $243,808,000 and $201,233,000 in 1998, 1997 and 1996,
respectively. The majority of these interest-earning assets, loans and leases,
averaged $190,419,000, $174,094,000 and $148,294,000 in 1998, 1997 and 1996,
respectively, representing increases of 9.4% in 1998 over 1997 and 17.4% in 1997
over 1996.
Earnings per share in 1998 were $1.72, an increase over the 1997 per share loss
of ($0.10). Both years were less than 1996, which stood at $2.09 per share. The
decreases over 1996 were primarily due to the need to provide for additional
loan and lease losses.
The Company paid cash dividends of $.42 per share in 1998, $.40 per share in
1997 and $.38 in 1996, and 5% stock dividends in 1998, 1997 and 1996. Earnings
per share have been adjusted retroactively to reflect the stock dividends.
Average interest-bearing liabilities, consisting of interest paid on
interest-bearing deposits and other borrowed money, increased to $209,492,000 in
1998, from $198,616,000 in 1997, and $162,582,000 in 1996. The average rate paid
on these interest-bearing liabilities was 4.22%, 4.68% and 4.58%, respectively.
The primary component of interest-earning liabilities is interest-bearing
deposits which stood at $201,569,000, $197,995,000 and $161,724,000 in 1998,
1997 and 1996, respectively, representing limited growth of 1.8% in 1998 over
1997 and a substantial increase of 22.4% in 1997 over 1996.
The Company recognized a substantial increase in other borrowed money in 1998
over 1997 and 1996. The average balance of other borrowed funds was $7,923,000,
$621,000 and $858,000, in 1998, 1997 and 1996, respectively. The increase in
1998 was due to the Banks need to borrow funds
9
on its seasonal credit line with the Federal Reserve Bank, in order to fund the
increased loan demand during its peak lending periods in the second and third
quarters of the year.
Average noninterest-bearing demand accounts, consisting primarily of business
checking accounts, have increased to $52,364,000 in 1998, from $49,283,000 in
1997 and $40,128,000 in 1996. The increase in deposits from 1996 to 1998
reflects the opening of the new office of the Bank in Wheatland, California,
during 1997. Additionally, the increases were attributed to the marketing
efforts of the Bank and the acquisition of deposits resulting from large
financial institution branch consolidations and closings in the Company's market
area.
Management believes that the Company has adequate liquidity to meet its needs,
such as funding the undisbursed portion of borrower's lines of credit,
withdrawals by depositors, managing interest and market rate risk in the event
of significant changes in interest rates, and meeting its cash needs. Federal
Funds Sold is the means by which the Company invests its excess cash overnight
with other banks.
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - AVERAGE BALANCE SHEETS
1998 1997
---------------------------------------- --------------------------------------------
AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT BALANCE RATE AMOUNT
---------------------------------------- --------------------------------------------
ASSETS
Earning-Assets
Short-Term Investments:
Federal Funds Sold $ 10,196,017 5.26% $ 536,411 $ 29,191,325 5.39% $ 1,573,312
- ----------------------------------------------------------------------------------------------------------------------------
Total 10,196,017 5.26% 536,411 29,191,325 5.39% 1,573,312
- ----------------------------------------------------------------------------------------------------------------------------
Investment Securities:
Taxable 51,637,291 6.23% 3,219,517 35,319,174 6.55% 2,313,612
Non-Taxable 6,139,576 4.74% 291,112 5,202,958 5.28% 274,620
- ----------------------------------------------------------------------------------------------------------------------------
Total 57,776,867 6.08% 3,510,629 40,522,132 6.39% 2,588,232
- ----------------------------------------------------------------------------------------------------------------------------
Loans: 190,418,971 10.91% 20,779,496 174,094,049 11.04% 19,231,028
- ----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 258,391,855 9.61% 24,826,536 243,807,506 9.59% 23,392,572
Allowance for
Possible Loan Losses (5,622,159) (4,137,285)
Non-Earning Assets
Cash and due from banks 16,838,189 16,352,541
Premises and Equipment 8,028,423 7,944,483
Other 10,394,031 9,641,086
------------ ------------
Total Non-Earning Assets 35,260,643 33,938,110
------------ ------------
Total Assets $288,030,339 $273,608,331
------------ ------------
------------ ------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $107,440,206 3.00% $ 3,225,520 $104,673,000 3.73% $ 3,904,112
Time Certificates 94,129,266 5.50% 5,176,284 93,321,953 5.74% 5,360,741
Other 7,922,863 5.41% 428,970 621,054 3.84% 23,841
- ----------------------------------------------------------------------------------------------------------------------------
Total 209,492,335 4.22% 8,830,774 198,616,007 4.68% 9,288,694
- ----------------------------------------------------------------------------------------------------------------------------
Non Interest-Bearing Deposits
and Other Liabilities:
Demand,
Non Interest-Bearing 52,364,097 49,283,416
Other Liabilities 3,139,968 3,017,102
Shareholders' Equity 23,033,939 22,691,806
------------ ------------
Total 78,538,004 74,992,324
------------ ------------
Total Liabilities and
Shareholder's Equity $288,030,339 $273,608,331
------------ ------------
------------ ------------
Net Interest Income $15,995,762 $14,103,878
----------- -----------
Net Interest Margin 5.39% 4.91%
----- -----
1996
----------------------------------------
AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT
----------------------------------------
ASSETS
Earning-Assets
Short-Term Investments:
Federal Funds Sold $ 27,962,872 5.30% $1,482,801
- ---------------------------------------------------------------------------
Total 27,962,872 5.30% 1,482,801
- ---------------------------------------------------------------------------
Investment Securities:
Taxable 20,654,011 7.70% 1,591,086
Non-Taxable 4,322,277 6.36% 274,808
- ---------------------------------------------------------------------------
Total 24,976,288 7.47% 1,865,894
- ---------------------------------------------------------------------------
Loans: 148,293,868 11.62% 17,226,138
- ---------------------------------------------------------------------------
Total Earning Assets 201,233,028 10.22% 20,574,833
Allowance for
Possible Loan Losses (3,952,228)
Non-Earning Assets
Cash and due from banks 13,751,241
Premises and Equipment 6,769,581
Other 7,140,684
------------
Total Non-Earning Assets 27,661,506
------------
Total Assets $224,942,306
------------
------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing Deposits:
Demand, Savings and
Money Market $ 92,765,254 3.80% $ 3,524,331
Time Certificates 68,959,042 5.64% 3,891,406
Other 858,176 3.86% 33,161
- ---------------------------------------------------------------------------
Total 162,582,472 4.58% 7,448,898
- ---------------------------------------------------------------------------
Non Interest-Bearing Deposits
and Other Liabilities:
Demand,
Non Interest-Bearing 40,127,679
Other Liabilities 1,881,981
Shareholders' Equity 20,350,174
------------
Total 62,359,834
------------
Total Liabilities and
Shareholder's Equity $224,942,306
------------
------------
Net Interest Income $13,125,935
-----------
Net Interest Margin 5.64%
-----
- ----------------------------------------------------------------------------------------------------------------------------
10
NET INTEREST INCOME
Net interest income, the difference between interest earned on loans and
investments and the interest paid on deposits and other sources of funds, is the
principal component of the Company's earnings. The preceding table shows the
composition of average earning assets and average interest-bearing liabilities,
average yields and rates and the Company's net interest margin.
Interest income increased to $24,827,000 in 1998, from $23,393,000 or 6.13% in
1997 and was $20,575,000 in 1996, representing an increase of 13.7% in 1997 over
1996. The average interest rate earned on loans was 10.91% in 1998, compared to
11.05% in 1997 and 11.62% in 1996.
The Company's loan portfolio consists mainly of loans that reprice immediately
with changes in the bank reference rate, therefore, closely following interest
rate trends. The increase in interest income in 1998 is a result of the increase
in the volume of interest-earning assets.
Average Federal Funds Sold were $10,196,000 in 1998, $29,191,000 in 1997 and
$27,963,000 in 1996, representing a decrease of 65.07% in 1998 over 1997 and an
increase of 4.39% in 1997 over 1996. The decrease in 1998 was primarily due to
the Company's shifting of funds into longer term, higher yielding investments.
Total interest expense decreased to $8,831,000 or 4.93% in 1998 from $9,289,000
in 1997. Total interest expense increased 24.7% in 1997 from $7,449,000 in 1996.
The decrease in interest expense in 1998 over 1997 was due to a decline in the
rates paid on deposits, thereby, decreasing the Company's cost of funds. The
rise in 1997 over 1996 was due to an increase of 22.2% in interest-bearing
liabilities.
CHANGES IN VOLUME/RATE
Changes in the rates earned and paid and the volume of interest-earning assets
and interest-bearing liabilities affect the Company's net yield on
interest-earning assets. The impact of changes in volume and rate on net
interest income in 1998 and 1997 is shown in the following table. Changes
attributable to both volume and rate have been allocated to rate.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES IN VOLUME/RATE
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------------- ---------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
Federal Funds Sold $(1,024) $ (13) $(1,037) $ 65 $ 25 $ 90
Investment Securities:
Taxable 1,069 (163) 906 1,129 (406) 723
Nontaxable 49 (33) 16 56 (56) -
Loans 1,810 (341) 1,469 2,998 (993) 2,005
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,905 $ (551) $ 1,354 $4,248 $(1,430) $2,818
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Demand, Savings and
Money Market 103 (781) (678) 453 (73) 380
Time Certificates 46 (231) (185) 1,374 96 1,470
Other 280 125 405 (9) 0 (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 430 $(888) $ (458) $1,818 $ 23 $1,841
- -----------------------------------------------------------------------------------------------------------------------------------
Increase(Decrease) in Net Interest Income $ 1,475 $ 337 $ 1,812 $2,430 $(1,453) $ 977
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
LOANS
Outstanding total loans averaged $190,419,000 in 1998, as compared to
$174,094,000 in 1997 and $148,294,000 in 1996. This represents increases of
$16,325,000 or 9.4% in 1998, $25,800,000 or 17.4% in 1997 and $16,401,000 or
12.4% in 1996. The Company continues to emphasize its agricultural, real estate,
commercial and lease financing activities.
The increase in average total loans during 1998 primarily reflects increases in
real estate lending activities. Both construction and mortgage lending increased
substantially during the year. The Company has increased its lending activities
in these markets due to the favorable economic conditions in the real estate
market.
11
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
COMPOSITION OF LOAN PORTFOLIO
DECEMBER 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Commercial and Agricultural $ 81,112,377 $ 79,384,520 $ 71,527,482 $ 74,355,093 $ 69,143,245
Real Estate-Construction 37,382,839 23,927,538 29,916,204 18,048,005 12,647,669
Real Estate-Mortgage 36,538,047 28,032,552 28,564,640 28,288,337 33,450,751
Consumer 2,443,283 1,956,254 2,983,939 2,814,717 3,111,243
Lease Financing 23,313,399 33,465,023 15,892,783 3,216,140 6,501,110
Other 392,570 1,021,665 2,214,574 1,522,174 3,109,201
- ----------------------------------------------------------------------------------------------------------
Total $181,182,515 $167,787,552 $151,099,622 $128,244,466 $127,963,219
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
The Company lends to consumers, small to medium sized businesses and small to
medium sized farmers 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.
A significant portion of the Company's loan portfolio consists of loans secured
by residential, commercial and agricultural real estate.
Real estate mortgage and construction loans, including loans secured by
agricultural real estate, equaled $73,921,000 or 41% and $51,960,000 or 31% of
the total loan portfolio at December 31, 1998 and 1997, respectively. These
loans are secured by real estate, and advances are limited to a range of
appraised value depending on the type of loan.
The Company makes agricultural production loans and other agricultural loans
that are secured by growing crops and crop proceeds. These loans generally are
at their peak in the third quarter of each year. The Company had $50,505,000 or
27.9% and $30,132,000 or 18.0% of its loan portfolio in agricultural production
loans outstanding at December 31, 1998 and 1997, respectively. Approximately 3%
of these loans are guaranteed by the Farm Service Agency, which is an agency of
the U.S. Department of Agriculture.
The Company originates mortgage loans on residential and agricultural
properties, most of which it sells into the secondary market to divest itself of
the interest rate risk associated with these mostly fixed-interest rate
products. The Company accounts for these loans in accordance with Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers of Financial
Assets and Extinguishment of Liabilities."
As of December 31, 1998, 1997, and 1996, total loans serviced by the Company
were $146,026,000, $151,619,000 and $107,637,000. Total loans sold by the
Company were $65,795,000 in 1998, $66,953,000 in 1997, and $45,614,000 in 1996.
The decrease in loans sold during 1998 is a function of modestly lower
production in farm mortgage lending and the Company's strategy to retain some
real estate secured loans in its loan portfolio. The Company moderately expanded
its mortgage origination departments during 1998 to keep pace with loan demand.
QUALITY OF LOANS
Inherent in the lending function is the fact that loan losses will be
experienced and the risk of loss will vary with the type of loan extended and
the creditworthiness of the borrower. To reflect the estimated risks of loss
associated with its loan portfolio, provisions are made to the Company's
allowance for loan losses. As an integral part of this process, the allowance
for loan losses is subject to review and possible adjustment as a result of
Management's assessment of risk or through regulatory examinations conducted by
governmental agencies.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company uses the allowance method in providing for loan losses. Loan losses
are charged to the Allowance for Loan and Lease Losses ("Allowance") and
recoveries are credited to the Allowance. The Allowance at December 31, 1998 was
$6,024,000 or 3.3% of total loans outstanding as compared to $5,514,000 or 3.3%
of total loans outstanding at December 31, 1997. Management, after a thorough
analysis and a third party loan review, believes that the Allowance at December
31, 1998, was adequate to provide for losses that can be reasonably anticipated.
Additions to the Allowance are made by provisions for loan and lease losses. The
provision is charged as an operating expense and is based upon past loan loss
experience and estimates of potential losses that, in Management's judgment,
deserve current recognition. Management determines the appropriate size of the
Allowance based upon specific allocations for classified and impaired loans and
a general allocation for other loans based upon the loss experience during the
past twelve rolling months for each particular type of loan. Other factors
considered by Management include growth, composition and overall quality of the
loan portfolio, and current economic conditions that may affect the borrower's
ability to pay. Actual losses may vary from current estimates. The estimates are
reviewed periodically, and adjustments, as necessary, are charged to operations
in the period in which they became known.
12
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
ACTIVITY IN ALLOWANCE FOR LOAN AND LEASE LOSSES
1998 1997 1996 1995 1994
-------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Total loans and leases outstanding $181,183 $167,788 $151,100 $128,244 $127,963
Average loans and leases 190,419 174,094 148,294 131,893 118,956
Balance, January 1 5,514 4,053 3,911 3,288 3,087
Charge-off by loan category
Commercial and other 2,095 4,311 323 413 29
Consumer 49 73 - 46 43
Real Estate 189 335 4 96 125
- ------------------------------------------------------------------------------------------------------
Total 2,333 4,719 327 555 197
- ------------------------------------------------------------------------------------------------------
Recoveries by loan category
Commercial and other 499 19 53 249 48
Consumer 98 3 31 44 3
Real Estate - 5 - 10 -
- ------------------------------------------------------------------------------------------------------
Total 597 27 84 303 51
- ------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 1,736 4,692 243 252 146
Provision charged to expense 2,246 6,153 385 875 347
- ------------------------------------------------------------------------------------------------------
Balance, December 31 $ 6,024 $ 5,514 $ 4,053 $ 3,911 $ 3,288
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Ratios:
Net charge-offs (recoveries)
to average loans 0.91% 2.76% 0.16% 0.19% 0.12%
Allowance to loans at
end of Year 3.32% 3.29% 2.68% 3.05% 2.57%
- ------------------------------------------------------------------------------------------------------
The Company had loan charge-offs of $2,333,000 in 1998, $4,719,000 in 1997 and
$327,000 in 1996 and net loan charge-offs (which include recoveries) of
$1,736,000, $4,692,000, $243,000 in 1998, 1997 and 1996, respectively. These net
charge-offs are equal to 0.91%, 2.76% and 0.16% of average loans for 1998, 1997
and 1996.
Loan losses sustained during 1998 are divided among five loan categories.
Commercial loan losses totaled $699,000 or 30% of total loan losses,
agricultural loan losses totaled $775,000 or 33%, lease losses totaled $621,000
or 27%, consumer loan losses totaled $49,000 or 2% and real estate loan losses
totaled $189,000 or 8%.
Five sizeable charged off loans accounted for 64% of the total loan losses
($1,500,000) and one of these five credits accounted for 33% of total loan
losses ($770,000) during 1998. The large agricultural loan loss was a livestock
loan. The producer experienced severe financial difficulty due to adverse market
trends and production problems. The other four loans in this grouping were all
commercial credits. Each of these businesses sustained cash flow difficulties
largely due to adverse economic conditions.
During 1998, the Company's loan collection team also focused on the recovery of
previously charged-off loans. The Company successfully recovered $597,000 or 26%
of total 1998 charge-offs.
During 1997, loan losses were centered in five credit relationships and a group
of twenty-two leases. This grouping of credits comprised 93% of total loan and
lease losses. Of the five loans, two were agricultural loans (total charge-off
of $2,218,260), two were commercial loans (total charge-off of $1,406,253) and
one was a real estate development loan (total charge-off of $343,424). The
aggregate lease losses totaled $401,921.
The charged-off loans in 1996 included two row crop loans consisting of a
charge-off of $203,000 of a loan with an original balance of $1,500,000, a
charge-off of $42,000 from an original balance of $450,000, and a letter of
credit of $35,000, which the Company was obligated to pay when its customer
defaulted on an obligation.
13
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- ---------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE
1998 1997 1996 1995 1994
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
---------------- ---------------- ---------------- ---------------- ---------------
$ % $ % $ % $ % $ %
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
BALANCE APPLICABLE TO:
Commercial and Agricultural $3,644 60.49% $3,423 62.07% $1,918 47.34% $2,267 57.98% $1,776 54.02%
Real Estate-Construction 925 15.36% 897 16.28% 802 19.80% 550 14.07% 325 9.88%
Real Estate-Mortgage 610 10.13% 392 7.11% 766 18.90% 863 22.06% 860 26.16%
Consumer 32 0.53% 31 0.56% 80 1.97% 86 2.19% 80 2.43%
Leases 706 11.72% 656 11.89% 364 8.97% - - - -
Other 107 1.78% 115 2.09% 123 3.02% 145 3.70% 247 7.51%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $6,024 100.00% $5,514 100.00% $4,053 100.00% $3,911 100.00% $3,288 100.00%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS:
Loans Accounted for on
a Nonaccrual Basis $5,644 $7,585 $ 846 $ 293 $1,110
Other Loans Contractually
Past Due 90 Days or More 854 328 2,202 60 50
------ ------ ------ ------- ------
Total $6,498 $7,913 $3,048 $ 353 $1,160
------ ------ ------ ------- ------
------ ------ ------ ------- ------
- ---------------------------------------------------------------------------------------------------------------------------------
The allocation of the Allowance as of the end of the last five fiscal years is
summarized in the table above. Any allocation or breakdown in the Allowance
lends an appearance of exactness that does not exist. Thus, the allocation above
should not be interpreted as an indication of expected amounts or categories
where charge-offs will occur.
Management believes the total Allowance is adequate. While Management uses
available information to provide for loan loss reserve allocations, future
additions to the allowance may be necessary based upon changes in economic
conditions and other variables.
NONPERFORMING LOANS
The trend in nonperforming loans has improved over the past year as
nonperforming assets decreased from $7,913,000 or 4.4% of the portfolio on
December 31, 1997 to $6,498,000 or 3.9% of the portfolio on December 31, 1998.
The Company has reduced nonperforming assets by $2,068,000 or 27% in the past
year. This achievement is attributable to the successful execution of a
classified asset reduction plan and enhanced quality control in the management
of the loan portfolio. Furthermore, this improvement was achieved despite the
years poor agricultural results for the Company's agricultural customers due to
crop production and quality suffered from the El Nino weather patterns, and the
Asian economic crisis causing lower commodity prices.
Loans are generally placed on nonaccrual status when they are 90 days past due
as to either interest or principal. At that time, any accrued but uncollected
interest is reversed, and additional income is recorded on a cash basis as
payments are received. However, loans that are in the process of renewal in the
normal course of business, or are well-secured and in the process of collection,
may not be placed on nonaccrual status, at the discretion of Management. A
nonaccrual loan may be restored to an accrual basis when interest and principal
payments are current and the prospects for future payments are no longer in
doubt.
At December 31, 1998, nonaccrual loans amounted to $5,644,000 or 3.1% of total
loans compared to $7,585,000 or 4.5% of total loans at December 31, 1997 and
$846,000 or 0.56% of total loans at December 31, 1996. A 26% decrease in
nonaccrual loans was achieved during 1998. Again, the decrease is attributable
to a successful classified asset reduction plan and enhanced quality control
procedures.
The Company's nonaccrual assets as of December 31, 1998 included twelve loan
relationships and thirteen leases. However, 70% of these nonaccrual loans were
concentrated in two credit relationships. The largest nonaccrual loan complex is
an agricultural loan. Nonaccrual loans to this borrower comprised 46% of the
Company's total nonaccrual loans as of December 31, 1998. The Company completed
a loan restructuring with this debtor that created a plan for orderly debt
repayment over a period of years. The debtor made a substantial payment to the
Company during 1998. Provided the debtor performs under this restructuring, the
loan may qualify for transfer out of nonaccrual status as early as 1999.
Twenty-three percent of the Company's nonaccrual loans were extended to a real
estate developer. The restructuring plan with this debtor has failed and the
Company is now in the foreclosure process. The Company expects to acquire this
real property during 1999 and liquidate the collateral. Both of these large
nonaccrual loans have been partially charged down to a level below the value of
the loan collateral.
The Company's nonaccrual assets at December 31, 1997 included twelve loan
relationships and ten leases. Ninety-two percent of these nonaccrual loans were
concentrated in five credit relationships. The largest nonaccrual loan complex
was an agricultural loan and the second largest was a loan to a real estate
developer. These two loans remain on the Company's
14
books and are discussed above. Nineteen percent of the Company's December 31,
1997 nonaccrual loans existed in a loan to a livestock producer. This loan was
not on the Company's books at December 31, 1998. The remaining balance of the
December 31, 1997, nonaccrual loans are distributed among a number of smaller
loans and leases. These loans are either in the process of collection or in the
process of being restructured.
At December 31, 1996, the nonaccrual loans included three loans totaling
approximately $542,000 related to a residential real estate development where it
was necessary for the developer to change the type of housing to be constructed.
Additionally, land values in the area decreased due to over-building and a
general decline in sales activity. The Company successfully negotiated a loan
restructure with this borrower during 1997. Other nonaccrual loans included two
business loans with government guarantees, a commercial loan which was
ultimately restructured with additional collateral and a crop loan that was 90%
guaranteed by the Farm Service Agency.
Loans on accrual status that were past due 90 days or more as to principal and
interest increased on December 31, 1998 to $854,000 compared to $328,000 on
December 31, 1997 and $2,202,000 on December 31, 1996. The increase in 1998 was
due to one large loan which was in the process of being modified. This
modification closed in January 1999 and the loan became current. The past due
loan totals as of December 31, 1996, were high due to some special circumstances
surrounding certain loans at that time.
INVESTMENTS
In 1998, the Company's investment portfolio was $60,639,000 or 20.5% of total
assets, an increase from $57,198,000 or 19.5% of total assets in 1997, and
$34,664,000 or 13.2% of total assets in 1996. At December 31, 1998, 1997 and
1996, Federal Funds Sold were $12,100,000, $35,600,000 and $41,300,000,
respectively. Federal Funds Sold are overnight deposits with other banks. In
1998 and 1997, the increase in investment securities was due in part to the
transfer of funds from overnight Federal Funds to longer term investments that
yield a higher rate of return. In addition, the increase in the investment
portfolio was due to deposits growing at a faster pace than loans.
Under Statement of Financial Accounting Standard No. 115 (SFAS 115), investments
of a bank in debt and equity securities must be classified in three different
categories: "Trading," "available-for-sale" and "held-to-maturity," and there
are different accounting methods for each category. The Company has classified
all of its investment securities as either "available-for-sale" or
"held-to-maturity."
SFAS 115 requires that any unrealized gain or loss of the "available-for-sale"
category be reported as an adjustment to the Company's equity capital, even
though this gain or loss would only be realized if the investment were actually
sold. If the investment is in the "held-to-maturity" category, no unrealized
gains or losses need be reported.
The following table summarizes the distribution of the Company's investment
securities as of December 31, 1998 and 1997.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 1998
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government agencies $51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
$51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $ 301,007 $ 2,181 $ - $ 303,188
Obligations of states and political subdivisions 4,062,556 41,186 (900) 4,102,842
Corporate obligations and other securities 4,742,466 59,380 (5,096) 4,796,750
- ------------------------------------------------------------------------------------------------------------------------
$ 9,106,029 $102,747 $ (5,996) $ 9,202,780
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government agencies $38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
$38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $10,751,994 $ 49,638 $ (1,050) $10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 - 7,012,911
Corporate obligations and other securities 1,424,875 6,765 - 1,431,640
- ------------------------------------------------------------------------------------------------------------------------
$19,156,186 $ 89,997 $ (1,050) $19,245,133
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
15
As of December 31, 1998, the Company's "available-for-sale" category adjustment
reflected a net unrealized gain of $33,930 net of taxes, and the approximate
market value of the Company's total investment portfolio was $60,736,000,
reflecting an unrealized gain of $158,441.
As of December 31, 1997, the Company's "available-for-sale" category adjustment
reflected a net unrealized loss of $1,202 net of taxes, and the approximate
market value of the Company's total investment portfolio was $57,287,000,
reflecting an unrealized gain of $86,760.
The Company had investment securities pledged as collateral for certain
deposits, typically deposits of government entities and for the Bank's seasonal
borrowing line of $18,766,000, $11,652,000 and $10,375,000, at December 31,
1998, 1997 and 1996, respectively.
DEPOSITS
Total deposits at December 31, 1998, 1997 and 1996 were $268,808,000,
$266,931,000 and $237,892,000. These figures represent an increase of $1,877,000
or 0.7% during 1998 and $29,039,000 or 12.2% during 1997. Average total deposits
were $253,934,000 in 1998, $247,278,000 in 1997 and $201,852,000 in 1996. The
increase in deposits reflect both normal growth and the acquisition of deposits
resulting from branch consolidations and closings in the Company's market area
by large financial institutions coupled with the Company's aggressive marketing
efforts. In addition, 1997 reflects deposits gained from a newly opened branch.
Average time certificates of deposit increased to $94,129,000 in 1998, from
$93,322,000 in 1997, and $68,959,000 in 1996, representing a slight increase of
0.9% in 1998. The larger increase in 1997 primarily reflects the acquisition of
new deposits, and depositors shifting funds from other interest-bearing accounts
at the Company to higher yielding time certificates. The Company has been able
to attract and retain deposits by providing interest rates on deposits
competitive with other financial institutions in its market area.
The remaining maturities of the Company's certificates of deposit in amounts of
$100,000 or more, including public time deposits, as of December 31, 1998 and
1997, are indicated in the table below. Interest expense on these certificates
of deposit totaled $2,124,000 in 1998 and $2,187,000 in 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MATURITY OF CERTIFICATES OF DEPOSITS $100,000 OR MORE
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -----------------------
(DOLLARS IN THOUSANDS)
Three month or less $15,604 $14,692
Over three months
through twelve months 14,473 20,714
Over one year
through three years 8,131 3,558
Over three years 4,332 1,798
- -------------------------------------------------------------------------------
Total $42,540 $40,762
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NONINTEREST INCOME
Noninterest income for 1998 was $5,601,000, an increase of 10.8% over 1997,
which stood at $5,057,000 and $3,136,000 in 1996. The table below sets forth the
components of noninterest income for the years indicated:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NONINTEREST INCOME (DOLLARS IN THOUSANDS)
1998 1997 1996
------- ------- --------
Service charges on deposit accounts $ 918 $1,009 $ 917
Service charges & fees on loans 507 572 487
Brokered loan fees 1,252 1,029 557
Lease commissions 2,025 1,671 271
Other 899 776 904
Total $5,601 $5,057 $3,136
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Service charges and fees on deposit accounts, one of the primary components in
noninterest income, decreased in 1998 to $918,000 or 9.0% over the 1997 amount
of $1,009,000. This decrease was primarily the result of the Banks decision to
tighten its overdraft policy, thereby foregoing a portion of the income earned
on returned checks. Loan servicing fees in 1998 were $507,000, $572,000 in 1997
and $487,000 in 1996. Brokered loan fees, another primary source of noninterest
income, were $1,252,000 in 1998, an increase of 21.8% over 1997 which stood at
$1,029,000, an increase of 84.7% over 1996 brokered loan fee income of $557,000.
These increases were the result of increased business volume in residential and
agricultural mortgage loans.
Lease commissions increased to $2,025,000 or 21.2% in 1998 and $1,671,000 or
517% over 1996 commissions of $271,000. These increases were due to a higher
volume of leases by the Bank's subsidiary, EPI. The Bank purchased EPI in
October 1996, therefore, commission income was reported for three months in 1996
compared to twelve months of income in 1997 and 1998.
16
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
1998 1997 1996
------------------------- ---------------------------- -----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF AVERAGE OF AVERAGE OF AVERAGE
AMOUNT EARNING ASSETS AMOUNT EARNING ASSETS AMOUNT EARNING ASSETS
---------- --------------- -------- --------------- --------- ----------------
(DOLLARS IN THOUSANDS)
Salaries and benefits $ 8,484 3.28% $ 7,768 3.19% $ 5,513 2.74%
Occupancy 821 0.32% 735 0.30% 572 0.28%
Equipment 1,442 0.56% 1,293 0.53% 998 0.50%
Advertising and promotion 302 0.12% 370 0.15% 342 0.17%
Telephone expense 349 0.14% 395 0.16% 236 0.12%
Directors fees 216 0.08% 219 0.09% 391 0.19%
Attorney fees 799 0.31% 345 0.14% 209 0.10%
Other 2,343 0.91% 2,457 1.01% 2,008 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Total $14,756 5.71% $13,582 5.57% $10,269 5.10%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Noninterest expense increased in 1998 to $14,756,000 or 8.6% over 1997,
$13,582,000 or 32.3% in 1997 over 1996 noninterest expense of $10,269,000.
Salaries and employee benefits were $8,484,000 in 1998, $7,768,000 in 1997 and
$5,513,000 in 1996 representing increases of 9.2% and 40.9% in 1998 and 1997,
respectively. During 1998, continued centralization of services created
additional personnel efficiencies, thereby reducing the growth in staffing
expense. The substantial savings that came with these personnel efficiencies was
offset partially by the need for the Bank to expand its Loan Administration
staff in order to recognize the increased loan volume and to implement the
restructuring of the department.
The increase in 1997's noninterest expense reflects salary and benefit expense
for a full twelve months for EPI, which was acquired by the Bank in October
1996. This increase in 1997 over 1996 amounted to approximately $1,100,000. In
addition, the Bank recognized an increase in salaries due to commissions paid to
its real estate sales staff. The Bank recognized a substantial volume increase
in real estate mortgage refinancing, which in turn increased income to the Bank
and commissions paid to generate that increased volume. The Bank also
restructured its salaries to a level competitive with other banks in its
operating areas.
Another component of noninterest expense is attorney fees. These fees increased
in 1998 to $799,000 or 131.6% over the 1997 expense of $345,000 which increased
over 1996 by 65.1% from $209,000. The increase in attorney fees during 1998 is
attributed to the escalated legal expenses associated with the collection and
resolution of nonperforming loans.
INCOME TAXES
The provision (benefit) for income taxes was $1,714,000 in 1998, ($413,000) in
1997 and $2,207,000 in 1996. The Company's effective tax rate was 37.3%,
(71.9%), and 39.4% for 1998, 1997 and 1996, respectively.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities reprice than assets in a given period, a
liability sensitive position is created. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets reprice
more quickly than liabilities in a given period (an asset sensitive position), a
decline in market rates will have an adverse effect on net interest income.
The Company is subject to considerable competitive pressure in generating
deposits and loans at rates and terms prevailing in the Company's market areas.
However, 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.
The risks associated with commercial banking consist primarily of interest rate
risk and credit risk. The Bank attempts to manage its interest rate risk by
making variable rate loans and by interest rate gap analysis. Credit risk
relates to the ability of borrowers to repay the principal and interest on their
loan in a timely manner. This risk is managed by adherence to credit standards
and the taking of collateral to secure most of the Bank's loans.
The majority of the Bank's loan portfolio consists of loans with variable
interest rates. The following table illustrates the composition of the Bank's
loan portfolio as of December 31,1998, as it pertains to interest-rate
sensitivity.
17
This table shows that a total of $127,926,000 of the Bank's loans are
repriceable within one year.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL LOAN VARIABLE RATE FIXED RATE LOANS
PORTFOLIO LOANS UNDER 1 YEAR OVER 1 YEAR
------------- -------------- ---------------- -------------
$181,183,000 $102,524,000 $25,402,000 $53,257,000
- -------------------------------------------------------------------------------
On a monthly basis, the Bank calculates its interest-rate gap position whereby
interest-rate sensitive assets are compared with interest-rate sensitive
liabilities for specific periods to determine if the Bank is susceptible to
significant earnings changes as a result of changes in interest rates. If the
gap percentage is positive, the Bank's interest earnings would increase during a
period of increasing interest rates and the Bank's interest earnings would
decrease during a period of declining interest rates. The reverse would be true
if the Bank has a negative gap. The Bank puts more emphasis on its gap position
for periods up to one year, as it is felt that a longer horizon gives the Bank
more time and flexibility to reposition its assets and liabilities to counteract
any potential earnings decrease.
It is the Bank's policy to limit the one-year, one percent shock Net Interest
Margin change to 5% of total annual projected Net Interest Margin.
Additionally, Management has developed a matrix that, on a monthly basis,
calculates changes to the projected one-year 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 December 31,1998, for a 200 basis
point increasing and decreasing rate environment were 13.8% and 25.4%,
respectively. This means that if interest rates go up the Net Interest Margin of
the Bank will increase; if interest rates go down it will decrease.
The following table presents the interest rate sensitivity of the Company as of
December 31, 1998.
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 1998
REPRICING OPPORTUNITY
OVER THREE
THREE MONTHS
MONTHS THROUGH 1 YEAR- OVER
OR LESS 12 MONTHS 3 YEARS 3 YEARS TOTAL
(DOLLARS IN THOUSANDS)
Federal Funds Sold $ 12,100 $ - $ - $ - $ 12,100
Loans 113,050 14,876 10,161 43,096 181,183
Taxable Investments 6,936 2,372 2,370 44,898 56,576
Non-taxable Investments 1,050 350 1,658 1,005 4,063
- ---------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 138,353 $ 17,754 $ 14,429 $83,386 $253,922
- ---------------------------------------------------------------------------------------------------------------
Interest Bearing Demand 51,851 - - - 51,851
Savings and Money Market Deposits 54,125 - - - 54,125
Time Certificates 39,690 39,002 11,311 6,821 96,824
- ---------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 145,666 39,002 11,311 6,821 202,800
- ---------------------------------------------------------------------------------------------------------------
Gap $ (7,313) $(21,248) $ 3,118 $76,565 $ 51,122
- ---------------------------------------------------------------------------------------------------------------
Cumulative Gap (7,313) (28,561) (25,443) 51,122
--------- -------- -------- -------
--------- -------- -------- -------
- ---------------------------------------------------------------------------------------------------------------
LIQUIDITY
To maintain adequate liquidity requires that sufficient resources be available
at all times to meet cash flow requirements of the Company. The need for
liquidity in a banking institution arises principally to provide for deposit
withdrawals, credit needs of its customers and to take advantage of investment
opportunities. A company may achieve desired liquidity from both assets and
liabilities. The Company considers cash and deposits held in other banks,
federal funds sold, other short term investments, maturing loans and
investments, receipts of principal and interest on loans available for sale
investments and potential loan sales as sources of asset liquidity. Deposit
growth and access to credit lines established with correspondent banks and
market sources of funds are considered by the Company as sources of liability
liquidity.
Historically, during the first two quarters of each year the Bank generally has
experienced 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. The Company's liquid assets totaled $53,712,000
and $65,025,000 at December 31, 1998 and 1997, respectively. Liquid assets as a
percentage of total assets were 18.2% and 22.3%, respectively
18
as of those dates. Liquidity is also affected by collateral requirements of its
public deposits and certain borrowings.
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 December 31, 1998 and
December 31, 1997, the Bank had no outstanding balances on these lines. At
December 31, 1998, Management believes that the Company maintains adequate
amounts of liquid assets to meet its liquidity needs.
CAPITAL RESOURCES
The Company and the Bank are subject to requirements of the Federal Reserve
Board and FDIC, respectively, governing capital adequacy. These guidelines are
intended to reflect the degree of risk associated with both on and off balance
sheet items. Financial institutions are expected to comply with a minimum ratio
of qualifying total capital to risk-weighted assets of 8%, at least half of
which must be in Tier 1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4%,
which is intended to supplement the risk-based capital requirements and to
ensure that all financial institutions continue to maintain a minimum level of
core capital.
Total shareholders' equity on December 31, 1998, increased by $2,285,000 to
$23,655,000 over December 31, 1997, total shareholders' equity of $21,370,000.
As can be seen by the following table, the Company and Bank exceeded all
regulatory capital ratios on December 31, 1998.
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1998
COMPANY BANK
AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Tier 1 Capital $ 23,416 9.12% $ 23,260 9.06%
Tier 1 Capital minimum requirement 10,270 4.00% 10,264 4.00%
- -----------------------------------------------------------------------------------------
Excess $ 13,146 5.12% $ 12,996 5.06%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Capital 26,660 10.38% 26,502 10.33%
Total Capital minimum requirement 20,540 8.00% 20,528 8.00%
- -----------------------------------------------------------------------------------------
Excess $ 6,120 2.38% $ 5,974 2.33%
- -----------------------------------------------------------------------------------------
Risk-adjusted assets $256,754 $256,604
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Leverage Capital Ratio
Tier 1 Capital to quarterly $ 23,416 8.20% $ 23,260 8.14%
average total assets
Minimum leverage requirement 11,427 4.00% 11,419 4.00%
- -----------------------------------------------------------------------------------------
Excess $ 11,989 4.20% $ 11,841 4.14%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Total Quarterly average assets $285,678 $285,463
-------- --------
-------- --------
- -----------------------------------------------------------------------------------------
INFLATION
It is Management's opinion that the effects of inflation on the Company's
financial statements for the years ended December 31, 1998, 1997 and 1996 are
not material.
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment and are
subject to supervision and examination by various federal and state regulatory
agencies. The Company, as a bank holding company, is subject to regulation and
supervision by primarily the Federal Reserve. The Bank, as a
California-chartered commercial bank, is subject to supervision and regulation
by primarily the Federal Deposit Insurance Corporation ("FDIC") and the
California State Department of Financial Institutions ("DFI"). Federal and
California state laws and regulations govern numerous matters involving both
entities, including maintenance of adequate capital and financial condition,
permissible types, amounts and terms of extensions of credit and investments,
permissible non-banking activities, the level of reserves against deposits,
19
and restrictions on dividend payments. The federal and state regulatory agencies
possess extensive discretion and powers to prevent or remedy unsafe or unsound
practices or violations of law by banks and bank holding companies. The Company
and the Bank also undergo periodic examinations by one or more of these
regulatory agencies, which may subject them to changes in asset valuations, in
amounts of required loss allowances and in operating restrictions resulting from
the regulators' judgments based on information available to them at the time of
their examination. The Bank's operations are also subject to a wide variety of
state and federal consumer protection and similar statutes and regulations.
Those and other restrictions limit the manner in which the Company and the Bank
may conduct business and obtain financing. The laws and regulations to which the
Company and the Bank are subject can and do change significantly from time to
time, and such changes could materially affect the Company's business, financial
condition and operating results.
As a result of the Company's and 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 passed a resolution to remedy the
concerns which include: maintaining and, if necessary, retaining qualified
management; maintaining the Bank's Tier 1 Leverage Capital in such an amount as
to equal or exceed seven percent (7%) of the Bank's FDIC Part 325 total assets
(as of December 31, 1998, the Bank's Tier 1 Leverage Capital ratio stood at
8.20%); continuing with the diligent implementation of a previously adopted plan
to reduce the level of non-performing and problem loans, and revision of lending
and collection policies and procedures; continuing with the diligent
implementation of a revised operating budget and cost control plan in order to
restore the Bank's prior level of profitability; ensuring that the Bank
maintains an adequate Allowance for loan and lease losses; and, requiring the
Bank to seek prior approval of the FDIC and DFI before the payment of any cash
dividends.
Additionally, the FDIC and Federal Reserve Board ("FRB") have notified the Bank
and Company that they have determined that the condition of the Bank and Company
are such that prior approval of the regulatory agencies is necessary before
adding or replacing any member of the boards of directors, employing any person
as a senior executive officer, or changing the responsibilities of any senior
executive officer so that the individual would be assuming a different senior
executive officer position. Finally, due to the Bank's condition, the FDIC is
also restricting the Company's and the Bank's ability to enter into any
contracts to pay or make any golden parachute and indemnification payments to
institution affiliated parties.
SEGMENT REPORTING
SFAS No. 131 establishes standards for public business enterprises' reporting of
information about operating segments in annual financial statements. The
Statement requires the enterprises to report selected information concerning
operating segments in interim financial reports issued to shareholders.
Additionally, the Statement establishes requirements for related disclosures
about products, services, geographic areas and major customers.
SFAS No. 131 requires public business enterprises to report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
The Statement further requires reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company has adopted SFAS No. 131 which did not have a
significant effect since the Company believes that it operates in one segment -
the commercial banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of computers
systems, software, and other equipment utilizing microprocessors to distinguish
the year 1900 from the year 2000. The Year 2000 issue poses significant risks
for all businesses, households, and governments and could result in system
failures and miscalculations causing disruptions in normal business and
governmental operations if action is not taken to fix the problem before the
year 2000 arrives.
The impact of Year 2000 issues on the Company will depend not only on corrective
actions taken by the Company but may also be impacted by the way in which Year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company.
COMPANY'S COMPLIANCE EFFORTS
The Company is currently engaged in a four-phase management program that
includes assessment, renovation, validation and implementation. To ensure Year
2000 compliance, the Company has identified all major applications and systems
that may require modification. The Company's program includes all computer
systems, including PC and network hardware and software, and mainframe and
mainframe software. The program also covers all equipment and other systems
utilized in the Company and Bank's operations or on the premises from which the
Company and Bank operates. The Company is on schedule to meet all internal
deadlines set in the plan.
20
In addition, the Bank is in the process of communicating with its large
borrowers, customers and major vendors to determine the Bank's and/or the
Company's vulnerability to those third parties should they fail to resolve their
Year 2000 issues. The responses are being evaluated; however, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on time, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a materially adverse effect on the Company.
COMPLIANCE EXPENSES
The Company's program calls for the utilization of internal and external
resources to implement its Year 2000 project. The Company has completed the
assessment phase of its plan and believes that there is adequate time remaining
to assess and correct any significant issues that may materialize. The purchase
of any necessary hardware and software will be capitalized in accordance with
normal policy. Personnel and all other costs related to the project are being
expensed as incurred. To date, the Company has expended approximately $302,000
on its Year 2000 compliance efforts. Management estimates an additional
expenditure of $136,000 will be required to complete its program. The majority
of these costs are expected to be incurred during 1999 and are not expected to
have a material impact on the Company's cash flows, results of operations, or
financial condition.
RISKS OF NONCOMPLIANCE
The failure to address all Year 2000 issues could result in substantial
interruptions to the Company's normal business activities. These interruptions
could in turn affect its financial condition as well as the business activities
of its customers. Through the efforts involved in its Year 2000 project, no
major interruptions are expected. However, due to the uncertainty involved in
the Year 2000 problem, all of the effects of the century date change to the
organization cannot be absolutely determined. Although at this time it is not
possible to determine the extent of the adverse financial effects, with any
specificity, the Company is preparing contingency plans if disruptions occur.
Given the Year 2000 project progress to date and with successful implementation
of the remaining phases of the project, Management believes that the Company is
well positioned to significantly reduce potential negative effects that may
exist.
CONTINGENCY PLAN
A contingency plan is in the process of being developed in order to structure a
methodology that would allow the Company to continue operations in the event the
Company, its key suppliers, customers or third party service providers prove not
to be year 2000 compliant, and such noncompliance is expected to have a material
adverse impact on the Company's operations. The Company's contingency plan
mitigates risk by: (1) identifying and assuring that alternative key suppliers
and computer backup computers will be available; (2) providing additional loan
reserves in the event of customer loan repayment problems attributed to Year
2000 issues; and (3) providing plans and procedures to assure that the Bank has
sufficient liquidity and currency available to allow customers access to their
funds even in the event of power or computer systems failure.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take advantage of
the "safe harbor" provisions of the PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 for any forward-looking statement made by, or on behalf of, the Company.
The factors identified in this cautionary statement are important factors (but
not necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
The dates on which the Company believes the Year 2000 Project will be completed
and implemented are based on Management's best estimates, which were derived
utilizing numerous assumptions of future events. Such assumptions include, but
are not limited to, the continued availability of certain financial resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with the implementation of the Year 2000
Project. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third-parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure its ability to timely and
cost-effectively resolve problems associated with the Year 2000 issue that may
affect its operations and business, or expose it to third-party liability.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of California Independent Bancorp:
We have audited the accompanying consolidated balance sheets of CALIFORNIA
INDEPENDENT BANCORP (a California corporation) AND SUBSIDIARIES as of December
31, 1998 and 1997, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company'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 California Independent Bancorp
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Anderson, LLP
Sacramento, California
February 12, 1999
22
CONSOLIDATED FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
1998 1997
------------ --------------
ASSETS
Cash and due from banks $ 30,900,727 $ 18,425,047
Federal funds sold 12,100,000 35,600,000
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents 43,000,727 54,025,047
Investment securities held-to-maturity 9,106,029 19,156,186
Investment securities available-for-sale 51,533,305 38,041,857
- ------------------------------------------------------------------------------------------------
Total investments 60,639,334 57,198,043
Loans and leases 150,919,757 131,673,564
Loans and leases held-for-sale 30,262,758 36,113,988
Less - allowance for loan and lease losses (6,024,111) (5,514,299)
- ------------------------------------------------------------------------------------------------
Net loans 175,158,404 162,273,253
Premises and equipment, net 7,848,799 8,177,800
Interest receivable 2,854,674 2,670,933
Other real estate owned 101,014 917,535
Other assets 5,709,653 6,266,985
- ------------------------------------------------------------------------------------------------
Total assets $295,312,605 $291,529,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 66,008,029 $ 62,224,350
Interest-bearing 202,800,415 204,706,508
- ------------------------------------------------------------------------------------------------
Total deposits 268,808,444 266,930,858
Interest payable 1,622,659 1,814,197
Other liabilities 1,226,331 1,414,227
- ------------------------------------------------------------------------------------------------
Total liabilities 271,657,434 270,159,282
COMMITMENTS
Shareholders' equity:
Common stock, no par value-
Authorized -- 20,000,000 shares
Issued and outstanding -- 1,744,580 shares in 1998 and
1,733,688 shares in 1997 15,561,767 13,587,419
Retained earnings 8,099,474 7,864,097
Debt guarantee of ESOP (40,000) (80,000)
Accumulated other comprehensive income 33,930 (1,202)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 23,655,171 21,370,314
- ------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $295,312,605 $291,529,596
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
23
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans and leases $20,779,496 $19,231,028 $17,226,138
Interest on investments-
Taxable interest income 3,219,517 2,313,613 1,591,086
Nontaxable interest income 291,112 274,620 274,808
Interest on federal funds sold 536,411 1,573,312 1,482,801
- ----------------------------------------------------------------------------------------------------
Total interest income 24,826,536 23,392,573 20,574,833
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 8,401,804 9,264,853 7,415,738
Interest on other borrowings 428,970 23,841 33,160
- ----------------------------------------------------------------------------------------------------
Total interest expense 8,830,774 9,288,694 7,448,898
- ----------------------------------------------------------------------------------------------------
Net interest income 15,995,762 14,103,879 13,125,935
PROVISION FOR LOAN AND LEASE LOSSES 2,246,145 6,153,000 385,000
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan
and lease losses 13,749,617 7,950,879 12,740,935
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges on deposit accounts 918,118 1,008,691 917,466
Lease commissions 2,025,400 1,670,636 271,070
Brokered loan fees 1,252,066 1,028,550 557,007
Other 1,405,592 1,349,407 1,390,880
- ----------------------------------------------------------------------------------------------------
Total noninterest income 5,601,176 5,057,284 3,136,423
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 8,484,040 7,768,328 5,512,769
Occupancy expense 821,435 734,772 572,532
Furniture and equipment expense 1,441,597 1,293,088 998,145
Other 4,008,945 3,786,305 3,186,083
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 14,756,017 13,582,493 10,269,529
- ----------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 4,594,776 (574,330) 5,607,829
PROVISION (BENEFIT) FOR INCOME TAXES 1,714,300 (412,900) 2,206,778
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 2,880,476 $ (161,430) $ 3,401,051
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS
Basic earnings per share $ 1.72 $ (0.10) $ 2.09
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.62 $ (0.10) $ 1.98
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Cash dividends per common share $ 0.42 $ 0.40 $ 0.38
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,679,436 1,656,111 1,626,550
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
24
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS
--------- ------------ ------------
BALANCE DECEMBER 31, 1995 1,446,888 $ 9,303,841 $ 9,706,538
Comprehensive income:
Net income -- -- 3,401,051
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income (loss), net of tax: -- -- --
Comprehensive income -- -- --
5% stock dividend with cash
paid in lieu of fractional shares 72,050 1,513,050 (1,523,842)
Reduction of ESOP debt -- -- --
Options exercised 28,253 60,218 --
Shares surrendered from exercise of options (1,159) (25,208) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 236,289 --
Cash dividends -- -- (647,941)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 1,546,032 $ 11,088,190 $ 10,935,806
Comprehensive income:
Net loss -- -- (161,430)
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income, net of tax:- -- -- --
Comprehensive income (loss) -- -- --
5% stock dividend with cash paid in
lieu of fractional shares 77,304 2,203,164 (2,218,649)
Reduction of ESOP debt -- -- --
Options exercised 29,857 41,175 --
Shares surrendered from exercise of options (2,062) (57,957) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 312,847 --
Cash dividends -- -- (691,630)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 1,651,131 $ 13,587,419 $ 7,864,097
Comprehensive income:
Net income -- -- 2,880,476
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- --
Less: reclassification adjustments for
gains included in net income -- -- --
Other comprehensive income, net of tax:- -- -- --
Comprehensive income -- -- --
5% stock dividend with cash paid in lieu
of fractional shares 82,433 1,895,959 (1,908,005)
Reduction of ESOP debt -- -- --
Options exercised 20,190 55,837 --
Shares surrendered from exercise of options (9,174) (121,307) --
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- 143,859 --
Cash dividends -- -- (737,094)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 1,744,580 $ 15,561,767 $ 8,099,474
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
DEBT
GUARANTEE
OF EMPLOYEE ACCUMULATED
STOCK OTHER
OWNERSHIP COMPREHENSIVE
PLAN INCOME TOTAL
------------ ------------ ------------
BALANCE DECEMBER 31, 1995 $ (160,000) $ 24,990 $ 18,875,369
Comprehensive income:
Net income -- -- 3,401,051
Other comprehensive income (loss), net of tax:
Net unrealized investment losses -- -- (39,336)
Less: reclassification adjustments for
gains included in net income -- -- (3,470)
------------
Other comprehensive income (loss), net of tax: -- (42,806) (42,806)
------------
Comprehensive income -- -- 3,358,245
------------
------------
5% stock dividend with cash
paid in lieu of fractional shares -- -- (10,792)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 60,218
Shares surrendered from exercise of options -- -- (25,208)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 236,289
Cash dividends -- -- (647,941)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ (120,000) $ (17,816) $ 21,886,180
Comprehensive income:
Net loss -- -- (161,430)
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- 62,864
Less: reclassification adjustments for
gains included in net income -- -- (46,250)
------------
Other comprehensive income, net of tax: -- 16,614 16,614
------------
Comprehensive income (loss) -- -- (144,816)
------------
------------
5% stock dividend with cash paid in
lieu of fractional shares -- -- (15,485)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 41,175
Shares surrendered from exercise of options -- -- (57,957)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 312,847
Cash dividends -- -- (691,630)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ (80,000) $ (1,202) $ 21,370,314
Comprehensive income:
Net income -- -- 2,880,476
Other comprehensive income, net of tax:
Net unrealized investment gains -- -- 35,132
Less: reclassification adjustments for
gains included in net income -- -- --
------------
Other comprehensive income, net of tax:- -- 35,132 35,132
------------
Comprehensive income -- -- 2,915,608
------------
------------
5% stock dividend with cash paid in lieu
of fractional shares -- -- (12,046)
Reduction of ESOP debt 40,000 -- 40,000
Options exercised -- -- 55,837
Shares surrendered from exercise of options -- -- (121,307)
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions -- -- 143,859
Cash dividends -- -- (737,094)
- -----------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 $ (40,000) $ 33,930 $ 23,655,171
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
25
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,880,476 $ (161,430) $ 3,401,051
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 1,132,251 975,178 776,561
Provision for losses on other real estate owned 54,153 80,389 97,823
Provision for loan losses 2,246,145 6,153,000 385,000
Provision for deferred taxes 20,330 (1,067,925) (103,192)
Investment security (gains) losses, net 0 46,250 (3,470)
Purchase of loans and leases held-for-sale (26,920,053) (28,445,574) (16,469,131)
Proceeds from loan and lease sales 65,795,347 66,953,000 45,533,048
(Gain) loss on sale of real estate properties, net 0 (11,363) (240,358)
(Increase) decrease in assets-
Interest receivable (183,741) (457,850) (942,215)
Other assets 537,003 749,828 376,548
Increase (decrease) in liabilities-
Interest payable (191,538) 408,166 75,954
Other liabilities (147,897) 36,375 383,667
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 45,222,476 45,258,044 33,271,286
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in loans 3,299,527 7,202,650 (6,956,353)
Origination of loans held-for-sale (57,512,441) (67,234,000) (45,669,103)
Purchase of securities held-to-maturity (4,994,679) (15,440,977) (11,841,055)
Purchase of securities available-for-sale (39,119,032) (30,986,075) (7,760,490)
Proceeds from maturity of securities held-to-maturity 14,993,880 19,538,000 10,326,530
Proceeds from sales and maturities of securities available-for-sale 25,713,672 4,325,006 2,000,000
Proceeds from sales of other real estate owned 968,692 239,569 489,246
Purchases of premises and equipment (803,250) (1,732,591) (1,803,261)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (57,453,631) (84,088,418) (61,214,486)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 3,783,679 7,107,120 11,290,397
Net increase (decrease) in interest-bearing deposits (1,906,093) 21,931,470 33,305,414
Cash dividends (737,094) (691,630) (647,941)
Stock options exercised 78,389 296,065 271,299
Cash paid in lieu of fractional shares (12,046) (15,485) (10,792)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,206,835 28,627,540 44,208,377
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (11,024,320) (10,202,834) 16,265,177
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 54,025,047 64,227,881 47,962,704
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 43,000,727 $54,025,047 $64,227,881
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for-
Interest expense $ 9,480,232 $ 8,969,709 $ 7,352,690
Income taxes 1,740,000 988,234 1,889,000
- --------------------------------------------------------------------------------------------------------------------
CONTINUED ON NEXT PAGE
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING ACTIVITIES
Debt guarantee of ESOP $ (40,000) $ (40,000) $ (40,000)
Net unrealized gain (loss) on securities held as available-for-sale
(net of taxes) 35,132 16,614 (42,806)
Tax benefit arising from exercise of nonqualified stock options and
disqualifying dispositions 143,859 312,847 236,289
Stock dividends 1,895,959 2,203,164 1,513,050
Increase (decrease) in other real estate owned as a result of foreclosure (206,324) 144,510 463,196
- --------------------------------------------------------------------------------------------------------------------
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of California Independent Bancorp and
Subsidiaries (the Company) conform with generally accepted accounting principles
and general practice within the banking industry. The more significant of these
policies applied in the preparation of the accompanying financial statements are
discussed below.
PRINCIPLES OF CONSOLIDATION-
The accompanying financial statements include the accounts of California
Independent Bancorp (CIB) and its wholly-owned subsidiary, Feather River State
Bank (the Bank) and its wholly-owned subsidiary, EPI Leasing Company, Inc.
(EPI). Significant intercompany transactions and balances have been eliminated
in consolidation.
NATURE OF OPERATIONS-
CIB is a California Corporation and the bank holding company for the Bank,
located in Yuba City, California. The Bank was incorporated as a California
state banking corporation on December 1, 1976, and commenced operations on April
6, 1977. The Company was incorporated on October 28, 1994, and became the
holding company for the Bank on May 2, 1995. The Bank engages in a broad range
of financial services activities, and its primary market is located in the
northern Sacramento Valley, with a total of seven branches. In addition, the
Bank operates three loan production offices, emphasizing residential mortgage
and agricultural lending and one lease production office through EPI Leasing
Company, Inc. The primary source of income for the Bank is from lending
activities, including commercial, agricultural, real estate and
consumer/installment loans and leases.
USE OF ESTIMATES IN THE PREPARATION OF
FINANCIAL STATEMENTS-
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS-
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
INVESTMENT SECURITIES-
The Bank classifies its investments as either "held-to-maturity" or
"available-for-sale." Securities that the Bank has the positive intent and
ability to hold to maturity are classified as "held-to-maturity" and accounted
for at amortized cost in the Consolidated Balance Sheets.
Other securities for which the Bank does not have the positive intent or ability
to hold to maturity are classified under the balance sheet caption
"available-for-sale" and are reported at their fair values, with unrealized
gains and losses reported on a net-of-tax basis as a separate component of
shareholders' equity. Fair values are based on quoted market prices or broker or
dealer price quotations on a specific identification basis. Certain economic
factors could cause the Bank to sell some of these securities prior to maturity.
Such factors include significant movements in interest rates and significant
changes in liquidity demands. Gains or losses on sale of investment securities
are computed using the specific identification method.
LOANS-
Loans are stated at the principal amount outstanding less applicable unearned
interest income.
A loan is 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. When a loan is impaired, the recorded
amount of the loan in the balance sheets is based on the present value of
expected future cash flows discounted at
27
the loan's effective interest rate, or on the observable or estimated market
price of the loan, or the fair value of the collateral if the loan is collateral
dependent. Income on impaired loans is recognized in accordance with the Bank's
accounting for loans placed on a nonaccrual status. Cash payments are first
applied as a reduction of the principal balance until collectibility of the
remaining principal and interest can be reasonably assured. Thereafter, interest
income is recognized as it is collected in cash.
LOANS AND LEASES HELD-FOR-SALE-
The Bank originates mortgage loans on residential and farm properties that it
sells into the secondary market to divest itself of the interest rate risk
associated with these primarily fixed-interest rate products. The Bank accounts
for these loans at the lower of cost or net realizable value.
As of January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers of Financial Assets and
Extinguishment of Liabilities." This statement requires, under certain
circumstances, entities to recognize as a separate asset an amount related to
the right to service mortgage loans. The adoption of this statement had an
immaterial impact on the Company's financial position and results of operations.
SALES AND SERVICING OF SBA LOANS-
The Bank originates loans to customers under the Small Business Administration
(SBA) program that generally provides for SBA guarantees of 70% to 90% of each
loan. The Bank generally maintains these loans in its portfolio, but
occasionally sells the guaranteed portion of each loan to a third party and
retains the unguaranteed portion in its own portfolio. The Bank may be required
to refund a portion of the sales premium received, if the borrower defaults or
the loan prepays within 90 days of the settlement date. At December 31, 1998,
the Bank had received no premiums subject to such recourse. A gain is recognized
on the sale of SBA loans through collection on sale of a premium over the
adjusted carrying value, through retention of an ongoing rate differential less
a normal service fee (excess servicing fee) between the rate paid by the
borrower to the buyer and the rate paid by the Bank to the purchaser, or both.
To calculate the gain (or loss) on the sale, the Bank's investment in an SBA
loan is allocated among the retained portion of the loan, the servicing retained
and the sold portion of the loan, based on the relative fair value of each
portion. The gain (or loss) on the sold portion of the loan is recognized at the
time of sale based on the difference between the sale proceeds and the allocated
investment. As a result of the relative fair value allocation, the carrying
value of the retained portion is discounted, with the discount accreted to
interest income over the life of the loan. The servicing fees are reflected as
an asset that is amortized over an estimated life using a method approximating
the level yield method; in the event future prepayments exceed Management's
estimates and future expected cash flows are inadequate to cover the unamortized
excess servicing asset, additional amortization would be recognized. In its
calculation of the relative fair value of servicing fees, the Bank is required
to estimate adequate compensation for servicing. The Bank uses the contractual
rate of 100 basis points as its estimate of adequate compensation for servicing.
ALLOWANCE FOR LOAN AND LEASE LOSSES-
The Allowance for Loan and Lease Losses ("Allowance") is maintained at a level
considered adequate by Management to provide for losses that can be reasonably
anticipated. Accordingly, loan losses are charged to the Allowance and
recoveries are credited to it. The provision for loan losses charged to
operating expense is based upon past loan loss experience, loan impairment and
estimates of potential losses which, in Management's judgment, deserve current
recognition. Other factors considered by Management include growth, composition
and overall quality of the loan portfolio, reviews of specific problem loans,
and current economic conditions that may affect the borrowers' ability to pay.
This evaluation process requires the use of current estimates that may vary from
the ultimate losses experienced in the future. The estimates are reviewed
periodically, and adjustments, as they become necessary, are charged to
operations in the period in which they become known.
OTHER REAL ESTATE OWNED-
Other real estate owned consists of properties acquired by the Bank through
foreclosure and is carried at the lower of cost or fair value, less estimated
costs to sell. At the time the property is acquired, if the estimated fair value
is less than the amount outstanding on the loan, the difference is charged
against the Allowance. Subsequent declines, if any, in estimated fair value are
charged to expense.
INTEREST AND FEES ON LOANS AND LEASES-
Origination fees and commitment fees, offset by certain direct loan origination
costs, are deferred and recognized over the contractual life of the loan as
yield adjustment. Interest income on loans and direct lease financing is accrued
monthly as earned on all credits not classified as nonaccrual. Unearned income
on loans, where applicable, is recognized as income using the effective interest
method over the term of the loan.
Loans are generally placed on nonaccrual status when they are 90 days past due
as to either interest or principal or are otherwise determined to be impaired.
At that time, any accrued but uncollected interest is reversed, and additional
income is recorded on a cash basis as payments are received. However, loans that
are well-secured and in the process of collection may not be placed on
nonaccrual status, at the discretion of Management. A nonaccrual loan may be
restored to an accrual basis when interest and principal payments are current
and prospects for future payments are no longer in doubt.
DEPRECIATION AND AMORTIZATION-
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises, furniture, fixtures and equipment is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from 3 to 31.5 years. Leasehold improvements are amortized using the
straight-line method
28
over the asset's useful life or the term of the lease, whichever is shorter.
Expenditures for major renewals and improvements of bank premises and equipment
are capitalized, and those for maintenance and repairs are charged to expense as
incurred.
INCOME TAXES-
Income taxes reported in the financial statements are computed at current tax
rates, including deferred taxes resulting from temporary differences in the
recognition of items for tax and financial reporting purposes.
The Bank records income taxes for financial statement purposes using the
liability or balance sheet method, under which the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various balance sheet assets and liabilities. Under
this method, the computation of the net deferred tax asset or liability gives
current recognition to changes in tax laws and rates.
FINANCIAL ACCOUNTING PRONOUNCEMENTS-
On January 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income refers to revenues,
expenses, gains, and losses that generally accepted accounting principles
recognize as changes in value to an enterprise but are excluded from net income.
For the Company, comprehensive income includes net income (loss) and changes in
the fair value of its available-for-sale investment securities.
On January 1, 1998, the Bank adopted the Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information". This statement establishes standards for reporting
enterprise segments of a company in the footnotes to the financial statements.
For the Company, only commercial banking and the leasing enterprise meet the
requirements of a reportable segment according to the guidelines set forth in
SFAS 131.
RECLASSIFICATIONS-
Certain reclassifications have been made to amounts previously reported to
conform with current presentation methods. Such reclassifications have no effect
on net income or shareholders' equity previously reported.
(2) INVESTMENT SECURITIES:
As of December 31, 1998, 1997, and 1996, the Bank's equity capital reflected a
net unrealized gain (loss), net of applicable taxes, of $33,930, $(1,202), and
$(17,816), respectively.
The amortized cost and approximate fair value of investments in debt securities
and other investments at December 31, 1998 and 1997 are as follows:
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ---------- -----------
DECEMBER 31, 1998
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $51,471,615 $122,505 $(60,815) $51,533,305
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies $301,007 $2,181 $0 $303,188
Obligations of states and political subdivisions 4,062,556 41,186 (900) 4,102,842
Corporate obligations and other securities 4,742,466 59,380 (5,096) 4,796,750
- ------------------------------------------------------------------------------------------------------------------------
Total $ 9,106,029 $102,747 $ (5,996) $ 9,202,780
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $38,044,044 $ 26,287 $(28,474) $38,041,857
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 10,751,994 49,638 (1,050) 10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 0 7,012,911
Corporate obligations and other securities 1,424,875 6,765 0 1,431,640
- ------------------------------------------------------------------------------------------------------------------------
Total $19,156,186 $ 89,997 $ (1,050) $19,245,133
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
29
The following table shows the amortized cost and estimated fair value of
investment securities by contractual maturity at December 31, 1998 and 1997.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
--------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COSTS VALUE COSTS VALUE
------------ ------------ ------------ -------------
DECEMBER 31, 1998
Within one year $ 1,701,575 $ 1,704,283 $ 9,009,275 $ 9,009,328
After one but within five years 7,099,454 7,182,822 39,462,340 39,505,777
After five but within ten years 305,000 315,675 3,000,000 3,018,200
- ------------------------------------------------------------------------------------------------
Total $ 9,106,029 $ 9,202,780 $51,471,615 $51,533,305
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Net gains (losses) from sales of "available-for-sale" investment securities
during 1998, 1997, and 1996 were $0, $46,250 and $3,470, respectively. Gross
gains of $0, $46,250 and $3,470, and gross losses of $0, $0 and $0, were
realized on those sales in 1998, 1997, and 1996, respectively.
Investment securities pledged as collateral for certain deposits amounted to
$18,765,780 and $11,651,809 at December 31, 1998 and 1997, respectively.
(3) LOANS:
Loans outstanding are summarized as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
1998 1997
------------ ------------
Commercial and
agricultural $ 81,112,377 $ 79,384,520
Real estate construction 37,382,839 23,927,538
Real estate mortgage 36,538,047 28,032,552
Consumer 2,443,283 1,956,254
Lease financing 23,313,399 33,465,023
Other 392,570 1,021,665
- ------------------------------------------------------------------------------
Totals $181,182,515 $167,787,552
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Loans on which the accrual of interest has been discontinued or reduced amounted
to approximately $5,644,000 and $7,585,000 December 31, 1998 and 1997,
respectively. This represents the total recorded investment in impaired loans.
The allowance for loan losses that was allocated to these impaired loans totaled
$1,137,457 and $1,907,950 as of December 31, 1998 and 1997, respectively. For
income reporting purposes, impaired loans are placed on a nonaccrual status.
This is more fully discussed in Note 1. The average balance of impaired loans
during 1998 and 1997 was $7,659,329 and $5,665,437, respectively. Interest
income recorded on those loans during 1998 and 1997 was $343,812 and $642,230,
respectively. Foregone interest on loans placed on nonaccrual status was
$1,431,874 and $982,125 as of December 31, 1998 and 1997, respectively.
Changes in the allowance for loan losses are summarized as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
---------- ---------- -----------
Balance,
beginning of year $ 5,514,299 $ 4,052,783 $3,910,970
Provision 2,246,145 6,153,000 385,000
Loans charged-off (2,333,268) (4,718,424) (327,357)
Recoveries on loans
previously charged-off 596,935 26,940 84,170
- ------------------------------------------------------------------------------
Balance, end of year $ 6,024,111 $ 5,514,299 $4,052,783
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(4) PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------
1998 1997
------------ --------------
Land $ 1,432,957 $ 1,432,957
Bank premises
and improvements 6,015,264 5,868,922
Furniture, fixtures and equipment 6,397,114 5,785,116
----------- -----------
13,845,335 13,086,995
Less accumulated depreciation
and amortization (5,996,536) (4,909,195)
- ------------------------------------------------------------------------------
$ 7,848,799 $ 8,177,800
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
30
Depreciation and amortization charged to expense was $1,132,251, $975,178 and
$776,561, in 1998, 1997 and 1996, respectively.
(5) DEPOSITS:
A summary of deposit balances follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------
1998 1997
-------------- ----------------
Demand $ 66,008,000 $ 62,224,350
Interest-bearing
transaction accounts 66,012,253 40,133,001
Savings deposits 39,963,668 68,789,994
Time deposits 96,824,523 95,783,513
- ------------------------------------------------------------------------------
Total deposits $268,808,444 $266,930,858
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Certificates of deposit of $100,000 or more, including public time deposits,
amounted to approximately $42,540,013 and $40,761,778 at December 31, 1998 and
1997, respectively.
Interest expense on certificates of deposit of $100,000 or more, including
public time deposits, amounted to approximately $2,123,535 and $2,186,861, in
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of all Certificates of Deposits
were as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31, 1998
---------------------
Three months or less $39,689,011
Over three through twelve months 39,001,842
Over one through three years 11,313,514
Over three years 6,820,156
- ------------------------------------------------------------------------------
Total $96,824,523
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(6) OTHER NONINTEREST INCOME AND EXPENSE:
The components of other operating income and expense were as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Servicing fees on loans $ 507 $ 572 $ 487
Gains on sale of OREO 41 11 240
Gains on sales of leases 192 0 0
Other 666 766 664
- ------------------------------------------------------------------------------
Total other
noninterest income $1,406 $1,349 $1,391
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Advertising and promotion $ 302 $ 370 $ 342
Telephone expense 349 395 236
Attorney Fees 799 345 209
Directors' Fees 216 219 391
Other 2,343 2,457 2,008
- ------------------------------------------------------------------------------
Total other
noninterest expense $4,009 $3,786 $3,186
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(7) INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -------------
Current-
Federal $1,204,494 $ 592,054 $1,697,811
State 489,476 62,971 612,159
- ------------------------------------------------------------------------------
1,693,970 655,025 2,309,970
- ------------------------------------------------------------------------------
Deferred-
Federal 69,891 (907,736) (85,574)
State (49,561) (160,189) (17,618)
- ------------------------------------------------------------------------------
20,330 (1,067,925) (103,192)
- ------------------------------------------------------------------------------
$1,714,300 $ (412,900) $2,206,778
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The effective tax rate and statutory federal income tax rate are reconciled as
follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------ ------- ---------
Federal statutory
income tax rate 34.0% (34.0)% 34.0%
State franchise taxes,
net of Federal income
tax benefit 7.2 (7.2) 7.4
Tax-exempt interest (3.0) (21.9) (2.1)
Corporate dividends received (1.6) (15.7) 0
Tax reserve adjustment 0 6.5 0
Other 0.7 0.4 0.1
- ------------------------------------------------------------------------------
37.3% (71.9)% 39.4%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The components of the net deferred tax asset of the Bank, recorded in other
assets, as of December 31, 1998 and 1997, were as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1998 1997
---------- -------------
Deferred tax assets-
Loan losses $2,000,524 $2,509,072
California franchise tax 166,422 29,640
Other real estate owned 58,383 131,669
Unrealized loss on
available-for-sale securities 0 985
Nonaccrual loans 376,629 170,857
Other 231,475 143,392
- ------------------------------------------------------------------------------
Total deferred tax assets $2,833,433 $2,985,615
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CONTINUED ON NEXT PAGE
31
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1998 1997
------------ --------------
Deferred tax liabilities-
Depreciation $ 220,549 $ 250,578
Accretion 0 100,838
Unrealized gain on
available-for-sale securities 27,760 0
- ------------------------------------------------------------------------------
Total deferred tax liabilities 248,309 351,416
- ------------------------------------------------------------------------------
Net deferred tax asset $2,585,124 $2,634,199
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The components of the deferred income tax provisions are summarized as follows:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ----------- ----------
Provisions for
loan and lease losses $ 508,548 $(1,019,549) $ (62,802)
Interest on
non-accrual loans (205,772) 157,633 6,287
Tax depreciation methods (30,029) (6,360) (7,589)
California franchise tax (136,782) (175,715) (53,570)
Other real estate owned 73,286 (15,228) (54,179)
Accretion (100,838) 15,602 17,661
Other (88,083) (24,308) 51,000
- ------------------------------------------------------------------------------
$ 20,330 $(1,067,925) $ (103,192)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(8) SHAREHOLDERS' EQUITY:
At December 31, 1998, CIB was authorized to issue 20,000,000 shares of no par
common stock. Of this amount, 1,744,580 and 1,651,131 shares of common stock
were issued and outstanding at December 31, 1998 and 1997, respectively.
One of the principal sources of cash for the Company will be dividends from its
subsidiary bank. Banking regulations limit the amount of dividends that may be
paid without prior approval of the Company's regulatory agencies to the lesser
of retained earnings or the net income of the Company for its last three fiscal
years, less any distributions during such period, subject to capital adequacy
requirements.
At December 31, 1998, the Company had approximately $4,005,109 available for
payments of dividends, which would not require the prior approval of the banking
regulators under this limitation.
The Bank adopted SFAS No. 128, "Earnings per Share," effective December 15,
1998. As a result, the Bank's earnings per share for all prior periods have been
restated. The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations:
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1998 FOR THE YEAR ENDED 1997
---------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS income
available to common
stockholders $2,880,476 1,679,436 $ 1.7 $ (161,430) 1,656,111 $ (0.10)
Effect of dilutive securities:
Employee Stock Options 0 99,946 0 0 82,727 0
Diluted EPS income
available to common
stockholders $2,880,476 1,779,382 $ 1.6 $ (161,430) 1,738,838 $ (0.09)
- ----------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1996
-------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Basic EPS income
available to common
stockholders $3,401,051 1,626,550 $ 2.09
Effect of dilutive securities:
Employee Stock Options 0 91,115 0
Diluted EPS income
available to common
stockholders $3,401,051 1,717,665 $ 1.98
- --------------------------------------------------------------------------------------------------------
In August 1998, the Board of Directors authorized a five percent stock dividend
that was distributed on September 18, 1998. The dividend was declared on August
18, 1998, to holders of record on August 31, 1998. The dividend resulted in the
issuance of 82,433 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
In August 1997, the Board of Directors authorized a five percent stock dividend
that was distributed on September 12, 1997. The dividend was declared on August
12, 1997, to holders of record on August 29, 1997. The dividend resulted in the
issuance of 77,304 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
In August 1996, the Board of Directors authorized a five percent stock dividend
that was distributed on September 20, 1996. The dividend was declared on August
13, 1996, to holders of record on August 30, 1996. The dividend resulted in the
issuance of 72,050 additional shares of common stock. All common stock and per
share amounts have been adjusted to reflect the stock dividend.
32
(9) DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS-
For these short-term instruments, the carrying value is a reasonable estimate of
fair value.
INVESTMENTS-
For securities held-for-investment purposes, fair values are based on quoted
market prices or dealer quotes. See Note 2 for further discussion.
LOANS-
The fair value of loans is estimated by discounting the future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit ratings for same remaining maturities. The fair value of nonperforming
loans is estimated based on allocating specific and general reserves to the
various nonperforming loan classifications.
DEPOSIT LIABILITIES-
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
OTHER LIABILITIES-
Other liabilities represent short-term instruments. The carrying amount is a
reasonable estimate of fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-
The fair value of amounts for fees arising from commitments to extend credit,
standby letters of credit and financial guarantees written are not material.
The estimated fair values of the Bank's financial instruments at December 31,
1998 and 1997 are as follows:
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- ------------ ------------ -------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 43,000,727 $ 43,000,727 $ 54,025,047 $ 54,025,047
Investments 60,639,334 60,736,085 57,198,043 57,286,990
Loans (net) 175,158,404 177,947,899 162,273,253 164,503,476
FINANCIAL LIABILITIES:
Deposits $268,808,444 $269,168,792 $266,930,858 $267,297,159
Interest payable and other liabilities 2,848,990 2,848,990 3,228,424 3,228,424
- --------------------------------------------------------------------------------------------------------------------
(10) STOCK OPTIONS:
During 1989, the Bank adopted the Feather River State Bank 1989 Amended and
Restated Stock Option Plan. The plan is nonqualified and provides that
nonemployee directors and key employees may be granted options to purchase the
Company's stock at the fair value of the shares as determined by the Board of
Directors. As of May 1995, all previously granted options to purchase the Bank's
stock had been retired and exchanged for options to purchase the Company's
stock, on a one-for-one option basis. All granted options must be exercised
within the earlier of ten years of the date of grant, or within 30 days of
termination of employment, or status as a director. Vesting is determined at the
time of grant by the Board of Directors. Current participants vest over five
years from date of employment.
During 1996, the Company adopted the California Independent Bancorp 1996 Stock
Option Plan (1996 Plan), which sets aside 149,052 shares of no par value common
stock of the Company for which options may be granted to key, full-time salaried
employees and officers of the Company, as well as non-employee directors of the
Company. The exercise price of all options to be granted under the 1996 Plan
must be at least 100% of the fair market value of the Company's common stock on
the granting date and be paid in full at the time the option is exercised in
cash, shares of the Company's common stock with a fair value equal to the
purchase price or a combination thereof. Under the 1996 Plan, all options expire
no more than ten years after the date of grant.
33
Federal income tax benefits relating to options exercised under both plans have
been credited to shareholder's equity. The Company accounts for these plans
under APB Opinion No. 25, under which no compensation cost is recognized upon
issuance of options. Had compensation cost for these plans been determined
consistent with FASB No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
---------- --------- -----------
NET INCOME: As reported $2,880,476 $(161,430) $3,401,051
Pro Forma 2,619,110 (420,522) 3,208,455
PRIMARY EPS: As reported 1.72 (0.10) 2.20
Pro Forma 1.56 (0.27) 2.07
FULLY DILUTED EPS: As reported 1.62 (0.10) 2.07
Pro Forma 1.47 (0.27) 1.96
- -----------------------------------------------------------------------------------------------------
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's two stock option plans at December 31,
1998, 1997 and 1996, and changes during the years then ended is presented in the
table and narrative below.
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
------- ------- --------
Outstanding at beginning of year 223,171 225,813 221,190
Granted 42,638 39,359 39,291
Exercised (22,306) (39,912) (34,668)
Expired 0 (2,089) 0
Forfeited (500) 0 0
Outstanding at end of year 243,003 223,171 225,813
Exercisable at end of year 240,798 222,106 225,318
Weighted average fair value of options granted 9.03 9.35 7.04
- -----------------------------------------------------------------------------------------------------
The options outstanding at December 31, 1998 have exercise prices between $4.92
and $25.85 and remaining contractual lives between 0.5 years and 9.75 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: weighted
average risk-free interest rates of 5.48, 6.43 and 5.67 percent; weighted
average expected dividend yields of 1.77%, 1.80% and 2.19%. For all three years,
the expected life used was seven years and the expected volatility used was 31%.
(11) PROFIT SHARING PLAN AND EMPLOYEE
STOCK OWNERSHIP PLAN:
The Bank formed a 401(k) Qualified Savings Plan (the Plan) effective August 1,
1993. All full-time employees who have reached the age of 21 are eligible to
participate beginning on January 1st or July 1st following six months of
employment. All eligible employees are 100% vested in their own contributions,
which may be any whole percentage of pay between 2% and 12% inclusive. Beginning
January 1, 1995, the Bank made annual matching contributions, which were equal
to 20% of each employee's elective contributions not exceeding 6% of pay.
Contributions are invested with Lincoln National Life Insurance Company under
employee directed investment options. The Bank's matching contribution amounted
to approximately $40,000 in 1998, $35,000 in 1997 and $31,912 in 1996.
The Bank formed an Employee Stock Ownership Plan (the ESOP) effective January
1, 1988. Effective January 1, 1995, the ESOP was amended to recognize CIB and
all of its employees as participants. All employees who have completed six
months of service and have reached the age of 21 are eligible to participate
in the ESOP. The ESOP provides for annual contributions at the discretion of
the Board of Directors. The contributions are allocated based on the
participants' compensation for the year. Employees vest ratably in the ESOP
over six years. The ESOP borrowed $200,000 from a nonprofit corporation to
acquire 9,762 shares of CIB common stock in August 1995. The borrowing is
payable in five equal annual installments with interest at prime minus 1/2
percent. The rate was 7.25% at December 31, 1998. The Bank made contributions
to the ESOP of approximately $40,000 in each of the years 1998, 1997 and 1996.
34
(12) FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK:
The Bank makes commitments to extend credit in the normal course of business to
meet the financing needs of its customers. 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 amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of nonperformance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on Management's credit evaluation of the borrower. Collateral held varies
but may include certificates of deposit, accounts receivable, inventory,
property and equipment, and real property.
The Bank also issues standby letters of credit, which are unconditional
commitments to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support construction bonds, private borrowing
arrangements, and similar transactions. Most of these guarantees are short-term
commitments expiring in 1998 and are not expected to be drawn upon. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds collateral as
deemed necessary, as described above.
The contract amount of commitments not reflected on the balance sheet at
December 31, 1998, were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Loan commitments $66,088,227
Standby letters of credit $ 133,000
- --------------------------------------------------------------------------------
The Bank is obligated under a number of noncancellable operating leases for
premises and equipment used for banking purposes. Minimum future rental
commitments under noncancellable operating leases as of December 31, 1998 were
as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEASE COMMITMENTS
-----------------
1999 $139,145
2000 52,621
2001 33,564
2002 33,564
2003 33,564
Thereafter 145,444
--------
$437,902
--------
--------
- --------------------------------------------------------------------------------
Rent under operating leases was approximately $180,944, $149,713 and $52,487 in
1998, 1997 and 1996, respectively.
(13) RELATED PARTY TRANSACTIONS:
The Bank has had loan and deposit transactions and has contracted for services
with certain officers and directors and the companies with which they are
associated. In the opinion of Management and the Board of Directors, all such
loans, commitments to lend, and contracts for services were made under terms
that are consistent with the Bank's normal policies. Loan transactions with
these officers and directors for the years ended December 31, 1998 and 1997,
respectively, are as follows:
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
1998 1997
---------- -----------
Loan balances -
Beginning of year $8,215,744 $8,070,014
Additions 4,992,154 8,996,935
Collections (8,832,602) (8,851,205)
---------- -----------
End of year $4,375,296 $8,215,744
---------- -----------
---------- -----------
- -----------------------------------------------------------------------
The Bank had loans outstanding to a director of the Bank and his associates in
excess of 5 percent of shareholders' equity. The total principal balance of the
loans to this director was approximately $3,298,977 and $3,914,374 at December
31, 1998 and 1997, respectively.
Remodeling work on branches and offices of the Bank was done by directors of the
Bank. The Bank paid approximately $9,711, $442,168, and $320,901 for this work
in 1998, 1997 and 1996, respectively.
35
(14) CALIFORNIA INDEPENDENT BANCORP FINANCIAL STATEMENTS (PARENT ONLY):
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------------
1998 1997
---------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET-
ASSETS:
Cash and due from banks $ 54 $ 2
Investment in subsidiaries 23,499 21,260
Other assets 102 108
- ------------------------------------------------------------------------------------------------
Total assets $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Shareholders' equity
Total shareholders' equity $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 23,655 $ 21,370
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME-
Administrative expense $ 81 $ 116
Other expense 97 82
- ------------------------------------------------------------------------------------------------
Loss before equity in net income of subsidiaries $ 178 $ 198
Equity in net income of subsidiaries:
Distributed 899 707
Undistributed 2,086 (750)
Income tax benefit 73 80
- ------------------------------------------------------------------------------------------------
Net income $ 2,880 $ (161)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss) $ 2,880 $ (161)
Adjustments to reconcile net income to net cash
provided by operating activities-
Undistributed equity in net income of subsidiaries (2,086) 750
Deferred income taxes 0 0
Decrease in other operating assets 7 57
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 801 $ 646
- ------------------------------------------------------------------------------------------------
Investing activities:
Net cash provided by investing activities - -
Financing activities:
Dividends paid (749) (707)
- ------------------------------------------------------------------------------------------------
Net cash used in:
Financing activities (749) (707)
- ------------------------------------------------------------------------------------------------
(Increase) decrease in cash and cash equivalents $ 52 $ (61)
Cash and cash equivalents, beginning of year 2 63
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 54 $ 2
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
(15) QUARTERLY STATEMENTS OF OPERATIONS:
The following information is unaudited. However, in the opinion of Management,
all adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for such periods, are reflected.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further explanation of quarterly
results of operations.
36
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
1998 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $5,966 $6,340 $6,558 $5,964
Interest expense 2,172 2,191 2,368 2,101
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,794 4,149 4,190 3,863
Provision for loan and lease losses 396 290 754 806
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 3,398 3,859 3,436 3,057
Noninterest income 1,349 1,403 1,558 1,291
Noninterest expense 3,456 3,892 3,909 3,500
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,291 1,370 1,085 848
Provision for income taxes 480 520 405 309
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 811 $ 850 $ 680 $ 539
Basic earnings per share $ 0.49 $ 0.51 $ 0.41 $ 0.31
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.46 $ 0.49 $ 0.38 $ 0.29
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,651,131 1,653,139 1,669,367 1,742,943
1997 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $5,473 $ 5,904 $6,162 $ 5,854
Interest expense 2,210 2,360 2,407 2,312
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,263 3,544 3,755 3,542
Provision for loan losses (40) (3,296) 0 (2,817)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,223 248 3,755 725
Noninterest income 1,062 1,094 1,453 1,448
Noninterest expense 2,958 3,385 3,569 3,670
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,327 (2,043) 1,639 (1,497)
Provision (benefit) for income taxes 510 (850) 651 (724)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 817 $(1,193) $ 988 $ (773)
Basic earnings per share $ 0.53 $ (0.76) $ 0.63 $ (0.50)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.51 $ (0.73) $0.60 $(0.48)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,546,032 1,552,808 1,571,498 1,637,712
1996 QUARTER ENDED (UNAUDITED)
------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $4,823 $ 4,867 $ 5,311 $5,574
Interest expense 1,746 1,743 1,884 2,076
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,077 3,124 3,427 3,498
Provision for loan losses 60 40 80 205
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,017 3,084 3,347 3,293
Noninterest income 638 589 677 1,232
Noninterest expense 2,346 2,360 2,583 2,980
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,309 1,313 1,441 1,545
Provision for income taxes 522 526 537 622
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 787 $ 787 $ 904 $ 923
Basic earnings per share $ 0.48 $ 0.49 $ 0.56 $ 0.56
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.46 $ 0.46 $ 0.53 $ 0.53
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,612,219 1,612,222 1,615,649 1,638,997
- --------------------------------------------------------------------------------------------------------------------------------
37
(16) REGULATORY MATTERS:
The Company and Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and 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 Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total capital (Total Risk-Based), and Tier 1 capital
(Tier 1 Risk-Based) (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (Tier 1 Leverage Ratio) (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Company and Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum Total Risk-Based, Tier 1 Risk-Based, Tier 1 Leverage Ratios as set forth
in the table. There are no conditions or events since that notification that
Management believes have changed the institution's category.
The Company's and Bank's actual capital amounts and ratios are also presented in
the table:
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
TO BE WELL-
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- ---------- -------- ---------- ---------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT RATIO DATA)
AS OF DECEMBER 31, 1998:
Total Risk-Based Capital:
California Independent Bancorp $26,660 10.38% > $20,540 > 8.00% > $25,675 > 10.00%
- - - -
Feather River State Bank $26,502 10.33% > $20,528 > 8.00% > $25,660 > 10.00%
- - - -
Tier I Risk-Based Capital:
California Independent Bancorp $23,416 9.12% > $10,270 > 4.00% > $15,405 > 6.00%
- - - -
Feather River State Bank $23,260 9.06% > $10,264 > 4.00% > $15,396 > 6.00%
- - - -
Tier I Leverage Ratio:
California Independent Bancorp $23,416 8.20% > $11,427 > 4.00% > $14,284 > 5.00%
- - - -
Feather River State Bank $23,260 8.14% > $11,419 > 4.00% > $14,283 > 5.00%
- - - -
AS OF DECEMBER 31, 1997:
Total Risk-Based Capital:
California Independent Bancorp $24,124 10.25% > $18,826 > 8.00% > $23,533 > 10.00%
- - - -
Feather River State Bank $24,006 10.23% > $18,780 > 8.00% > $23,475 > 10.00%
- - - -
Tier I Risk-Based Capital:
California Independent Bancorp $21,151 8.99% > $ 9,413 > 4.00% > $14,120 > 6.00%
- - - -
Feather River State Bank $21,040 8.96% > $ 9,390 > 4.00% > $14,085 > 6.00%
- - - -
Tier I Leverage Ratio:
California Independent Bancorp $21,151 7.43% > $11,384 > 4.00% > $14,230 > 5.00%
- - - -
Feather River State Bank $21,040 7.40% > $11,377 > 4.00% > $14,221 > 5.00%
- - - -
- --------------------------------------------------------------------------------------------------------------
38
(17) FUTURE FINANCIAL ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
will adopt this statement on January 1, 1999, and does not expect that it will
have a material impact on its financial position or results of operations.
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", which is effective for the
first quarter beginning after December 15, 1998. This statement amends Statement
of Financial Accounting Standards No. 65 "Accounting for Certain Mortgage
Banking Activities" to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. The Company will adopt
this statement on January 1, 1999, and does not expect that it will have a
material impact on its financial position or results of operations.
39