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 JUNE 30, 1999
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to _________________
Commission File Number 0-265520
California Independent Bancorp
------------------------------
(Exact name of registrant as specified in its charter)
California 68-0349947
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1227 Bridge St., Suite C, Yuba City, California 95991
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(530) 674-4444
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class June 30, 1999
----- -------------
Common stock, no par value 1,809,859 shares
This report contains 52pages. The Exhibit Index is on page 27.
1
PART I- FINANCIAL INFORMATION
ITEM 1
CALIFORNIA INDEPENDENT BANCORP AND
SUBSIDIARIES FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE-MONTHS 4
CONSOLIDATED STATEMENTS OF INCOME FOR SIX-MONTHS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-25
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II- OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS 26
ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS 26
ITEM 3
DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5
OTHER INFORMATION 26
ITEM 6
EXHIBITS AND REPORTS ON FORM 8K 27
SIGNATURES 28
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
------------- ------------- -------------
ASSETS
Cash and due from banks $ 19,836,315 $ 30,900,727 $ 17,497,010
Federal funds sold 12,100,000
------------- ------------- -------------
Cash and cash equivalents 19,836,315 43,000,727 17,497,010
Investment securities:
Held-to-maturity securities, at amortized cost
(fair value of $8,684,672, $9,202,780 and 8,714,055 9,106,029 13,416,576
$13,445,270 respectively)
Available-for-sale securities, at fair value 61,391,066 51,533,305 47,061,271
------------- ------------- -------------
Total investments 70,105,121 60,639,334 60,477,847
Loans and leases 147,614,151 150,919,757 162,323,548
Loans and leases held-for-sale 42,752,260 30,262,758 43,658,261
------------- ------------- -------------
Gross Loans 190,366,411 181,182,515 205,981,809
Less- allowance for loan and lease losses (6,663,063) (6,024,111) (5,411,363)
------------- ------------- -------------
Net Loans 183,703,348 175,158,404 200,570,446
Premises and equipment, net 7,738,121 7,848,799 7,996,620
Interest receivable 4,248,244 2,854,674 4,042,071
Other real estate owned 1,485,159 101,014 105,210
Other assets 6,498,259 5,709,653 4,924,024
------------- ------------- -------------
Total assets $ 293,614,567 $ 295,312,605 $ 295,613,228
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 54,845,792 $ 66,008,029 $ 51,789,069
Interest-bearing 207,146,690 202,800,415 196,981,331
------------- ------------- -------------
Total deposits 261,992,482 268,808,444 248,770,400
Interest payable 1,300,469 1,622,659 1,541,893
Other liabilities 6,599,978 1,226,331 22,628,064
------------- ------------- -------------
Total liabilities 269,892,929 271,657,434 272,940,357
Shareholders' equity:
Common stock, no par value-
Authorized- 20,000,000 shares
Issued and outstanding - 1,809,859 shares
June 30, 1999, 1,744,580 shares December
31, 1998 and 1,739,331 shares June 30, 1998
16,116,518 15,561,767 13,571,154
Retained earnings 8,532,215 8,099,474 9,164,058
Debt guarantee of ESOP (40,000) (40,000) (80,000)
Accumulated other comprehensive (loss) income (887,095) 33,930 17,659
------------- ------------- -------------
Total shareholders' equity 23,721,638 23,655,171 22,672,871
------------- ------------- -------------
Total liabilities and shareholders' equity $ 293,614,567 $ 295,312,605 $ 295,613,228
------------- ------------- -------------
------------- ------------- -------------
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
JUNE 30, 1999 JUNE 30, 1998
----------- -------------
INTEREST INCOME
Interest and fees on loans and leases $ 4,668,412 $ 5,334,080
Interest on investment-
Taxable interest income 990,695
900,774
Nontaxable interest income 40,952
74,637
Interest on federal funds sold 37,409 30,510
----------- -------------
Total interest income 5,737,468 6,340,001
----------- -------------
INTEREST EXPENSE
Interest on deposits 2,008,611 2,093,023
Interest on other borrowings 30,452 97,726
----------- -------------
Total interest expense 2,039,063 2,190,749
----------- -------------
Net interest income 3,698,405 4,149,252
PROVISION FOR LOAN AND LEASE LOSSES (250,000) (290,000)
----------- -------------
Net interest income after provision for loan and lease losses 3,448,405 3,859,252
----------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 255,413 220,006
Lease commissions 465,318 559,642
Brokered loan fees 37,539 353,034
Other 327,121 270,357
----------- -------------
Total noninterest income 1,085,391 1,403,039
----------- -------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,049,093 2,107,550
Occupancy expense 200,353 184,894
Furniture and equipment expense 363,342 343,157
Legal and professional fees 93,440 328,231
Other 1,306,741 928,072
----------- -------------
Total noninterest expense 4,012,969 3,891,904
----------- -------------
Income before provision for income taxes 520,827 1,370,387
PROVISION FOR INCOME TAXES 185,550 519,550
----------- -------------
Net income $ 335,277 $ 850,837
----------- -------------
----------- -------------
PER SHARE AMOUNTS
Basic earnings per share $ 0.19 $ 0.46
----------- -------------
----------- -------------
Diluted earnings per share $ 0.17 $ 0.51
----------- -------------
----------- -------------
Cash dividends per common share $ 0.11 $ 0.11
----------- -------------
----------- -------------
Weighted Average Common Shares Outstanding 1,792,691 1,798,179
----------- -------------
----------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
4
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX-MONTHS SIX-MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------ --------------
INTEREST INCOME
Interest and fees on loans and leases $ 9,379,748 $ 9,941,322
Interest on investment-
Taxable interest income 1,867,562 1,780,820
Nontaxable interest income 86,303 164,833
Interest on federal funds sold 243,002 419,666
------------ --------------
Total interest income 11,576,615 12,306,641
------------ --------------
INTEREST EXPENSE
Interest on deposits 4,060,132 4,258,792
Interest on other borrowings 33,864 102,739
------------ --------------
Total interest expense 4,093,996 4,361,531
------------ --------------
Net interest income 7,482,619 7,945,110
PROVISION FOR LOAN AND LEASE LOSSES (800,000) (686,000)
------------ --------------
Net interest income after provision for loan and lease losses 6,682,619 7,259,110
------------ --------------
NONINTEREST INCOME
Service charges on deposit accounts 459,126 459,613
Lease commissions 897,628 1,090,778
Brokered loan fees 133,204 611,348
Other 725,026 590,885
------------ --------------
Total noninterest income 2,214,984 2,752,624
------------ --------------
NONINTEREST EXPENSE
Salaries and employee benefits 4,047,888 4,070,194
Occupancy expense 403,569 371,594
Furniture and equipment expense 746,280 691,201
Legal and professional fees 218,217 489,807
Other 2,193,310 1,723,878
------------ --------------
Total noninterest expense 7,609,265 7,346,674
------------ --------------
Income before provision for income taxes 1,288,338 2,665,060
PROVISION FOR INCOME TAXES 464,800 1,001,850
------------ --------------
Net income $ 823,538 $ 1,663,210
------------ --------------
------------ --------------
PER SHARE AMOUNTS
Basic earnings per share $ 0.47 $ 0.93
------------ --------------
------------ --------------
Diluted earnings per share $ 0.41 $ 0.92
------------ --------------
------------ --------------
Cash dividends per common share $ 0.22 $ 0.21
------------ --------------
------------ --------------
Weighted Average Common Shares Outstanding 1,770,078 1,797,131
------------ --------------
------------ --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESES CONSOLIDATED STATEMENTS
5
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(UNAUDITED)
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 823,538 $ 1,663,210
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 548,052 551,731
Provision for possible loan losses 800,000 686,000
Write-down of other real estate owned 120,849 38,099
Provision for deferred taxes 753,566 15,431
(Increase) decrease in assets-
Interest receivable (1,393,570) (1,371,138)
Other assets (1,542,172) 1,327,530
Increase (decrease) in liabilities-
Interest payable (322,190) (272,304)
Fed Funds purchased, other borrowings and other liabilities 5,373,647 21,213,836
------------ ------------
Net cash provided by operating activities 5,161,720 23,852,395
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (10,950,952) (38,983,193)
Purchase of investments (31,085,349) (20,442,209)
Proceeds from maturity of HTM Securities 1,490,000 8,126,000
Proceeds from sales/maturity of AFS Securities 19,208,537 9,055,266
Proceeds from sales of other real estate owned 101,014 774,226
Purchases of premises and equipment (437,374) (370,551)
------------ ------------
Net cash used for investing activities (21,674,124) (41,840,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in noninterest bearing deposits (11,162,237) (10,435,281)
Net increase (decrease) in interest bearing deposits 4,346,275 (7,725,177)
Cash dividends (390,797) (363,249)
Stock options exercised 554,751 (16,264)
Cash paid in lieu of fractional shares 0 0
------------ ------------
Net cash provided by (used in) financing activities (6,652,008) (18,539,971)
NET INCREASE (DECREASE) (23,164,412) (36,528,037)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 43,000,727 54,025,047
------------ ------------
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 19,836,315 17,497,010
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS
6
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 June 30, 1999, December 31, 1998 and June 30, 1998,
and the results of its operations for the periods ended June 30,
1999 and June 30,1998, 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 June 30, 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 June 30, 1999, amounted to a
total of approximately $3,842,996.
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 and May
of 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 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.
7
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 (loss) for the six-months
ended June 30, 1999 and June 30, 1998 was ($63,557) and $1,680,869,
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 for all fiscal quarters of all
fiscal years beginning after June 15, 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 adoption of the applicable provisions
of SFAS No. 134 did not have a material effect on the Company.
8
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 June 30, 1998 and
December 31, 1998 to June 30, 1999. Additionally, the sections discuss
significant changes and trends in the Company's results of operations for the
three and six-month periods ended June 30, 1999, compared to the same period in
1998.
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
The Company reported net income of $823,538 for the six-month period ending June
30, 1999 as compared to $1,663,210 for the same period ending June 30, 1998. Net
income for the three-month period ending June 30, 1999 and 1998 was $335,277 and
$850,837, respectively. These 1999 figures represent a 50.5% decline over
the same six-month period for 1998 and a 60.6% decline over the prior year's
second quarter figures. The decline in net income is attributable to several
factors including: a lower loan volume which resulted in a marked decrease in
interest and loan fee income; additional provisions to the loan and lease loss
reserve; and significant declines were recognized in lease commissions and
brokered loan fees earned. Each of these factors are discussed in detail
below in the "Results of Operations" section of this Item.
Total assets at June 30, 1999 were $293,614,567. This figure represents a slight
decrease from $295,312,605 at December 31, 1998 and $295,613,228 at June 30,
1998. Gross loans were $190,366,411 at June 30, 1999, a 5.1% increase from
$181,182,515 at December 31, 1998 and 7.6% decrease from $205,981,809 at June
30, 1998. The increase from June 30,1999 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 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.
9
The Company's investment portfolio at June 30,1999, was $70,105,121 compared to
December 31, 1998 investments of $60,639,334 and $60,477,847 at June 30, 1998.
The increase in the investment portfolio from December 31, 1998, to June 30,
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 $19,836,315 at June 30, 1999,
$43,000,727 at December 31, 1998 and $17,497,011 as of June 30, 1998. The
decrease in cash and cash equivalents from December 31, 1998 to June 30, 1999 is
a result of the Company's shifting of funds to longer term, higher yielding
investments.
Total deposits decreased from $268,808,444 at December 31, 1998, to $261,992,482
at June 30, 1999. The reduction in deposits is a reflection of normal seasonal
decreases in noninterst-bearing deposits amounting to $11,162,237 offset by an
increase of $4,346,275 in interest-bearing deposits resulting in a net decrease
in total deposits of $6,815,962 or 2.5%.
The total loan-to-deposit ratios were 72.7%, 67.4% and 82.8% at June 30, 1999,
December 31, 1998 and June 30, 1998.
LOANS
The Company lends primarily to small and medium sized businesses, small to large
sized farmers and consumers within its market area, which is comprised
principally of Sutter, Yuba, Colusa, and Yolo counties, and, secondarily, Butte,
Glenn, Sacramento, Placer, Madera and Fresno counties. In addition, the Company
originates commercial and industrial equipment leases through its subsidiary
EPI, located in Citrus Heights, California.
Total loans outstanding as of June 30, 1999 was $190,366,411. This amount
represents an increase of $9,183,896 or 5.1% since December 31, 1998 and a
decrease of $15,615,398 or 7.6% compared to June 30, 1998.
Due to the types of loans made, the Company sustains moderate seasonal
variations in outstanding loan totals. 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
June 30, 1999, December 31, 1998 and June 30, 1998.
COMPOSITION OF THE LOAN PORTFOLIO
- ---------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
Loan Category
Commercial and Agricultural $ 80,475,016 $ 71,784,483 $ 88,694,004
Real Estate-Construction 36,500,172 54,828,845 49,511,498
Real Estate-Mortgage 44,944,208 28,503,710 32,500,381
Consumer 2,497,044 2,655,031 2,262,965
Lease Financing 25,691,560 23,313,399 32,602,230
Other 258,411 97,047 410,731
------------------------------------------------------
Total $190,366,411 $181,182,515 $205,981,809
- ---------------------------------------------------------------------------------------
The principal changes in the loan portfolio between June 30, 1998 and June 30,
1999 are discussed below:
1. Commercial and Agricultural loans declined $8,218,988 or 9.3%.
This loan category includes agricultural and business credits.
The Company provides a wide range of loan products to farmers,
10
commercial businesses and retail and industrial businesses
throughout its trade area. Over the past year the Company has
focused its efforts on enhancing the quality of its loan portfolio
and resolving problem credits. As a result of enhanced credit
underwriting standards and diligent loan collection practices, a
decrease of $7,300,000 occurred in the Company's business loan
portfolio. The agricultural loan totals remained essentially
unchanged from June 30, 1999 compared to June 30, 1998
2. Real estate construction loans declined by $13,011,326 or 26.3%
during the past year. The Company extends construction loans
primarily to builders of single family houses. Loans are also made
to individual borrowers and to real estate developers. The decrease
in real estate construction loans is due to two principal
events. First, the Company's tightened credit standards for
real estate developers have resulted in a lower loan volume. Real
Estate development loans have decreased in excess of
$5,000,000 over the past year. Second, in an effort to
increase efficiency, staffing changes were implemented at
the Company's real estate loan production offices. Following
these changes, productivity of the new staff has been
lower than expected due in large part to lower loan demand
caused by a slowing in the refinance market which has
accompanied the increase in market interest rates. It is
anticipated that production will improve in forthcoming
quarters.
3. Lease financing has declined by $6,910,670 or 21.2% during the
past year. The Company originates commercial and industrial
equipment leases through its subsidiary EPI. In order to
enhance fee income and properly manage the lease portfolio
during the last six months, the Company has sold several
pools of leases. These lease pool sales resulted in the reduction
in lease receivables as of June 30, 1999 compared to June 30, 1998.
4. Other loans secured by real estate increased by $12,443,827 between
June 30, 1998 and June 30, 1999. Loans in this category
include those credits secured by residential (single family and
multi-family), commercial and agricultural real property.
The increase is attributable to successful business
development efforts and the Company's conscious decision to
increase its residential real estate loan portfolio. As of
June 30, 1999, 42.8% of the bank's portfolio was real estate
secured (includes construction and other real estate), as
compared to 39.8% as of June 30, 1998.
During the second quarter of 1999, there were no significant changes in the
Company's loan management, lending philosophy or credit delivery procedures.
11
LOAN QUALITY
The table shown below summarizes the composition of non-performing loans as of
June 30, 1999, December 31, 1998 and June 30, 1998 ($ in 000's) as well as the
changes between the periods.
- ----------------------------------------------------------------------------------------------------------------------------
$ Amt. Change $ Amt. Change $ Amt.
6/30/99 12/31/98 6/30/98
------------------------------------------------------------------------------------------
ACCRUING LOANS PAST DUE
90 DAYS OR MORE
Commercial 0 -100.0% 6.0 +100.0 0
Agricultural 0 0.0% 0 0.0% 0
Real Estate 0 0.0% 0 0.0% 0
Leases 0 0.0% 0 -100.0% 50.0
Consumer 0 -100.0% 0.2 100.0% 0
------------------------------------------------------------------------------------------
TOTAL 0 -100.0% 6.2 -98.6% 50.0
------------------------------------------------------------------------------------------
NONACCRUAL LOANS
------------------------------------------------------------------------------------------
Commercial 840.0 +1.30% 829.1 -11.33% 935.0
Agricultural 1610.7 -8.23% 1755.2 -48.29% 3394.0
Real Estate 1789.9 -35.09% 2757.3 +22.60% 2249.0
Leases 136.3 -16.60% 163.4 +2.77% 159.0
Consumer 0 0 0
------------------------------------------------------------------------------------------
TOTAL 20.49% 5,505.0 -18.29% 6737.0
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
4376.9 -20.58% 5511.2 -18.80% 6787.0
TOTAL NONPERFORMING
- ----------------------------------------------------------------------------------------------------------------------------
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 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. It is only under special circumstances of collection can the
transfer to nonaccrual be avoided. At June 30, 1999 there were no accrual loans
that met those conditions.
The Company's policy is to automatically transfer loans past due 90 days to
nonaccrual status resulting in no accruing loans past due 90 days or more as
of June 30, 1999. Only by special circumstances of collection can the
transfer to nonaccrual be avoided. At June 30, 1999 there were no accrual
loans that met those conditions.
Between June 30, 1998 and December 31, 1998, the Company reduced nonperforming
loans by 18.8%. Nonperforming loans continued to decline an additional 20.6%
from December 31, 1998 to June 30, 1999 resulting in nonperforming loans
dropping 35.5% for the one year period from June 30, 1998 to June 30, 1999.
Nonperforming loans comprised 2.3% of the portfolio on June 30, 1999, which was
down from 3.1% of the portfolio on December 31, 1998 and 3.3% on June 30,1998.
Over the past year and a half, 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 and when appropriate revised to
aggressively reduce the level of nonperforming and problem loans. The trend in
continued reduction of
12
classified loans and non-performing loans proves that this approach 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,
54.5% of these loans (approximately $2.9 million) have been restructured or are
in process of being restructured, 16.3% (approximately $.7 million) are in the
process of collateral liquidation, and 29.2% of the loans (approximately $1.3
million) are currently in workout status. The plans are designed to return the
highest dollar amount to the Company in the shortest time while reducing credit
risk exposure. Management projects additional significant progress toward the
resolution of these troubled loans during the third quarter of 1999. However,
management projects that some of these credits will require several additional
quarters to resolve due to protracted workout arrangements.
Several of the large nonperforming loans listed in the table have been
partially charged-off such that the book value of the asset is well supported
by the loan's collateral value. As a result, management believes that the
risk of additional credit loss in the remaining nonperforming loans has been
minimized.
The Company's nonperforming credits are concentrated in two credit relationships
that comprise 64.6% of the total. Both credits are large agricultural
relationships.
The largest nonperforming loan has an outstanding balance of approximately
$2.5 million, and is 57.1% of total nonperforming loans. 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. The bank is currently
making an attempt to complete the restructure of the entire credit
relationship. Management anticipates a conclusion to the restructuring during
the third quarter of 1999.
The second largest nonaccrual loan's outstanding balance is approximately $.4
million, which amounts to 10.1% of total nonperforming loans. This loan is also
to an agricultural borrower. Progress was made during the second quarter 1999 as
the borrower successfully obtained a conditional commitment from another
financial institution to refinance real property. This refinancing is
anticipated to bring to the Company approximately $1.0 million to repay
carryover debt. In addition, favorable crop conditions have resulted in strong
projected margins for the 1999 crop year. Management expects additional loan
reductions during the third and fourth quarter of 1999.
The remaining 35.4% of the nonperforming loans are distributed amongst the
commercial, agricultural, real estate and lease portfolios. As indicated in the
table above, the Company sustained an overall decrease in nonaccrual loans of
18.8% between June 30, 1998 and December 31, 1998. Overall progress in the
nonperforming loan reduction continued through the June 30, 1999 quarter end
compared to December 31,1998, recording a 20.6% reduction. Accordingly, the
Company has demonstrated marked progress in resolving nonperforming loans
realizing a reduction of over $2.4 million, or 35.5%, since June 30, 1998.
In 1998, management 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 have an impact upon the Company's
borrowers ability to repay their loans.
The Company's Allowance for Loan and Lease Losses ("ALLL") totals $6,663,063
or 3.4% of gross loans as of June 30, 1999. This amount is compared to
$6,024,111 or 3.3% of gross loans as of December 31, 1998, and $5,411,363 or
2.6% of gross loans as of June 30, 1998. The Company uses the allowance
method in providing for possible loan and lease losses. Loan and lease losses
are charged against the ALLL, and recoveries are credited to the reserve.
13
Additional provisions for possible loan and lease losses also increase the ALLL.
The provision is based upon past loan loss experience and estimates of potential
loan and lease losses which, in management's judgment, deserves current
recognition. The estimates are reviewed regularly, and adjustments, as
necessary, are charged to operations in the period in which they become known.
The provision is charged to operating expense.
Management believes that the total ALLL is adequate to cover potential losses in
the loan and lease portfolio. While Management uses available information to
access the adequacy of the ALLL, future additions to the reserve may be
necessary based on changes in economic conditions and other factors
14
RESULTS OF OPERATIONS
Three and six-months ended June 30, 1999
Compared with
Three and six-months ended June 30, 1998
The Company realized net income for the first half of 1999 of $823,538 resulting
in diluted earnings of $0.41 per share. Net income for the three-month period
ending June 30, 1999 was $335,277 resulting in diluted earnings of $0.17 per
share. The net income for the three and six-month periods ending June 30, 1999
was less than the 1998 periods. The company reported net income of $850,837 or
$0.51 per share on a diluted basis for the three-month period and $1,663,210 or
$0.92 per share on a diluted basis for the six-month period, respectively. The
decrease in 1999 net income over the same period for 1998 was due to several
factors.
The primary factor contributing to the decline in net income was a decrease in
total interest income which stood at $11,576,615 at June 30, 1999, a decrease of
$730,026, or 5.9% over June 30, 1998 total interest income of $12,306,641. Total
interest income of $5,737,468 for the three-month period ending June 30, 1999
was also less than 1998 total interest income of $6,340,001, a decrease of
$602,533 or 9.5%.
Total interest income consists of interest and fees on loans and leases and
interest on investments. Interest and fees on loans and leases make up the
greatest portion of total interest income. Interest and fees on loans and leases
decreased in 1999 over the same periods ending June 30, 1998, by $665,668 or
12.5% for the three-month period and $561,574 or 5.6% for the six-month period.
The decrease is attributable to a generally lower interest rate environment and
a moderately lower average outstanding loan portfolio balance during the first
half of 1999 compared to the first half of 1998.
Another factor contributing to the decrease in net income was the continued
augmentation of the Company's ALLL. 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 $800,000 at June 30, 1999, which amounted to a
16.6% or $114,000 increase over the same period in 1998 provisions of $686,000.
A third factor impacting the Company's net income was the significant reduction
in real estate brokered loan fee income. The income from brokered loan fees for
the first six months of 1999, $133,204, fell by $478,144 or 78.2% in comparison
to the first six months of 1998 figure of $611,348. A comparison of the three
month period ending June 30, 1999 with the same three month period for 1998
provide similar results. Brokered loan fees during the 1999 three-month period
fell to $37,539 as compared to $353,034 earned during the second quarter of
1998. The diminishment in brokered loan fee income in 1999 can in part be
traced to the Company's decision during the first half of 1999 to hold selected
real estate loans in its portfolio instead of selling those loans into secondary
markets. The intent of this strategy was to diversify the Company's loan
portfolio and 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. In addition to the implementation of the strategy, income
generated from brokered loan fees has been adversely impacted by staffing
changes implemented at the Company's real estate loan production offices, and a
general slowing in the home refinance market which has accompanied the
increase in market interest rates.
A fourth factor which is reflected by the lower net income figure, is the
substantial decrease lease commissions. These commissions are earned on leases
generated by the Bank's subsidiary, EPI. For the three-month period ending June
30, 1999 commissions of $465,318 were realized versus $559,642 for the same
period in 1998, representing a $94,324 or 16.9% decrease. The decrease for the
comparative six-month figures is similar. For the six-month period ended June
30, 1999, lease commissions were $897,628 representing a 17.7% decrease in
commissions over the 1998 amount of $1,090,778. This decrease is the result of
competitive pricing in the markets served by EPI, resulting in a decline in the
volume of leases made.
15
Finally, the fifth factor which substantially contributed to the decrease in net
income for the three and six-month periods ending June 30, 1999, over the same
period in 1998, was an increase in other noninterest expenses. This increase
amounted to $50,438 for the three-month period and $469,432 for the six-month
period of June 30, 1999 over June 30, 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 $94,000 during the first half of 1999 in order to maintain its commitment
to its Year 2000 readiness program. Another significant increase to noninterest
expense includes an increase of $221,060 attributed to expenses incurred under
the Company's 1989 Stock Option Plan.
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 components of the Company's earnings. Net interest income also
slightly decreased in comparison to the prior year. Net interest income before
provision for loan and lease losses at June 30, 1999, was $3,698,405 for the
three-month period and $7,482,618 for the six-month period, representing
decreases of 10.9% and 5.8% over the same periods ending June 30, 1998.
The Company's primary source of income is interest and fees on loans and leases.
The table below depicts average loans and yields for the three and six-month
periods ending June 30, 1999 and 1998.
- -----------------------------------------------------------------------------------------------------------------------
Three-months Three-months Six-months Six-months
Ended Ended Ended ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------------------------------------------------------------------------------------
Average loans $ 182,152,901 $ 188,915,000 $ 179,073,787 $ 178,437,031
Outstanding
Average yields 10.35% 11.29% 10.48% 11.14%
Amount of interest
& fees earned $ 4,711,336 $ 5,334,000 $ 9,379,748 $ 9,941,322
Average prime rate 7.75% 8.50% 7.75% 8.50%
- -----------------------------------------------------------------------------------------------------------------------
The Company has experienced a decrease in total interest expense of 6.9% or
$151,686, for the three-months ending June 30, 1999 over 1998 and 6.1% or
$267,534 for the six-month periods. 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
as of June 30, 1999 and 1998 were 3.17% and 3.34% for the three-month period and
3.10% and 3.33% for the six-month period, respectively.
Rates and amounts paid on average deposits, including noninterest-bearing
deposits for the three and six-month periods ended June, 1999, compared to the
same periods in 1998, are set forth in the following table:
16
- -------------------------------------------------------------------------------------------------------------------
Three-months Three-months Six-months Six-months
ended Ended ended ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
Average deposits
Outstanding $ 259,022,565 $ 250,290,000 $ 261,992,482 $ 255,664,033
Average rates paid 3.17% 3.34% 3.10% 3.33%
Amount of interest
paid or accrued $ 2,051,521 $ 2,092,033 $ 4,060,132 $ 4,258,792
- -------------------------------------------------------------------------------------------------------------------
The Company experienced a decrease in total noninterest income of $317,648 or
22.6% for the three-month period and $537,640 or 19.5% for the six-month period
ended June 30, 1999, over the same periods 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, remained relatively level between the three and six-month
periods of 1999 over 1998. Income derived from service charges on deposit
accounts was $255,413 and $459,126 for the three and six-month periods ending
June 30, 1999, as compared to $220,006 and $459,163 for the respective three and
six-month period for 1998.
The decreases experienced in lease commission and brokered loans fees were
somewhat mitigated by increases of $56,764 and $134,142 in other noninterest
income during the three and six-month periods ending June 30, 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 3.6% in total noninterest expense
during the first half of 1999 over the same period in 1998. Total noninterest
expense stood at $4,012,969 and $3,891,904 for the three-month periods and
$7,609,265 and $7,346,674 for the six-month periods ending June 30, 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 decreased slightly during the three and six-month
periods of 1999 over 1998. This decrease was due to continued centralization of
services, which created additional personnel efficiencies, thereby reducing the
growth in staffing expense.
Occupancy and furniture and equipment expenses increased by 8.2% and stood
jointly at $1,149,849 and $1,062,795 at June 30, 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 55.4% to $218,217 at June 30, 1999 from
$489,807 at June 30, 1998. This decrease is associated with continued progress
towards the resolution of problem loans, and resulted in the reduction of legal
fees associated with the collection of such loans. Additionally, as previously
discussed, other noninterest expense, which consists of several other expenses
associated with the operations of the Company, increased 27.2%, and stood at
$2,193,310 and $1,723,878 at June 30, 1999 and June 30, 1998, respectively.
17
The following tables summarize the principal elements of operating expenses and
disclose the increases (decreases) and percent of increases (decreases) for the
three and six-month periods ended June 30, 1999 and 1998:
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease)
- --------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 over 1998
- --------------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Salaries and benefits $ 2,049,093 $ 2,107,550 $ (58,457) -2.8%
- --------------------------------------------------------------------------------------------------------------------
Occupancy 200,353 184,894 15,459 8.4%
- --------------------------------------------------------------------------------------------------------------------
Furniture and equipment 363,342 343,157 20,185 5.9%
- --------------------------------------------------------------------------------------------------------------------
Legal and professional fees 93,440 328,008 (234,568) -71.5%
- --------------------------------------------------------------------------------------------------------------------
Other operating expenses 1,306,741 928,295 378,446 40.8%
- --------------------------------------------------------------------------------------------------------------------
Total other expenses $ 4,012,969 $ 3,891,904 $ 121,065 3.1%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Six-months ended June 30, Increase (Decrease)
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1999 over 1998
- --------------------------------------------------------------------------------------------------------------------
Salaries and benefits $ 4,047,888 $ 4,070,194 $ (22,306) -0.5%
- --------------------------------------------------------------------------------------------------------------------
Occupancy 403,569 371,594 31,975 8.6%
- --------------------------------------------------------------------------------------------------------------------
Furniture and equipment 746,280 691,201 55,079 8.0%
- --------------------------------------------------------------------------------------------------------------------
Legal and professional fees 218,217 489,807 (271,590) -55.4%
- --------------------------------------------------------------------------------------------------------------------
Other operating expenses 2,193,310 1,723,878 469,432 27.2%
- --------------------------------------------------------------------------------------------------------------------
Total other expenses $ 7,609,264 $ 7,346,674 $ 262,590 3.6%
- --------------------------------------------------------------------------------------------------------------------
Applicable income taxes for the three and six-month periods ended June 30, 1999,
were $185,550 and $464,800 as compared to the June 30, 1998 amounts of $519,550
and $1,001,850, respectively.
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 June 30,
1999, the Bank had $5,110,000, outstanding on the Federal Reserve Bank line
and had no balances outstanding on this line at December 31, 1998 and June
30, 1998. The Bank did not utilize the Federal Home Loan Bank line or Lehman
Brothers loan during these periods.
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.
18
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 Company 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 June 30,1999, for a 200 basis point
increasing and decreasing rate environment were 19.7% and 20.7%, respectively.
CAPITAL RESOURCES
Total shareholders' equity as of June 30, 1999, increased by $66,467 to
$23,721,638 over December 31, 1998, total shareholders' equity of $23,655,171.
The June 30, 1999 higher figure represents a rise of $1,048,767 from June 30,
1998's total of $22,672,871.
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 June 30, 1999, and on December 31, 1998:
19
RISK BASED CAPITAL RATIO
AS OF JUNE 30, 1999
- ------------------------------------------------------------------------------------------------------
Company Bank
(Dollars in thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
Tier 1 Capital $ 24,411 9.95% $24,326 9.92%
Tier 1 Capital minimum
Requirement 9,811 4.00% 9,808 4.00%
-------------------------------------------------------------------
Excess $ 14,600 5.95% $14,518 5.92%
-------------------------------------------------------------------
-------------------------------------------------------------------
Total Capital 27,521 11.22% 27,435 11.19%
Total Capital minimum
Requirement 19,622 8.00% 19,616 8.00%
-------------------------------------------------------------------
Excess $ 7,899 3.22% $ 7,819 3.19%
-------------------------------------------------------------------
Risk-adjusted assets $245,270 $ 245,200
-------------------------------------------------------------------
-------------------------------------------------------------------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly $ 24,411 8.48% $24,326 8.46%
average total assets
Minimum leverage requirement 11,509 4.00% 11,503 4.00%
-------------------------------------------------------------------
Excess $ 12,902 4.48% $12,823 4.46%
-------------------------------------------------------------------
-------------------------------------------------------------------
Total Quarterly average assets $287,723 $ 287,573
----------- -----------
----------- -----------
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
----------- -----------
----------- -----------
20
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 continued concerns regarding the quality of the Bank's loan portfolio, 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 continued concerns regarding the quality of the Bank's loan portfolio, 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 June 30,
1999, the Bank's Tier 1 leverage capital ratio stood at 8.46%); continue 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; 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 Bank of San Francisco ("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
21
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.
SENIOR MANAGEMENT CHANGE
Effective June 15, 1999, former President and Chief Executive Officer Robert J.
Mulder resigned from his director and executive officer positions with the Bank
and Company. The Company and Bank's boards of directors ("Boards") have worked
closely with Mr. Mulder to assure a smooth transition, and Mr. Mulder has agreed
to continue his association with the Bank as a long-term consultant to the Bank.
To further strengthen senior management of the Bank and Company, the Boards have
announced that pending appropriate regulatory approval Larry D. Hartwig has
accepted the positions of president and chief executive officer of the Company
and Bank. Mr. Hartwig brings to the Company and Bank more than thirty (30) years
of experience in the banking industry, having most recently served as president
and chief executive officer of SC Bancorp and its wholly-owned subsidiary,
Southern California Bank. During late July, the Company and Bank were informed
by the FDIC and FRB that they did not object to Mr. Hartwig's serving in his
appointed positions.
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.
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 99% 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
22
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 99% 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 half of 1999, the Company has expended
approximately $94,300 on its Year 2000 compliance efforts. Since the program's
inception, the Company has expended approximately $407,500 on these efforts.
Management estimates an additional expenditure of $104,000 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.
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.
23
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 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 for all fiscal quarters of all fiscal years beginning after June 15,
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.
24
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 adoption of the applicable provisions
of SFAS No. 134 did not have a material effect on the Company.
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 pages 18 and 19). No
significant changes to the market risk or interest rate risk of the Company have
occurred since March 31, 1999.
25
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.
California Independent Bancorp's Annual Meeting of Shareholders was
held on May 19, 1999, in Yuba City, California. The following
resolutions were distributed to stockholders and adopted:
To elect the following eleven (11) nominees to serve as directors
until the next Annual Meeting and until their successors are elected
and have been qualified:
FOR AGAINST ABSTAIN
--- ------- -------
John L. Dowdell 1,348,478 0 60,869
Harold M. Eastridge 1,335,984 0 73,363
William H. Gilbert 1,341,871 0 67,476
Donald H. Livingstone 1,342,060 0 67,287
Alfred G. Montna 1,268,122 0 141,225
Robert J. Mulder 1,321,208 0 88,139
David A. Offutt 1,341,871 0 67,476
William K. Retzer 1,339,777 0 69,570
Ross D. Scott 1,341,863 0 67,484
Louis F. Tarke 1,349,480 0 59,867
Michael C. Wheeler 1,329,798 0 79,549
To ratify the appointment of Arthur Andersen LLP as the Company's
independent public accountants.
Vote: For 1,335,758
Against 53,809
Abstained 19,780
ITEM 5. OTHER INFORMATION.
None reported.
26
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. Filed as Exhibit 3.1 to the Company's
Quarterly Report filed on Form 10Q for the period ended
March 31, 1999.*
3.2 Secretary's Certificate of Amendment of Amendment to
Bylaws of California Independent Bancorp as of
May 18, 1999.
10.18 Consulting Agreement between Feather River State Bank
and Robert J. Mulder dated June 23, 1999.
10.19 Severance Agreement between California Independent
Bancorp, Feather River State Bank and Robert J. Mulder
dated May 25, 1999.
27 Financial Data Schedule
- ---------------
*Document incorporated herein by reference.
(b) Reports on Form 8K.
On June 28, 1999, the Company filed a Current Report on
Form 8-K regarding resignation of President and Chief
Executive Officer Robert J. Mulder from his directorship
and executive officer positions with the Company and the
Bank effective June 15, 1999, and the pending
appointment of Larry D. Hartwig as President and Chief
Executive Officer of the Company and Bank.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized
California Independent Bancorp
Date: August 10, 1999 /s/ Blaine Lauhon
---------------- -----------------
Blaine Lauhon
Senior Vice President
Date: August 10, 1999 /s/ Annette Bertolini
------------------ ---------------------
Annette Bertolini
Chief Financial Officer
28