FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission File Number 0-265520
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CALIFORNIA INDEPENDENT BANCORP
------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0349947
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1227 BRIDGE ST., SUITE C, YUBA CITY, CALIFORNIA 95991
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(Address of principal executive offices)
(Zip Code)
(530) 674-4444
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(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class March 31, 1999
----- --------------
Common stock, no par value 1,749,873 shares
This report contains 26 pages
PART I- FINANCIAL INFORMATION
ITEM 1 PAGE
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-23
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
PART II- OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 24
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5
OTHER INFORMATION 24
ITEM 6
EXHIBITS AND REPORTS ON FORM 8K 24-25
SIGNATURES 26
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
--------------------- ----------------- -----------------
ASSETS
Cash and due from banks $ 20,090,471 $ 30,900,727 $ 16,089,358
Federal funds sold 8,900,000 12,100,000 9,100,000
--------------------- ----------------- -----------------
Cash and cash equivalents 28,990,471 43,000,727 25,189,358
Investment securities:
Held-to-maturity securities, at amortized cost
(fair value of $9,689,171, $9,202,780 and
$18,693,134, respectively) 9,344,340 9,106,029 18,633,979
Available-for-sale securities, at fair value 64,687,804 51,533,305 51,013,310
--------------------- ----------------- -----------------
Total investments 74,032,144 60,639,334 69,647,289
Loans and leases 142,818,871 150,919,757 141,799,626
Loans and leases held-for-sale 33,431,379 30,262,758 35,660,879
--------------------- ----------------- -----------------
Gross Loans 176,250,250 181,182,515 177,460,505
Less- allowance for loan and lease losses (6,566,694) (6,024,111) (5,822,119)
--------------------- ----------------- -----------------
Net Loans 169,683,556 175,158,404 171,638,386
Premises and equipment, net 7,819,537 7,848,799 8,056,502
Interest receivable 3,089,879 2,854,674 3,410,647
Other real estate owned 101,014 101,014 649,096
Other assets 5,877,597 5,709,653 5,877,126
--------------------- ----------------- -----------------
Total assets $ 289,594,198 $ 295,312,605 $ 284,468,404
--------------------- ----------------- -----------------
--------------------- ----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 56,312,361 $ 66,008,029 $ 51,572,566
Interest-bearing 207,132,584 202,800,415 207,950,372
--------------------- ----------------- -----------------
Total deposits 263,444,945 268,808,444 259,522,938
Interest payable 1,446,152 1,622,659 1,721,716
Other liabilities 1,021,236 1,226,331 1,174,888
--------------------- ----------------- -----------------
Total liabilities 265,912,333 271,657,434 262,419,542
Shareholders' equity:
Common stock, no par value-
Authorized- 20,000,000 shares
Issued and outstanding - 1,749,873 shares March 31,
1999, 1,744,580 shares December 31, 1998 and
1,733,688 shares March 31, 1998 15,563,846 15,561,767 13,587,420
Retained earnings 8,395,424 8,099,474 8,494,846
Debt guarantee of ESOP (40,000) (40,000) (80,000)
Accumulated other comprehensive (loss) income (237,405) 33,930 46,596
--------------------- ----------------- -----------------
Total shareholders' equity 23,681,865 23,655,171 22,048,862
--------------------- ----------------- -----------------
Total liabilities and shareholders' equity $ 289,594,198 $ 295,312,605 $ 284,468,404
--------------------- ----------------- -----------------
--------------------- ----------------- -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
3
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
----------------------------------------------------------
INTEREST INCOME
Interest and fees on loans and leases $ 4,711,336 $ 4,607,242
Interest on investment-
Taxable interest income 876,867 880,046
Nontaxable interest income 45,351 90,196
Interest on federal funds sold 205,593 389,156
---------------------------- -------------------------
Total interest income 5,839,147 5,966,640
---------------------------- -------------------------
INTEREST EXPENSE
Interest on deposits 2,051,521 2,165,769
Interest on other borrowings 3,412 5,013
---------------------------- -------------------------
Total interest expense 2,054,933 2,170,782
---------------------------- -------------------------
Net interest income 3,784,214 3,795,858
PROVISION FOR LOAN AND LEASE LOSSES (550,000) (396,000)
---------------------------- -------------------------
Net interest income after provision for loan and lease
losses 3,234,214 3,399,858
---------------------------- -------------------------
NONINTEREST INCOME
Service charges on deposit accounts 203,713 239,607
Lease commissions 432,310 531,136
Brokered loan fees 95,665 258,314
Other 397,905 320,528
---------------------------- -------------------------
Total noninterest income 1,129,593 1,349,585
---------------------------- -------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,998,795 1,962,644
Occupancy expense 203,216 186,700
Furniture and equipment expense 382,938 348,044
Legal and professional fees 124,777 161,799
Other 886,570 795,583
---------------------------- -------------------------
Total noninterest expense 3,596,296 3,454,770
---------------------------- -------------------------
Income before provision for income taxes 767,511 1,294,673
PROVISION FOR INCOME TAXES 279,250 482,300
---------------------------- -------------------------
Net income $ 488,261 $ 812,373
---------------------------- -------------------------
---------------------------- -------------------------
PER SHARE AMOUNTS
Basic earnings per share $ 0.28 $ 0.47
---------------------------- -------------------------
---------------------------- -------------------------
Diluted earnings per share $ 0.25 $ 0.41
---------------------------- -------------------------
---------------------------- -------------------------
Cash dividends per common share $ 0.11 $ 0.10
---------------------------- -------------------------
---------------------------- -------------------------
Weighted Average Common Shares Outstanding 1,747,213 1,733,688
---------------------------- -------------------------
---------------------------- -------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
4
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(UNAUDITED)
MARCH 31, MARCH 31,
1999 1998
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 488,261 $ 812,373
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 279,114 270,898
Provision for possible loan losses 550,000 396,000
Write-down of other real estate owned 0 37,999
Provision for deferred taxes (222,000) 39,108
(Increase) decrease in assets-
Interest receivable (235,205) (739,714)
Other assets 54,056 350,751
Increase (decrease) in liabilities-
Interest payable (176,507) (92,481)
Fed Funds purchased, other borrowings and other
liabilities (205,095) 29,815
-------------------------------------------
Net cash provided by operating activities 532,624 1,104,749
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans 4,924,848 (9,761,133)
Purchase of investments (26,474,059) (20,413,272)
Proceeds from maturity of HTM Securities 920,000 3,000,000
Proceeds from sales/maturity of AFS Securities 11,889,914 5,011,824
Proceeds from sales of other real estate owned 0 230,440
Purchases of premises and equipment (249,852) (149,600)
-------------------------------------------
Net cash used for investing activities (8,989,149) (22,081,741)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in noninterest bearing deposits (9,695,668) (10,920,938)
Net increase (decrease) in interest bearing deposits 4,332,169 3,243,865
Cash dividends (192,311) (181,624)
Stock options exercised 2,079 0
Cash paid in lieu of fractional shares 0 0
-------------------------------------------
Net cash provided by (used in) financing activities (5,553,731) (7,858,697)
NET INCREASE (DECREASE) (14,010,256) (28,835,689)
-------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,000,727 54,025,047
-------------------------------------------
-------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 28,990,471 25,189,358
-------------------------------------------
-------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
5
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC"). In the opinion of Management, the
unaudited consolidated financial statements contain all adjustments
which are necessary to present fairly the financial position of
California Independent Bancorp ("Company") and its subsidiaries at
March 31, 1999, December 31, 1998 and March 31, 1998, and the results
of its operations for the periods ended March 31, 1999 and March
31,1998, respectively.
Certain information and footnote disclosures normally presented in
annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance with SEC
rules or regulations. The results of operations for the period ended
March 31, 1999, are not necessarily indicative of the operating results
for the full year ending December 31, 1999. It is suggested these
financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual report for the
year ended December 31, 1998.
NOTE 2 - CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary Feather River State Bank ("Bank"),
and the Bank's wholly owned subsidiary E.P.I. Leasing Company Inc.
("EPI"). All material intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 3 - LOANS TO DIRECTORS
In the ordinary course of business, the Company makes loans to
directors of the Company, which on March 31, 1999, amounted to a total
of approximately $3,678,000.
NOTE 4 - COMMITMENTS & CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend
credit and letters of credit, which are not reflected in the financial
statements. Management does not anticipate any material loss as a
result of these transactions.
NOTE 5 - CASH DIVIDENDS
In February, May, August and November of 1998 and February 1999, the
Company paid an eleven-cent per share cash dividend.
NOTE 6 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings per Share," which establishes standards
for computing and presenting earnings per share ("EPS"). It replaced
the presentation of primary EPS with a presentation of basic EPS. It
also required dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures
and required reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation. The statement is effective for financial statements
issued for periods ending
6
after December 15, 1997, and requires restatement for all periods
presented. The implementation of this statement does not have a
material effect on the Company's reported financial position or net
income.
Basic earnings per share excludes dilution and is computed by dividing
income available to the common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if options
or other contracts to issue common stock were exercised or converted
into common stock, or resulted in the issuance of common stock that
then shared the earnings of the Company.
NOTE 7 - FINANCIAL ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted 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. Total comprehensive income for the three months ended March
31, 1999 and March 31, 1998, is $250,856 and $858,969, respectively.
On January 1, 1998, the Company 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. The adoption of the applicable
provisions of SFAS No. 131 did not have a material effect on the
Company, as Management believes that the Company operates only in one
segment, the commercial banking segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires recognition of all derivatives as
either assets or liabilities in the statement of financial condition
and the measurement of those instruments at fair value. Recognition of
changes in fair value will be recognized into income or as a component
of other comprehensive income depending upon the type of the derivative
and its related hedge, if any. SFAS No. 133 is effective for the
Company beginning January 1, 2000. The Company is in the process of
determining the impact of SFAS No. 133 on the Company's financial
statements, which is not expected to be material.
In October of 1998, FASB issued SFAS No. 134, to be effective the first
fiscal quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65
to require entities engaged in mortgage banking activities to classify
their mortgage-backed securities, or other retained interests, based
upon their ability and intent to sell or hold those investments. The
intent of the statement is to conform the subsequent accounting for
securities retained after mortgage loan securitization with the
subsequent accounting for securities retained after the securitization
of other types of assets by mortgage banking entities. The Company has
adopted SFAS No. 134 and does not expect the statement to have a
material impact on its financial statements.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
California Independent Bancorp ("CIB", and with its subsidiaries 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 as a California State commercial chartered bank.
CIB was formed in 1994 and, after receiving regulatory and shareholder
approval, became the holding company for the Bank in May 1995. In October
1996, the Bank acquired E.P.I. Leasing Co., Inc. ("EPI") and operates this
equipment leasing company as a subsidiary.
Certain statements in this Form 10-Q quarterly report include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are subject to the 'safe harbor' provisions created by those
sections. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Such risks and uncertainties include, but are
not limited to, the following factors: competitive pressure in the banking
industry; changes in the interest rate environment; general economic conditions,
either nationally or regionally, that are less favorable than expected,
resulting in, among other things, a deterioration in credit quality and an
increase in the provision for possible loan losses; 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; the loss of key personnel;
and changes in the securities markets. In addition, such risks and uncertainties
include mortgage banking activities, merchant card processing and concentration
of lending activities.
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from March 31, 1998
and December 31, 1998 to March 31, 1999, and significant changes and trends in
the Company's results of operations for the three months ended March 31, 1999,
compared to the same period in 1998.
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
The Company reported net income of $488,261 as of March 31, 1999 as compared to
$812,373 for the period ending March 31, 1998. These figures represent a 39.9%
decline which primarily are attributible to two factors. First, the Company
continues to allocate additional funds to its provision for loan and lease
losses which amounted to $550,000 for the first quarter of 1999 as compared to
$396,000 for the same period 1998. Second, is the Company's strategic decision
to hold selected real estate loans in the Bank's portfolio instead of selling
these loans in the secondary markets. By implementing this strategy the Company
is attempting to take advantage of long-term increases in interest income, while
foregoing a lower return earned by the one-time brokered loan fee. The immediate
impact of this plan contributed to a decrease of brokered loan fee income. These
fees stood at $95,665 at March 31, 1999 a 63% decrease over the same period in
1998.
Total assets at March 31, 1999 decreased 1.9% from $295,312,605 at December 31,
1998 to $289,594,198. However, this marks an increase of 1.8% over March 31,
1998 total assets of $284,468,404. Gross loans were $176,250,250 at March 31,
1999, a 2.7% decrease from $181,182,515 at December 31, 1998 and 0.70% decrease
from $177,460,505 at March 31, 1998. The decrease from March 31,1999 over
December 31, 1998, represents the seasonal nature of the Company's loan
portfolio. Historically, the Company's agricultural loan demand increases in the
second
8
and third quarters of the year. The Company's loan balances begin to
decrease, during the fourth quarter of the year and into the first quarter of
the next year, as payments are received from its borrowers.
The Company's investment portfolio at March 31,1999, was $74,032,144 compared to
December 31, 1998 investments of $60,639,334 and $69,647,289 at March 31, 1998.
The increase in the investment portfolio from December 31, 1998, to March 31,
1999, was due to the reallocation of loan proceeds received into investments
rather than making new loans. Cash and cash equivalents which consists of cash
and due from banks and federal funds sold were $28,990,471 at March 31, 1999,
$43,000,727 at December 31, 1998 and $25,189,358 as of March 31, 1998. The
decrease in cash and cash equivalents from December 31, 1998 to March 31, 1999
is attributable to the Company shifting funds to longer term, higher yielding
investments.
Total deposits decreased from $268,808,444 at December 31, 1998, to $263,444,945
at March 31, 1999. This decline in deposits is a reflection of normal seasonal
decreases in noninterst-bearing deposits amounting to $9,695,668 offset by an
increase of $4,432,169 in interest-bearing deposits resulting in a net decrease
in total deposits of $5,363,499 or 2.0%.
The total loan-to-deposit ratios were 66.9%, 67.4% and 68.4% at March 31, 1999,
December 31, 1998 and March 31, 1998.
LOANS
Total loans outstanding, as of March 31, 1999 was $176,250,250. This represents
a decrease of $4,621,804 or 2.6% since December 31, 1998, and a slight decrease
of $1,210,255 or 0.7% compared to March 31, 1998. However, the average
outstanding balance of loans during the first quarter of 1999 was $175,942,005
compared to $167,230,374 for the first quarter of 1998. The Company's average
loans outstanding during the first quarter of 1999 were 5.21% greater than the
first quarter of 1998.
Due to the types of loans made by the Company, the outstanding loan totals
sustain moderate variations from quarter to quarter. Specifically, certain
seasonal variations are expected to occur in the agricultural and construction
loan portfolios. The table below sets forth the composition of the Company's
loan portfolio as of March 31, 1999, December 31, 1998 and March 31, 1998.
COMPOSITION OF THE LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
LOAN CATEGORY 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------
Commercial and Agricultural $67,810,602 $71,784,483 $71,503,959
Real Estate-Construction 42,007,098 54,828,845 46,518,235
Real Estate-Mortgage 40,707,570 28,503,710 29,044,052
Consumer 2,390,420 2,655,031 2,200,467
Lease Financing 23,278,541 23,313,399 27,819,287
Other 56,019 97,047 374,505
----------------------------------------------------------------------
Total $176,250,250 $181,182,515 $177,460,505
- -------------------------------------------------------------------------------------------------------------
9
The principal changes in the loan portfolio between December 31, 1998 and March
31, 1999 are discussed below:
1. Commercial and Agricultural loans declined $3,973,881 or 5.5%. The Company
provides a wide range of loan products to farmers and agri-businesses
throughout its trade area. A decrease occurred in the agricultural loan
portfolio as borrower's repaid 1998 crop production loans from the sale of
crops. This is to be expected during the spring. The commercial loan
portfolio declined due to loan payoffs from earnings and borrower
refinancing through other lenders. The commercial portfolio is expected to
increase in forthcoming quarters.
2. Real estate construction loans declined by $12,821,747 during the quarter.
The Company extends construction loans primarily to builders of single
family houses. Loans are made to individual borrowers and to real estate
developers. The decrease in real estate construction loans is primarily due
to the time of the year. As borrowers complete building, construction loans
are retired from permanent financing. During the first quarter of the year,
new construction is generally slow. Therefore, the Company's new
construction loan volume has not replaced the volume that was paid off
during the first quarter. Real estate construction loans generally increase
during the spring and summer months due to favorable weather conditions and
increased buyer activity.
3. Other loans secured by real estate increased by $12,203,860 between
December 31, 1998 and March 31, 1999. Loans included in this category
include those secured by residential (single family and multi-family),
commercial and agricultural real property. The Company offers a variety of
loans secured by real estate. The increase is attributable to successful
business development efforts and the Company's conscious decision to
increase its real estate loan portfolio. As of March 31, 1999, 47% of the
Bank's portfolio was real estate secured (includes construction and other
real estate).
The amount of interest and fees earned on loans during the first quarter 1999
was $4,711,336 compared to $4,607,242 during the first quarter of 1998. This was
achieved despite a generally lower interest rate environment. The 2.26% increase
is attributable to a modestly higher average outstanding loan portfolio balance
in the first quarter of 1999 compared to the first quarter of 1999.
The Company lends primarily to small and medium sized businesses, small to large
sized farmers and consumers within its market area, which is comprised
principally of Sutter, Yuba, Colusa, and Yolo counties and secondarily Butte,
Glenn, Sacramento, Placer, Madera and Fresno counties. In addition, the Company
originates commercial and industrial equipment leases through its subsidiary,
EPI, which is located in Citrus Heights, California.
LOAN QUALITY
The Company places loans on nonaccrual status if (1) principal or interest has
been in default for 90 days or more, unless the loan is both well secured and in
the process of collection; (2) payment in full of principal or interest is not
expected; or (3) the financial condition of the borrower has significantly
deteriorated.
10
The table shown below summarizes the composition of non-performing loans as of
March 31, 1999, December 31, 1998 and March 31, 1998 ($ in 000's) as well as the
changes between the periods.
- -------------------------------------------------------------------------------------------------------------
3/31/99 12/31/98 3/31/98
$ Amount % Change $ Amount % Change $ Amount
--------------------------------------------------------------------------
ACCRUING LOANS PAST DUE
90 DAYS OR MORE
Commercial $ 0 -100.0% $ 6.0 -84.7% $ 39.3
Agricultural 0 0.0% 0 -100.0% 404.0
Real Estate 0 0.0% 0 0.0% 0
Leases 0 0.0% 0 -100.0% 7.6
Consumer 0 -100.0% 0.2 0.0% .2
--------------------------------------------------------------------------
TOTAL $ 0 -100.0% $ 6.2 -98.6% $ 451.2
--------------------------------------------------------------------------
NONACCRUAL LOANS
--------------------------------------------------------------------------
Commercial 550.0 -33.7% 829.1 +44.7% 573.0
Agricultural 1673.9 -4.6% 1755.2 -63.7% 4841.7
Real Estate 3052.5 +10.7% 2757.3 +62.2% 1699.6
Leases 256.5 +38.0% 163.4 -13.4% 188.6
Consumer 0 0.00% 0 0.00% 0
--------------------------------------------------------------------------
TOTAL $5,532.9 +.5% $5,505.0 -24.6% $7,302.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$5,532.9 -.4% $5,511.2 -28.9% $7,754.1
TOTAL NONPERFORMING
- -------------------------------------------------------------------------------------------------------------
Management has implemented an automatic transfer of loans and leases to
nonaccrual status at 90 days past due. This action has resulted in the tables
reflection of no accruing loans past due 90 days or more as of March 31 1999.
Only under special circumstances can the transfer to nonaccrual be avoided. At
March 31,1999, there were no accrual loans that met those conditions.
During 1998, the Company reduced nonperforming loans by 28.9%. However, since
December 31, 1998, the percentage of nonperforming loans has remained relatively
constant with nonperforming loans slightly increasing by .4%. Nonperforming
loans comprised 3.1% of the portfolio on March 31, 1999, which was down from
3.6% of the portfolio on December 31, 1998 and 4.1% on March 31, 1998.
The Company's nonperforming loans rose significantly during the first half of
1997. The increase in nonperforming loans during that period was attributable to
increased risk exposure in a limited number of large credit relationships. Since
this time, the Company has made a concerted effort to reduce nonperforming
loans. In 1997, Management assembled an experienced group of loan collectors to
aggressively collect theses troubled loans and recover charged-off loans.
Additionally, a plan was adopted to aggressively reduce the level of
nonperforming and problem loans. This approach has been and continues to be
successful.
The Company devises specific loan resolution plans based upon the circumstances
surrounding the particular credit relationship. All nonperforming loans listed
above are in the process of collection. In terms of specific resolution plans,
52% of these loans (approximately $2.9 million) have been restructured or are in
the process of being restructured, 32% (approximately $1.7 million) are in the
process of collateral liquidation, and 16% of the loans (approximately $.9
million) are currently in a workout status. Plans are designed to return the
highest dollar amount to the Company in the shortest time while reducing credit
risk exposure. Management projects additional progress toward the
11
resolution of these troubled loans during the second quarter of 1999.
However, due to particular factors surrounding specific nonperforming loans,
Management projects that some of these credits will require several
additional quarters to resolve.
Several of the large nonperforming loans listed in the table have been
partially charged-off such that the book balance of the asset is now lower than
a conservative estimate of the value of the supporting loan collateral. As a
result of a conservative loss recognition practice and the collection plans
currently in place, Management believes that the risk of additional credit loss
in the remaining nonperforming loans has been reduced.
The Company's nonperforming credits are concentrated in two credit relationships
that comprise 68% of the total. One large agricultural credit relationship
comprises 46% of the total. This borrower sustained financial difficulty
stemming from a combination of factors. The debtor is currently in bankruptcy,
which has slowed progress toward ultimate loan resolution. Negotiations continue
to progress in an attempt to complete the restructure of the credit
relationship. Management anticipates a conclusion to the restructuring during
the second quarter of 1999.
The second largest nonaccrual loan, comprising 22% of total nonperforming loans,
is to a real estate developer. The Bank financed a subdivision that did not
proceed as scheduled. The borrower has sustained cash flow and solvency problems
and has filed personal bankruptcy. This credit has been restructured under a
development plan. Progress was made during the second and third quarters of 1998
as the real estate market improved modestly and the borrower was able to sell
certain real property. According to the terms of the plan, Management expects
additional loan reductions during the second quarter of 1999.
The remaining 32% of the nonperforming loans are distributed among the
commercial, agricultural, real estate and lease portfolios. As indicated in the
table above, the Company sustained an overall decrease in nonaccrual loans of
28.9% between March 31, 1998 and December 31, 1998. Nonaccrual commercial loan
category is the only portfolio that sustained an increase at December 31, 1998.
The significant offsetting changes in nonaccrual real estate and agricultural
loans at December 31, 1998 is a result of the reclassification of two loans
previously classified agricultural and now reported under the real estate
category totaling $1.2 million.
Overall progress in the nonperforming loan reduction was static at the March 31,
1999 quarter end compared to December 31,1998. Despite this, the Company
reflected a 28.6% improvement over the past twelve months compared to the first
quarter ending March 31,1998. The first quarter ending March 31,1999 compared to
the December 31,1998 year end noted a 33.7% improvement in nonperforming
commercial loans due to the collection of two accounts and a 4.6% drop in
nonperforming agricultural loans caused by a reduction in one agricultural loan.
These reductions were offset by 10.7% increase in nonperforming real estate
loans due to the addition of two new real estate credits totaling approximately
$386,000. The largest increase appeared as a 38.0% growth in lease categories.
Nonaccrual leases increased due to several bankruptcies and business failures
sustained by lessees. In addition, the automatic nonaccrual and charge-off
policy was also imposed on the leasing portfolio. The implementation of the
automatic nonaccrual policy is intended to provide for the earlier recognition
of potential problems.
Management has recently implemented a quarterly risk assessment process of all
loans and leases to maximize early problem detection and resolution. Portfolio
risk factors considered by Management include growth, composition and overall
quality of the loan portfolio. Management also continually reviews specific
problem loans and current economic conditions that may affect any concentration
of borrowers that may inhibit the ability to repay their loans.
12
The Company's Allowance for Loan and Lease Losses totaled $6,566,694 or 3.14% of
gross loans as of March 31, 1999. This amount is compared to $6,024,111 as of
December 31, 1998 and $5,822,119 as of March 31, 1998. The Company uses the
allowance method in providing for possible loan and lease losses. The allowance
method requires loan and lease losses to be charged against the allowance for
possible loan and lease losses and recoveries are credited to it. Management
believes that the total allowance for loan and lease losses is adequate to cover
potential losses and leases in the loan portfolio. While Management uses
available information to provide for loan and lease losses, future additions to
the allowance may be necessary based on changes in economic conditions or other
factors.
Additional provisions for possible loan and lease losses increase the allowance
for loan and lease losses. The provision for possible loan and lease losses is
charged to operating expense and is based upon past loan and lease loss
experience and estimates of potential loan and lease losses which, in
Management's judgment, deserves current recognition. Actual losses may vary from
current estimates. The estimates are reviewed regularly, and adjustments, as
necessary, are charged to operations in the period in which they become known.
13
RESULTS OF OPERATIONS
Three months ended March 31, 1999
Compared with
Three months ended March 31, 1998
The Company realized net income for the first quarter of 1999 of $488,261
resulting in diluted earnings of $0.25 per share. The net income as of March 31,
1999 was less than the first quarter of 1998, which reported net income of
$812,373 or $0.43 per share on a diluted basis. The decrease in 1999 over the
same period in 1998 was due to several factors.
The primary factor contributing to the decrease in net income was the continued
augmentation of the Company's allowance for loan and lease losses. To further
this objective, it was necessary for the Company to continue to increase its
provisions for loan and lease losses. These provisions stood at $550,000 at
March 31, 1999, which amounted to a 38.9% or $154,000 increase over the same
period in 1998 provisions of $396,000.
In addition to the increase in the provision for loan and lease losses, the
Company also recognized a decrease in real estate brokered loan fee income.
During the first quarter of 1999, the Company decided to hold selected real
estate loans in its portfolio instead of selling those loans into secondary
markets. The intent of this strategy is to benefit from the long-term, higher
yielding interest income stream created by the real estate loans, instead of the
one-time brokerage fee earned from the loans' sale. The income from brokered
loan fees stood at $95,665 and $258,314 for the periods ending March 31, 1999
and 1998, respectively, representing a decrease of $162,649 or 63.0%.
Another contributor to the decrease in net income for the three-month period
ending March 31, 1999, over the same period in 1998, was an increase in other
noninterest expenses. This increase amounted to $90,987 and stood at $886,570 at
March 31, 1999 and $795,583 during the same period in 1998. While the Company
has attempted to recognize operating efficiencies and control operating
expenses, it continues to incur expenses related to the Year 2000 issues. In
preparing for the Year 2000, the Company has taken precautionary measures to
ensure it is technologically sound. The Company has expensed more than $60,000
during the first quarter of 1999 in order to maintain its commitment to its Year
2000 readiness program. To date the Company has spent approximately $ 315,000
towards operating costs associated with its Year 2000 readiness.
Net interest income, the difference between interest earned on loans and
investments, and the interest paid on deposits and other sources of funds are
the principal component of the Company's earnings, also slightly decreased in
comparison to the prior year. Net interest income before provision for loan and
lease losses at March 31, 1999, was $3,784,214, a decrease of 0.3% over
$3,795,858 at March 31, 1998.
14
Interest income was $5,839,147 and $5,966,640 at March 31, 1999 and 1998,
respectively. The primary source of interest income is interest and fees on
loans and leases. The table below depicts average loans and yields for the
three-month periods ending March 31, 1999 and 1998.
- -------------------------------------------------------------------------------------------------------------
Three months ended Three months ended
March 31, 1999 March 31, 1998
- -------------------------------------------------------------------------------------------------------------
Average loans outstanding $ 175,942,005 $ 167,230,374
Average yields 10.71% 11.02%
Amount of interest
& fees earned $ 4,711,336 $ 4,607,242
Average prime rate 7.75% 8.50%
- -------------------------------------------------------------------------------------------------------------
The Company also experienced a decrease in total interest expense of 5.3% or
$115,849, for the three months ending March 31, 1999 over 1998 total interest
expense of $2,170,782. This decrease in interest expense is primarily reflective
of the Company's decision to adjust the rates it pays on deposits to levels
consistent with the markets it serves, thereby resulting in a lower average
interest rate paid on its deposits. Average rates paid on deposits for the
periods ending March 31, 1999 and 1998 were 3.12% and 3.32%, respectively.
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three month period ended March 31, 1999, compared to the same
periods in 1998, are set forth in the following table:
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
- -------------------------------------------------------------------------------------------------------------
Average deposits outstanding $ 263,415,213 $ 261,112,627
Average rates paid 3.12% 3.32%
Amount of interest paid or accrued $ 2,051,521 $ 2,165,769
- -------------------------------------------------------------------------------------------------------------
The Company experienced a decrease in total noninterest income of $219,992 or
16.3% for the three-month period ended March 31, 1999, over the same period in
1998. Total noninterest income consists primarily of; service charges on deposit
accounts, lease commissions, brokered loan fees and other noninterest income.
Service charge income on deposit accounts, one of the primary components in
noninterest income, was $203,713 for the three-month period ending March 31,
1999 compared to the same period in 1998 which stood at $239,607, a decrease of
$35,894. This decrease was primarily the result of the Company's decision to
tighten its overdraft policy, thereby foregoing a portion of the income earned
on returned checks.
Another component of noninterest income is lease commissions. These commissions,
earned on leases generated by the Bank's subsidiary, EPI, was $432,310 at March
31, 1999, a $98,826 or 19.6% decrease over March 31, 1998 lease commissions of
$531,136. This decrease is due to a decline in
15
the volume of leases made by EPI during the fourth quarter of year.
Brokered loan fee income has also declined 63% to $95,665 at March 31, 1999 from
$258,314 at March 31, 1998. This decrease, as describe above, is associated with
the Company's decision to hold selected real estate loans in the Bank's
portfolio instead of selling those loans.
These decreases were offset by an increase of $77,377 in other noninterest
income in during the quarter ending March 31, 1999 compared to the same period
in 1998. Other noninterest income consists of other service charges, fees and
commissions and income derived from the sale of loans and leases.
The Company recognized a slight increase of 4.1% in total noninterest expense
during the first quarter of 1999 over the same period in 1998. Total noninterest
expense stood at $3,596,296 and $3,454,770 at March 31, 1999 and 1998,
respectively. Noninterest expenses consist of, salaries and employee benefits,
occupancy and furniture and equipment expense, legal and professional fees and
other miscellaneous expenses.
Salaries and employee benefits increased 1.8% or $36,151 during the first
quarter of 1999 over 1998. This minimal increase was due to customary salary
increases which were somewhat offset by the continued centralization of services
which created additional personnel efficiencies, thereby reducing the growth in
staffing expense.
Occupancy and furniture and equipment expenses increased by 8.7% and stood
jointly at $586,154 and $534,744 at March 31, 1999 and 1998, respectively. This
increase is primarily due to additional furniture and equipment expenses
associated with the upgrade of the Company's systems to assure Year 2000
compliance.
Legal and professional fees declined 22.9% to $124,777 at March 31, 1999 from
$161,799 at March 31, 1998. This decrease is associated with continued progress
towards the resolution of problem loans, and the resultant reduction of legal
fees associated with the collection of such loans. Additionally, other
noninterest expense, which consists of several other expenses associated with
the operations of the Company, increased 11.4%, and stood at $886,570 and
$795,583 at March 31, 1999 and March 31, 1998, respectively.
The following tables summarize the principal elements of operating expenses and
disclose the increases (decreases) and percent of increases (decreases) for the
three-month periods ended March 31, 1999 and 1998:
- ------------------------------------------------------------------------------------------------------------------
Three months ended March 31, Increase (Decrease)
1999 1998 1999 over 1998
- ------------------------------------------------------------------------------------------------------------------
Salaries and benefits $ 1,998,795 $ 1,962,644 $ 36,151 1.8%
Occupancy 203,216 186,700 16,516 8.8%
Furniture and equipment 382,938 348,044 34,894 10.0%
Legal and professional fees 124,777 161,799 (37,022) -22.9%
Other operating expenses 886,570 795,583 90,987 11.4%
Total other expenses $ 3,596,296 $ 3,454,770 $ 141,526 4.1%
- ------------------------------------------------------------------------------------------------------------------
Applicable income taxes for the three-month period ended March 31, 1999, was
$279,250 as compared to the March 31, 1998 amount of $482,300.
16
LIQUIDITY
Historically, during the first two quarters of each year the Bank experiences
excess liquidity. The seasonal agricultural loan demand of the Bank tends to
challenge the Bank's liquidity position beginning in the second quarter and
continuing into the third quarter of each year. The Bank's liquid assets consist
of cash and due from banks, federal funds sold and investment securities with
maturities of one year or less (exclusive of pledged securities).
In order to fund its liquidity needs, the Bank has formal and informal borrowing
arrangements with the Federal Reserve Bank to meet unforeseen deposit outflows
or seasonal loan funding demands. During the fourth quarter of 1998, the Bank
also entered an agreement to borrow funds from the Federal Home Loan Bank.
Additionally, the Bank has an agreement with Lehman Brothers for a standby
short-term loan secured by U.S. Government and Agency Obligations contained in
the Bank's investment portfolio. As of March 31, 1999, December 31, 1998 and
March 31, 1998, the Bank had no balances outstanding on these lines.
RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities than assets reprice in a given period, a
liability sensitive position 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 analyzing interest rate trends. The majority
of the Bank's loan portfolio consists of loans with variable interest rates.
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, when appropriate, taking collateral to secure the
obligation.
Management has developed a matrix that calculates changes to the net interest
margin in both an increasing rate environment and a decreasing rate environment.
A 200 basis point (2%) shock rate is used for this calculation. The matrix
calculates a one-year Interest Rate Risk Ratio taking into consideration the
delays in the timing of repricing based on actual experience.
The one-year Interest Rate Risk ratios at March 31,1999, for a 200 basis point
increasing and decreasing rate environment were 12.9% and 17.0%, respectively.
17
CAPITAL RESOURCES
Total shareholders' equity on March 31, 1999, increased by $26,694 to
$23,681,865 over December 31, 1998, total shareholders' equity of $23,655,171,
and rose $1,633,003 from March 31, 1998 to March 31, 1999.
The Company is subject to capital adequacy guidelines issued by federal
regulators. These guidelines are intended to reflect the degree of risk
associated with both on- and off-balance sheet items.
Financial institutions are required to comply with a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, at least half of which must be in
Tier 1 Capital. In addition, federal agencies have adopted a minimum leverage
ratio of Tier 1 Capital to total assets of 4%, which is intended to supplement
risk-based capital requirements and to ensure that all financial institutions
continue to maintain a minimum level of core capital.
As can be seen by the following tables, the Company exceeded all regulatory
capital ratios on March 31, 1999, and on December 31, 1998:
RISK BASED CAPITAL RATIO
AS OF MARCH 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
COMPANY BANK
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 Capital $ 23,716 9.70% $ 23,585 9.65%
Tier 1 Capital minimum
Requirement 9,780 4.00% 9,779 4.00%
-------------------------------------------------------------------------
Excess $ 13,936 5.70% $ 13,806 5.65%
-------------------------------------------------------------------------
Total Capital 26,814 10.97% 26,684 10.91%
Total Capital minimum
Requirement 19,560 8.00% 19,558 8.00%
-------------------------------------------------------------------------
Excess $ 7,254 2.97% $ 7,126 2.91%
-------------------------------------------------------------------------
Risk-adjusted assets $244,502 $244,475
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 23,716 8.17% $ 23,585 8.13%
Average total assets
Minimum leverage requirement 11,614 4.00% 11,605 4.00%
-------------------------------------------------------------------------
Excess $ 12,102 4.17% $ 11,980 4.13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Quarterly average assets $290,349 $290,128
------------------- --------------------
------------------- --------------------
18
AS OF DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
COMPANY BANK
(Dollars in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Tier 1 Capital $ 23,416 9.12% $ 23,260 9.06%
Tier 1 Capital minimum
Requirement 10,270 4.00% 9,779 4.00%
-------------------------------------------------------------------------
Excess $ 13,146 5.12% $ 13,481 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 8.15%
Average total assets
Minimum leverage requirement 11,427 4.00% 11,605 4.00%
-------------------------------------------------------------------------
Excess $ 11,989 4.20% $ 11,655 4.15%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Quarterly average assets $285,678 $285,463
------------------- --------------------
------------------- --------------------
DIVIDENDS
Federal and State banking and corporate laws could limit the Bank's ability to
pay dividends to the Company. The Federal Reserve Board has issued a policy
statement that a bank holding company should not declare or pay a cash dividend
to its shareholders if the dividend would place undue pressure on the capital of
its subsidiary banks or if the dividend could be funded only through additional
borrowings or other arrangements that may adversely affect the financial
position of the holding company. In addition, a bank holding company may not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend, and its prospective rate of
earnings retention is sufficient to fully fund each dividend and appears
consistent with its capital needs, asset quality and overall financial
condition. As a result of the Bank's disappointing 1997 financial performance
and concerns disclosed during the Bank's December 31, 1997, joint regulatory
examination, the Bank's Board of Directors has passed a resolution which
requires the Bank to seek the written approval of the Federal Deposit Insurance
Corporation (`FDIC") and California Department of Financial Institutions
("DFI"), prior to the payment of any cash dividends.
SUPERVISION AND REGULATION
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. The resolution requires the Bank to: maintain and, if necessary,
retain qualified management; maintain the Bank's Tier 1 leverage capital in such
an amount as to equal or exceed 7% of the Bank's FDIC Part 325 total assets (as
of March 31, 1999, the Bank's Tier 1 leverage capital ratio stood at 8.13%);
continue with the diligent implementation of a previously adopted plan to reduce
the level of non-performing and problem loans, and revision of
19
lending and collection policies and procedures; continue with the diligent
implementation of a revised operating budget and cost control plan in order
to restore the Bank's prior level of profitability; ensure that the Bank
maintains an adequate reserve for loan losses; and 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 the Company that they have determined that the condition of the Bank and the
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 that the enterprise report selected information concerning
operating segments in interim financial reports issued to shareholders.
Additionally, the Statement establishes requirements for related disclosures
about products, services, geographic areas, and major customers.
SFAS No. 131 requires public business enterprises to report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets.
The Statement further requires reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS No. 131
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997.
The Company has adopted SFAS No. 131. The adoption of the applicable provisions
did not have a material effect on the Company, as Management believes that the
Company operates only in one segment, the commercial banking segment.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" has generally been described as the inability of computers
systems, software, and other equipment using 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. The Company 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.
20
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 presently 95% complete with its
four-phase process and continues to stay abreast of all areas that may be
impacted by the Year 2000 date change. The Company is on schedule to meet all
internal deadlines set forth in the plan and the "milestone dates" which have
been established by the FDIC.
In addition, the Bank continues to communicate 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 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
approximately 95% of its plan and believes 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. During the first quarter of 1999, the Company has expended
approximately $60,000 on its Year 2000 compliance efforts. Since the program's
inception, the Company has expended approximately $315,000 on these efforts.
Management estimates an additional expenditure of $135,000 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 NON COMPLIANCE
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 the 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, not all of the effects of the century date change to the
organization can 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.
21
CONTINGENCY PLAN
A contingency plan has been developed and tested in order to structure a
methodology that would allow the Company to continue operations in the event the
Company, or its key suppliers, customers, or third party service providers will
not 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.
The Company's Corporate Disaster Recovery/Business Resumption Program contains
the full text of various Federal Financial Institutions Examination Council's
Interagency Policies on Contingency Planning for Financial Institutions. This
plan, working in an integrated manner with our existing Security Measures &
Controls Procedures and Data Processing Disaster Recovery Plan, should provide
protection and guidance for the Company and its employees during potential Year
2000 emergencies, and should allow the Company to continue to serve its
customers and the local community, despite the existence of such an emergency.
However, as with any plan, the commitment and assistance of all Bank personnel
will be required, regardless of position, to carry out and achieve success in
implementing the contingency plan.
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
using 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.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130 -"REPORTING COMPREHENSIVE INCOME"
For financial statements issued after December 31, 1997, the FASB mandates
compliance with SFAS
22
No. 130, "Reporting Comprehensive Income." SFAS provides guidance as to the
presentation and display of comprehensive income and its components in the
financial statements. The statement defines "comprehensive income" to include
revenues, expenses, gains, and changes in equity from transactions during the
period. The Company has adopted SFAS No. 130, and does not expect the
statement to have a material impact on its financial statements.
SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES"
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities in the
statement of financial condition and the measurement of those instruments at
fair value. Recognition of changes in fair value will be recognized into income
or as a component of other comprehensive income depending upon the type of the
derivative and its related hedge, if any. SFAS No. 133 is effective for the
Company beginning January 1, 2000. The Company is in the process of determining
the impact of SFAS No. 133 on the Company's financial statements, which is not
expected to be material.
SFAS NO. 134 - "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES
RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR
SALE BY A MORTGAGE BANKING ENTERPRISE"
FASB issued SFAS No. 134 in October of 1998, to be effective the first fiscal
quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65 to require
entities engaged in mortgage banking activities to classify their
mortgage-backed securities, or other retained interests, based upon their
ability and intent to sell or hold those investments. The intent of the
statement is to conform the subsequent accounting for securities retained after
mortgage loan securitization with the subsequent accounting for securities
retained after the securitization of other types of assets by mortgage banking
entities. The Company has adopted SFAS No. 134 and does not expect the statement
to have a material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion, the Company's market risk and interest rate risk
profiles are within reasonable tolerances at this time. (See Item 2. Management
Discussion and Analysis of Financial Condition and Results of Operations,
sections discussing "Liquidity" and "Rate Sensitivity" at page 17). No
significant changes to the market risk or interest rate risk of the Company have
occurred since December 31, 1999.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None reported
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.
No changes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the period.
ITEM 5. OTHER INFORMATION.
None reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.
(a) Exhibits.
Exhibit No.
2.1 Plan of Reorganization and Merger Agreement dated January 30,
1995 by and between Feather River State Bank, FRSB Merger
Company and California Independent Bancorp. Filed as Exhibit
2.1 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
3.1 Secretary's Compiled, Amended and Restated Articles of
Incorporation for California Independent Bancorp as of April
26, 1999.
3.2 Bylaws of California Independent Bancorp. Filed as Exhibit 3.2
to the Company's General Form for Registration of Securities
on Form 10 (File No. 0-26552).*
27 Financial Data Schedule
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*Document incorporated herein by reference.
(b) No reports on Form 8K were filed during the period.
24