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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2000
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 000-30707
First Northern Community Bancorp
(Exact name of Registrant as specified in its charter)
California 68-0450397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 N. First St., Dixon, CA 95620
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
(Title of Class)
707-678-3041
(Registrant's telephone number including area code)
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 periods as 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates (based upon
the last reported trade on the OTC Bulletin Board on February 28, 2001) was
approximately $52,230,392. As of February 28, 2001, there were 3,072,376 shares
of Common Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and officers), 11, 12 and 13 of Part III incorporate
by reference information from the registrant's proxy statement to be filed with
the Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2001 Annual Meeting of Stockholders to be held on
April 26, 2001.
PART I
ITEM 1 - BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," estimate," "consider," or similar expressions are used. 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
risks discussed under "Risk Factors That May Affect Results" on pages 10 through
14 herein and other risk factors discussed elsewhere in this Report.
Unless otherwise indicated, all information herein has been adjusted to give
effect to a two-for-one stock split effected by the Bank in September 1998.
First Northern Bank of Dixon ("First Northern" or the "Bank") was established in
1910 under State Charter as Northern Solano Bank, and opened for business on
February 1st of that year. On January 2, 1912, the First National Bank of Dixon
was established under a Federal Charter, and until 1955, the two entities
operated side by side under the same roof and with the same management. In an
effort to increase efficiency of operation, reduce operating expense, and
improve lending capacity, the two banks were consolidated on April 8, 1955, with
the First National Bank of Dixon as the surviving entity.
In order to reduce reserve requirements and operate with higher lending limits,
on January 1, 1980, the Federal Charter was relinquished in favor of a
California State Charter, and the Bank's name was changed to First Northern Bank
of Dixon.
In April of 2000, the shareholders of First Northern Bank of Dixon approved a
corporate reorganization, which provided for the creation of a bank holding
company, First Northern Community Bancorp (the "Company") in which the Bank
would become a wholly owned subsidiary. This is reorganization, which was
effected May 19, 2000, will enable the Bank to better compete and grow in the
competitive and ever changing marketplace. As a result of the reorganization,
which was effective May 19, 2000, the Bank is a wholly owned and principal
operating subsidiary of the Company.
First Northern engages in the general commercial banking business in Solano and
Yolo Counties, and parts of Sacramento County.
The Company's and the Bank's Administrative Offices are located in Dixon. Also
located in Dixon are the Data Processing/Central Operations Department and the
Central Loan Department.
The Bank has eight full service Branches. Four are located in the Solano County
cities of Dixon, Fairfield, and Vacaville. The remaining four Branches are
located in the Yolo County cities of Winters, Davis, West Sacramento and
Woodland. In addition, the Bank has Real Estate Loan Offices in Davis and El
Dorado Hills that deal solely in residential mortgages and construction loans
and an SBA Loan Office in Sacramento, Sacramento County.
First Northern is in the commercial banking business, which includes accepting
demand, interest bearing transaction, savings, and time deposits, and making
commercial, consumer, and real estate related loans. It also offers installment
note collection, issues cashier's checks and money orders, sells travelers'
checks, rents safe deposit boxes, and provides other customary banking services.
The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC") and
each depositor's account is insured up to $100,000.
First Northern also offers a complete range of alternative investment products
and services. The Bank offers these services through London Pacific Securities,
Inc., a registered broker/dealer and a member of NASD and SIPC; and London
Pacific Advisory Services, Inc., a registered investment advisor. All
investments and/or financial services offered by the representative of London
Pacific Securities, Inc. are not insured by the FDIC.
The Bank offers limited international banking services and is looking into
providing trust services through an affiliation and equipment leasing, also
through and affiliation.
The operating policy of the Bank since inception has emphasized serving the
banking needs of individuals and small-to medium-sized businesses. In Dixon,
this has included businesses involved in crop and livestock production. The
economy of the Dixon area was primarily dependent upon agricultural related
sources of income and most employment opportunities were also related to
agriculture.
2
Agriculture continued to be a significant factor in the Bank's business after
the opening of the first Branch Office in Winters in 1970. A significant step
was taken in 1976 to reduce the Company's dependence on agriculture with the
opening of the Davis Branch.
The Davis economy is supported significantly by the University of California,
Davis. In 1981, a depository Branch was opened in South Davis, and was
consolidated into the main Davis Branch in 1986.
In 1983, the West Sacramento Branch was opened. The West Sacramento economy is
built around transportation and distribution related business. This addition to
the Bank's market area has further reduced the Company's dependence on
agriculture.
In order to accommodate the demand of the Bank's customers for long-term
residential real estate loans, a Real Estate Loan Office was opened in 1983.
This office is centrally located in Davis, and has enabled the Bank to access
the secondary real estate market.
The Vacaville Branch was opened in 1985. Vacaville is a rapidly growing
community with a diverse economic base including state prison (Department of
Corrections), food processing, distribution, shopping centers (Factory Outlet
Stores), medical, and other varied industries.
In 1994, the Fairfield Branch was opened. Fairfield has also been a rapidly
growing community bounded by Vacaville on the east. Its diverse economic base
includes military (Travis AFB), food processing (Anheuser-Busch plant), retail
(Solano Mall), manufacturing, medical, agriculture, and other varied industries.
Fairfield is the county seat for Solano County.
A Real Estate Loan Production Office was opened in El Dorado Hills, in April
1996, to serve the growing mortgage loan demand in the foothills area north of
Sacramento.
A Small Business Administration (SBA) Loan Department was opened in April 1997
in Sacramento to serve the small business and industrial loan demand throughout
the Bank's entire market area.
In June of 1997, the Bank's seventh Branch was opened in Woodland, the County
Seat of Yolo County. Woodland is an expanding and diversified 10.5 square mile
city with an economy dominated by agribusiness, retail services, and an
expanding industrial sector.
The Bank's eighth Branch, the Downtown Financial Center, opened in July of 2000
in Vacaville to serve the business and individual financial needs on the West
side of Interstate-80.
Through this period of change and diversification, the Bank's policy, which
emphasizes serving the banking needs of individuals and small-to medium-sized
businesses, has not changed. The Bank takes real estate, crop proceeds,
securities, savings and time deposits, automobiles, and equipment as collateral
for loans.
Most of the Bank's deposits are attracted from the market of northern and
central Solano County and southern and central Yolo County. The Bank is not
dependent on any single person or entity for its deposits. The loss of any one
or more of the Company's depositors would not have a material adverse effect on
the business of the Bank.
As of December 31, 2000, the Company and its subsidiary employed 170 full-time
equivalent staff. The Company and its subsidiary considers their relationship
with their employees to be good and have not experienced any interruptions of
operations due to labor disagreements.
First Northern has historically experienced seasonal swings in both deposit and
loan volumes due primarily to the agricultural economy. Deposits have typically
hit lows in February or March and peaked in November or December. Loans
typically peaked in the late spring and hit lows in the fall as crops are
harvested and sold. More recent experience shows the same deposit and loan
swings, since the real estate and agricultural economies tend to follow the same
seasonal cycle.
The Effect of Government Policy on Banking
The earnings and growth of the Bank are affected not only by local market area
factors and general economic conditions, but also by government monetary and
fiscal policies. For example, the Board of Governors of the Federal Reserve
System (the "FRB") influences the supply of money through its open market
operations in U.S. Government securities and adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Company cannot be
predicted. Additionally, state and federal tax policies can impact banking
organizations.
3
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Company reports to, registers with, and may
be examined by, the FRB. The FRB also has the authority to examine the Company's
subsidiaries. The costs of any examination by the FRB are payable by the
Company.
On March 11, 2000, the Gramm-Leach-Bliley Act (the "GLB Act") became effective.
This Act amended certain portions of the BHCA, subject to conditions. See
"Recently Enacted Legislation" below for more information.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
The FRB has significant supervisory and regulatory authority over the Company
and its affiliates. The FRB requires the Company to maintain certain levels of
capital. See "Capital Standards" below for more information. The FRB also has
the authority to take enforcement action against any bank holding company that
commits any unsafe or unsound practice, or violates certain laws, regulations or
conditions imposed in writing by the FRB. See "Prompt Corrective Action and
Other Enforcement Mechanisms" below for more information.
Under the BHCA, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the prior approval
of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. However, a bank holding company, with the approval of the FRB,
may engage, or acquire the voting shares of companies engaged, in activities
that the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Banks may also merge
across state lines, thereby creating interstate branches. Furthermore, a bank is
now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
Under California law, (a) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing
five year old California bank or industrial bank by merger or purchase, (b)
California state-chartered banks are empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states, and (c) the
Commissioner is authorized to approve an interstate acquisition or merger which
would result in a deposit concentration exceeding 30% if the Commissioner finds
that the transaction is consistent with public convenience and advantage.
However, a state bank chartered in a state other than California may not enter
California by purchasing a California branch office of a California bank or
industrial bank without purchasing the entire entity or by establishing a de
novo California bank.
4
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should 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 appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "Restrictions on Dividends and Other Distributions" below for
additional restrictions on the ability of the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees, which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and are
intended to improve the competitiveness of bank holding companies by, among
other things: (a) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval, (b)
streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities, and (c) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further change in bank control or in bank directors or
officers after an earlier approved change. These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank holding company to qualify as "well-run," both it and the insured
depository institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (a) maintain a total risk-based capital ratio of 10% or
greater; (b) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(c) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (a) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory, (b) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings, and (c) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
Bank Regulation and Supervision
The Company is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions ("DFI") and the Federal Deposit
Insurance Corporation (the "FDIC"). The regulations of these agencies affect
most aspects of the Company's business and prescribe permissible types of loans
and investments, the amount of required reserves, requirements for branch
offices, the permissible scope of the Company's activities and various other
requirements. While the Company is not a member of the FRB, it is also subject
to certain regulations of the FRB dealing primarily with check clearing
activities, establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
5
Under California law, the Bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the
maintenance of branch offices and automated teller machines, capital and reserve
requirements, deposits and borrowings, stockholder rights and duties, and
investment and lending activities. Whenever it appears that the contributed
capital of a California bank is impaired, the Commissioner shall order the bank
to correct such impairment. If a bank is unable to correct the impairment, such
bank is required to levy and collect an assessment upon its common shares. If
such assessment becomes delinquent, such common shares are to be sold by the
bank.
California law permits a state chartered bank to invest in the stock and
securities of other corporations, subject to a state chartered bank receiving
either general authorization or, depending on the amount of the proposed
investment, specific authorization from the Commissioner. Federal banking laws,
however, impose limitations on the activities and equity investments of state
chartered, federally insured banks. The FDIC rules on investments prohibit a
state bank from acquiring an equity investment of a type, or in an amount, not
permissible for a national bank. Non-permissible investments must have been
divested by state banks no later than December 19, 1996. FDIC rules also
prohibit a state bank from engaging as a principal in any activity that is not
permissible for a national bank, unless the bank is adequately capitalized and
the FDIC approves the activity after determining that such activity does not
pose a significant risk to the deposit insurance fund. The FDIC rules on
activities generally permit subsidiaries of banks, without prior specific FDIC
authorization, to engage in those activities that have been approved by the FRB
for bank holding companies because such activities are so closely related to
banking to be a proper incident thereto. Other activities generally require
specific FDIC prior approval and the FDIC may impose additional restrictions on
such activities on a case-by-case basis in approving applications to engage in
otherwise impermissible activities.
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off-balance-sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off-balance-sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level the Bank is required to maintain, the federal
banking agencies do not, in all respects, follow generally accepted accounting
principles ("GAAP") and have special rules which have the effect of reducing the
amount of capital that will be recognized for purposes of determining the
capital adequacy of the Bank.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance-sheet
items. The regulators measure risk-adjusted assets and off-balance-sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. Additionally, as of April 1,
1995, for Tier 1 capital purposes, deferred tax assets that can only be realized
if an institution earns sufficient taxable income in the future will be limited
to the amount that the institution is expected to realize within one year, or
ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of
a limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a
minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and
off-balance-sheet items of 4%.
6
On October 1, 1998, the FDIC adopted two rules governing minimum capital levels
that FDIC-supervised banks must maintain against the risks to which they are
exposed. The first rule makes risk-based capital standards consistent for two
types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The FDIC rules also provide
that a qualifying institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse retained. In
general, a qualifying institution is one that is well capitalized under the
FDIC's prompt corrective action rules. The amount of recourse that can receive
the preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. It is improbable; however, that an institution with a
3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
As of December 31, 2000, the Bank's capital ratios exceeded applicable
regulatory requirements. The following tables present the capital ratios for the
Bank, compared to the standards for well capitalized depository institutions, as
of December 31, 2000 (amounts in thousands except percentage amounts).
Actual Well Minimum
----------------- Capitalized Capital
Capital Ratio Ratio Requirement
------- ----- ----- -----------
Leverage.................... $35,787 9.2% 5.0% 4.0%
Tier 1 Risk-Based........... 35,787 12.8% 6.0% 4.0%
Total Risk-Based............ 39,331 14.1% 10.0% 8.0%
The federal banking agencies must take into consideration concentrations of
credit risk and risks from non-traditional activities, as well as an
institution's ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a Bank's capital
adequacy.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
7
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
"Well capitalized" "Adequately capitalized"
---------------- ----------------------
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; Tier 1 risk-based capital of 4%;
and Leverage ratio of 5%. and Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
---------------- ------------------------------
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than 3%;
or Leverage ratio less than 4%. or Leverage ratio less than 3%.
"Critically undercapitalized"
---------------------------
Tangible equity to total assets less
than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
8
The federal banking agencies also have authority to prohibit a depository
institution from engaging in business practices, which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
In addition to the restrictions imposed under federal law, banks chartered under
California law generally may only pay cash dividends to the extent such payments
do not exceed the lesser of retained earnings of the bank or the Company's net
income for its last three fiscal years (less any distributions to shareholders
during such period). In the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner in an amount not exceeding the greatest of the Company's retained
earnings, the Company's net income for its last fiscal year, or the Company's
net income for its current fiscal year.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of insurance
premiums will be.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
Recently Enacted Legislation
On March 11, 2000, the GLB Act became effective. The GLB Act repealed provisions
of the Glass-Steagall Act, which had prohibited commercial banks and securities
firms from affiliating with each other and engaging in each other's businesses.
Thus, many of the barriers prohibiting affiliations between commercial banks and
securities firms have been eliminated.
The Bank Holding Company Act of 1956, as amended (the "BHCA"), was also amended
by the GLB Act, to allow new "financial holding companies" ("FHC") to offer
banking, insurance, securities and other financial products to consumers.
Specifically, the GLB Act amended section 4 of the BHCA in order to provide for
a framework for the engagement in new financial activities. Bank holding
companies ("BHC") may elect to become an FHC if all its subsidiary depository
institutions are well capitalized and well managed. If these requirements are
met, a BHC may file a certification to that effect with the FRB and declare that
it chooses to become an FHC. After the certification and declaration is filed,
the FHC may engage either de novo or through an acquisition in any activity that
has been determined by the FRB to be financial in nature or incidental to such
financial activity. BHCs may engage in financial activities without prior notice
to the FRB if those activities qualify under the new list of activities in
section 4(k) of the BHCA. However, notice must be given to the FRB within 30
days after a FHC has commenced one or more of the financial activities. The
Company has not elected to become an FHC.
Under the GLB Act, FDIC-insured state banks, subject to various requirements
(and national banks) are permitted to engage through "financial subsidiaries" in
certain financial activities permissible for affiliates of FHCs. However, to be
able to engage in such activities the state bank must also be well capitalized
and well managed and have received at least a "satisfactory" rating in its most
recent CRA examination.
The Company cannot be certain of the effect of the foregoing recently enacted
legislation on its business, although there is likely to be consolidation among
financial services institutions and increased competition for the Company.
9
Pending Legislation and Regulations
Certain pending legislative proposals include bills to permit banks to pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, to enact privacy rules designed to regulate the ability of
financial institutions to use or share customer information, to end certain
predatory lending practices, to allow the payment of interest on reserves that
financial institutions must keep with the FRB, and to give judges the authority
to force high-income borrowers to repay their debts rather than cancel them
through bankruptcy. A proposal to merge the FDIC's two funds, the BIF and the
Savings Association Insurance Fund, has also been discussed in recent years. The
Company also expects that during 2001, the Financial Accounting Standards Board
will issue guidance as to whether to retain the pooling-of-interests method of
accounting for business combinations and related issues, including whether to
adopt an impairment-only approach to amortization of goodwill.
Competition
In the past, an independent Bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments have offered new investment vehicles,
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market.
The enactment of the GLB Act is the latest evidence of this trend, and it is
anticipated that this trend will continue as financial services institutions
combine to take advantage of the FSA's elimination of the barriers against such
affiliations. The enactment of the Interstate Banking and Branching Act in 1994
and the California Interstate Banking and Branching Act of 1995 have increased
competition within California. Recent legislation has also made it easier for
out-of-state credit unions to conduct business in California and allows
industrial banks to offer consumers more lending products. Moreover, regulatory
reform, as well as other changes in federal and California law will also affect
competition. The availability of banking services over the Internet or
"e-banking" has continued to expand. While the impact of these changes, and of
other proposed changes, cannot be predicted with certainty, it is clear that the
business of banking in California will remain highly competitive.
In order to compete with major financial institutions and other competitors in
its primary service areas, the Bank relies upon the experience of its executive
and senior officers in serving business clients, and upon its specialized
services, local promotional activities and the personal contacts made by its
officers, directors, and employees.
For customers whose loan demand exceeds the Bank's legal lending limit, the Bank
may arrange for such loans on a participation basis with correspondent banks.
The seasonal swings discussed earlier have, in the past, had some impact on the
Bank's liquidity. The management of investment maturities, sale of loan
participations, federal fund borrowings, qualification for funds under the
Federal Reserve Bank's seasonal credit program, and the ability to sell
mortgages in the secondary market have allowed the Bank to satisfactorily manage
its liquidity.
Risk Factors That May Affect Results
This Report includes forward-looking statements within the meaning of the
Exchange Act. These statements are based on management's beliefs and
assumptions, and on information currently available to management.
Forward-looking statements include the information concerning possible or
assumed future results of operations of the Bank set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Forward-looking statements also include statements in which words
such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions, including the risks discussed below and elsewhere in this Report.
The Company's actual future results and shareholder values may differ materially
from those anticipated and expressed in these forward-looking statements. Many
of the factors that will determine these results and values, including those
below, are beyond the Company's ability to control or predict.
10
Lending Risks Associated with Commercial Banking Activities
The Bank's business strategy is to focus on commercial business loans (which
includes agricultural loans), construction loans and commercial and multi-family
real estate loans. The principal factors affecting the Bank's risk of loss in
connection with commercial business loans include the borrower's ability to
manage its business affairs and cash flows, general economic conditions and,
with respect to agricultural loans, weather and climate conditions. Loans
secured by commercial real estate are generally larger and involve a greater
degree of credit and transaction risk than residential mortgage (one to four
family) loans. Because payments on loans secured by commercial and multi-family
real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be dependent on
factors other than the prevailing conditions in the real estate market or the
economy. Real estate construction financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project which, when completed, has
a value which is insufficient to assure full repayment of the construction loan.
Although the Bank manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not
materialize, in which event the Company's financial condition, results of
operations, cash flows and business prospects could be materially adversely
affected.
Dependence on Real Estate
At December 31, 2000, approximately 63% of the Bank's loans were secured by real
estate. The value of the Bank's real estate collateral has been, and could in
the future continue to be, adversely affected by any economic recession and any
resulting adverse impact on the real estate market in Northern California such
as that experienced during the early 1990's. See "-Economic Conditions and
Geographic Concentration."
The Bank's primary lending focus has historically been commercial (including
agricultural), construction and real estate mortgage. At December 31, 2000, real
estate mortgage and construction loans comprised approximately 23% and 25%,
respectively, of the total loans in the Company's portfolio. At December 31,
2000, all of the Company's real estate mortgage and construction loans and
approximately 37% of its commercial loans were secured fully or in part by deeds
of trust on underlying real estate. The Company's dependence on real estate
increases the risk of loss in both the Bank's loan portfolio and its holdings of
other real estate owned if economic conditions in Northern California
deteriorate in the future. Deterioration of the real estate market in Northern
California would have a material adverse effect on the Company's business,
financial condition and results of operations. See "-Economic Conditions and
Geographic Concentration."
Adverse California Economic Conditions Could Adversely Affect the Bank's
Business
The Bank's operations and a substantial majority of the Bank's assets and
deposits are generated and concentrated primarily in Northern California,
particularly the counties of Placer, Sacramento, Solano and Yolo, and are likely
to remain so for the foreseeable future. At December 31, 2000, approximately 63%
of the Bank's loan portfolio consisted of real estate related loans, all of
which were related to collateral located in Northern California. As a result,
poor economic conditions in California may cause the Bank to incur losses
associated with high default rates and decreased collateral values in it's loan
portfolio. In the early 1990's, the California economy experienced an economic
recession that resulted in increases in the level of delinquencies and losses
for many of the state's financial institutions. If California were to experience
another recession, it is expected that the Bank's level of problem assets would
increase accordingly. California real estate is also subject to certain natural
disasters, such as earthquakes, floods and mudslides, which are typically not
covered by the standard hazard insurance policies maintained by borrowers.
Uninsured disasters may make it difficult or impossible for borrowers to repay
loans made by the Bank. The occurrence of natural disasters in California could
have a material adverse effect on the Company's financial condition, results of
operations, cash flows and business prospects.
11
Risks Associated With the California Energy Crisis
Due to problems associated with the deregulation of the electrical power
industry in California, two California utilities have publicly announced that
their financial situation is grave and that bankruptcy proceedings are a
possibility unless remedial measures are adopted by the California legislature.
The utilities have also announced that they have already defaulted on certain
payment obligations.
In addition, customers of the utilities have been faced with increased gas
prices, power shortages and, in some cases, rolling blackouts. The long-term
impact of the energy crisis in California on the Bank's markets and business
cannot be predicted but could result in an economic slow-down. This could have
an adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and, as a result, on the Company's financial condition, results of operations
and the market value of its common stock.
Interest Rate Risk
The income of the Bank depends to a great extent on "interest rate
differentials" and the resulting net interest margins (i.e., the difference
between the interest rates earned on the Bank's interest-earning assets such as
loans and investment securities, and the interest rates paid on the Bank's
interest-bearing liabilities such as deposits and borrowings). These rates are
highly sensitive to many factors, which are beyond the Bank's control,
including, but not limited to, general economic conditions and the policies of
various governmental and regulatory agencies, in particular, the FRB. The Bank
is generally adversely affected by declining interest rates. In addition,
changes in monetary policy, including changes in interest rates, influence the
origination of loans, the purchase of investments and the generation of deposits
and affect the rates received on loans and investment securities and paid on
deposits, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Quantitative and Qualitative
Disclosure About Market Risk."
Potential Volatility of Deposits
At December 31, 2000, 12% of the dollar value of the Company's total deposits
was represented by time certificates of deposit in excess of $100,000. As such,
these deposits are considered volatile and could be subject to withdrawal.
Withdrawal of a material amount of such deposits would adversely impact the
Company's liquidity, profitability, business prospects, results of operations
and cash flows.
Dividends
The ability of the Company to pay cash dividends in the future depends on the
Company's profitability, growth and capital needs. In addition, the California
Financial Code restricts the ability of the Company to pay dividends. No
assurance can be given that the Company will pay any dividends in the future or,
if paid, such dividends will not be discontinued. See "-Supervision and
Regulation-Restrictions on Dividends and Other Distributions."
Competition
In California generally, and in the Bank's primary market area specifically,
major banks dominate the commercial banking industry. By virtue of their larger
capital bases, such institutions have substantially greater lending limits than
those of the Bank. In obtaining deposits and making loans, the Bank competes
with these larger commercial banks and other financial institutions, such as
savings and loan associations and credit unions, which offer many services that
traditionally were offered only by banks. In addition, the Bank competes with
other institutions such as money market funds, brokerage firms, and even retail
stores seeking to penetrate the financial services market. During periods of
declining interest rates, competitors with lower costs of capital may solicit
the Bank's customers to refinance their loans. Furthermore, during periods of
economic slowdown or recession, the Bank's borrowers may face financial
difficulties and be more receptive to offers from the Bank's competitors to
refinance their loans. No assurance can be given that the Bank will be able to
compete with these lenders. See "-Competition above for more information."
12
Government Regulation and Legislation
The Company and the Bank are subject to extensive state and federal regulation,
supervision and legislation, which govern almost all aspects of the operations
of the Company and the Bank. The business of the Bank is particularly
susceptible to being affected by the enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position
of other financial institutions. Such laws are subject to change from time to
time and are primarily intended for the protection of consumers, depositors and
the deposit insurance funds and not for the protection of shareholders of the
Company. The Company cannot predict what affect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on
the business and prospects of the Company, but it could be material and adverse.
See "Supervision and Regulation."
Reliance on Key Employees and Others
The Company's future success depends to a significant extent on the efforts and
abilities of its executive officers. The loss of the services of certain of
these individuals, or the failure of the Company to attract and retain other
qualified personnel, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
maintain any key man life insurance.
Adequacy of Allowance for Loan and Other Real Estate Losses
The Bank's allowance for estimated losses on loans was approximately $7.2
million, or 3.2% of total loans, and 974% of total nonperforming loans at
December 31, 2000. Material future additions to the allowance for estimated
losses on loans may be necessary if material adverse changes in economic
conditions occur and the performance of the Bank's loan portfolio deteriorates.
In addition an allowance for losses on other real estate owned may also be
required in order to reflect changes in the markets for real estate in which the
Bank's other real estate owned is located and other factors which may result in
adjustments which are necessary to ensure that the Bank's foreclosed assets are
carried at the lower of cost or fair value, less estimated costs to dispose of
the properties. Moreover, the FDIC and the DFI, as an integral part of their
examination process, periodically review the Bank's allowance for estimated
losses on loans and the carrying value of its assets. Increases in the
provisions for estimated losses on loans and foreclosed assets would adversely
affect the Bank's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Summary of Loan Loss Experience."
Shares Eligible for Future Sale
As of December 31, 2000, the Company had 3,070,949 shares of Common Stock
outstanding, all of which are eligible for sale in the public market without
restriction. Future sales of substantial amounts of the Company's Common Stock,
or the perception that such sales could occur, could have a material adverse
effect on the market price of the Common Stock. In addition, options to acquire
up to six percent of the outstanding shares of Common Stock at exercise prices
ranging from $10.48 to $13.44 have been issued to directors and certain
employees of the Company under the Company's 2000 Stock Option Plan and Outside
Directors 2000 Nonstatutory Stock Option Plan, and options to acquire up to an
additional 16% of the outstanding shares of Common Stock are reserved for
issuance under such plans. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale, will
have on the market price of the Company's Common Stock. See "Market for the
Company's Common Stock and Related Stockholder Matters."
Absence of Public Market; Volatility in Stock Price
There currently is no active trading market for the Company's Common Stock. No
assurance can be given that an active public trading market will develop or
that, if developed, it will be sustained. As a result of the lack of a trading
market, the market price of the Company's Common Stock may experience
fluctuations that are unrelated to the operating performance of the Company. In
particular, the price of the Company's Common Stock may be affected by general
market price movements as well as developments specifically related to the
financial services sector, including interest rate movements, quarterly
variations, or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
financial services industry.
13
Technology and Computer Systems
Advances and changes in technology can significantly impact the business and
operations of the Company. The Company faces many challenges including the
increased demand for providing computer access to Company accounts and the
systems to perform banking transactions electronically. The Company's merchant
processing services require the use of advanced computer hardware and software
technology and rapidly changing customer and regulatory requirements. The
Company's ability to compete depends on its ability to continue to adapt its
technology on a timely and cost-effective basis to meet these requirements. In
addition, the Company's business and operations are susceptible to negative
impacts from computer system failures, communication and energy disruption and
unethical individuals with the technological ability to cause disruptions or
failures of the Company's data processing systems.
Environmental Risks
The Company, in its ordinary course of business, acquires real property securing
loans that are in default, and there is a risk that hazardous substances or
waste, contaminants or pollutants could exist on such properties. The Company
may be required to remove or remediate such substances from the affected
properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Company may not have adequate remedies
against the prior owners or other responsible parties to recover its costs.
Finally, the Company may find it difficult or impossible to sell the affected
properties either prior to or following any such removal. In addition, the
Company may be considered liable for environmental liabilities in connection
with its borrowers' properties, if, among other things, it participates in the
management of its borrowers' operations. The occurrence of such an event could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
Dilution
As of December 31, 2000, the Company had outstanding options to purchase an
aggregate of 263,161 shares of Common Stock at exercise prices ranging from
$10.48 to $13.44 per share, or a weighted average exercise price per share of
$12.03. To the extent such options are exercised, shareholders of the Company
will experience dilution. See "Market for the Company's Common Stock and Related
Stockholder Matters."
14
ITEM 2 - PROPERTIES
Dixon Branch - Consists of a two-story building with approximately 16,600 square
feet of space situated in the central business district in the city of Dixon in
northern Solano County. The Bank owns this property with no encumbrances.
Regency Park Branch - Approximately 5,000 square feet of space situated in a
shopping center in the city of Vacaville in north central Solano County. The
property is subject to a lease expiring in December 2005. The term of the lease
is fifteen years with options to extend this lease for an additional nineteen
years.
Fairfield Branch - Approximately 3,800 square feet of space situated in an
office complex in the city of Fairfield in western Solano County. Property is
subject to a lease expiring in December 2001.
Operations Center - Consists of a one-story building with approximately 33,500
square feet of space situated in the central business district in the city of
Dixon in northern Solano County. The Bank owns the property with no
encumbrances.
Future Bank Site - Vacant lot situated in the city of Dixon in northern Solano
County. The Bank owns the property with no encumbrances.
Winters Branch - Consists of a two-story building with approximately 2,800
square feet of space situated in the central business district in the city of
Winters in southern Yolo County. The Bank owns the property with no
encumbrances.
Davis Branch - Approximately 5,000 square feet of space situated in the central
business district in the city of Davis in southern Yolo County. The property is
subject to a lease expiring in March 2004.
Real Estate Loan Office - Approximately 2,200 square feet of space situated in
the central business district in the city of Davis in southern Yolo County. The
property is subject to a month-to-month lease.
West Sacramento Branch - Consists of a one-story building with approximately
5,000 square feet of space situated in the Port of Sacramento industrial park in
the city of West Sacramento in southern Yolo County. The Bank owns the property
with no encumbrances.
Woodland Branch - Approximately 3,800 square feet of space situated in the
central business district in the city of Woodland in central Yolo County. The
property is subject to a lease expiring in April 2002. The Bank has options to
extend this lease an additional fifteen years.
El Dorado Hills Loan Office - Approximately 800 square feet of space situated in
an office complex in the city of El Dorado Hills in El Dorado County. The
property is subject to a month-to-month lease.
SBA Loan Production Office - Approximately 800 square feet of space situated in
the central business district, in an office complex, in the city of Sacramento
in Sacramento County. Property is subject to a lease expiring in April 2003. The
term of the lease is three years.
Vacaville Financial Center Branch - Approximately 5,000 square feet of space
situated in the central business district in the city of Vacaville in north
central Solano County. The property is subject to a lease expiring in April
2005. The term of the lease is five years with options to extend this lease for
an additional ten years.
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material pending legal
proceeding, nor is any of their property the subject of any material pending
legal proceeding, except ordinary routine litigation arising in the ordinary
course of the Bank's business and incidental to its business, none of which are
expected to have a material adverse impact upon the Company's or the Bank's
business, financial condition or results of operations.
15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS
The Company's common stock is not listed on any exchange, nor is it included on
NASDAQ. However, trades may be reported on the OTC Bulletin Board under the
symbol "FNRN". The Company is aware that Hoefer & Arnett, Inc., Sutro & Co.,
Wedbush Morgan Securities and PaineWebber, Inc. all make a market in the
Company's common stock. Management is aware that there are also private
transactions in the Company's common stock although the data set forth below may
not reflect all such transactions.
The following table summarizes the range of sales prices of the Company's Common
Stock (the Bank's common stock prior to May 19, 2000) for each quarter during
the last two fiscal years and is based on information provided by Hoefer &
Arnett, Inc. The quotations reflect the price that would be received by the
seller without retail mark-up, mark-down or commissions and may not have
represented actual transactions:
QUARTER/YEAR HIGH LOW
------------ ---- ---
4th Quarter 2000 $17.00 $15.00
3rd Quarter 2000 $16.00 $14.50
2nd Quarter 2000 $14.50 $13.75
1st Quarter 2000 $14.44 $13.63
4th Quarter 1999 $14.00 $13.50
3rd Quarter 1999 $14.50 $13.25
2nd Quarter 1999 $14.00 $12.75
1st Quarter 1999 $13.50 $11.75
As of December 31, 2000, there were approximately 896 holders of record of the
Company's common stock, no par value, which is the only class of equity
securities authorized or issued.
In the last two years the Bank has declared the following stock dividends:
Shareholder Dividend Date
Record Date Percentage Payable
----------- ---------- -------
February 29, 2000 6% March 31, 2000
February 27, 1999 5% March 31, 1999
The Company does not expect to pay a cash dividend in the foreseeable future.
There are regulatory limitations on cash dividends that may be paid by the
Company under state and federal laws. See "Supervision and Regulation -
Restrictions on Dividends and Other Distributions."
16
ITEM 6 - SELECTED FINANCIAL DATA
The selected consolidated financial data below have been derived from the
Company's audited financial statements. The selected consolidated financial data
set forth below as of December 31, 1997, and 1996 have been derived from the
Bank's historical financial statements not included in this Report. The
financial information for 2000, 1999 and 1998 should be read in conjunction
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is in Part I (Item 7) of this Report and with the Company's
audited financial statements and the notes thereto, which are included in Part
II (Item 8) of this Report.
Summary of Operations for the year ended December 31,
----------------------------------------------------
(in thousands, except share and per share amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Interest Income and Loan Fees $ 28,857 $ 25,136 $ 23,453 $ 22,022 $ 20,797
Interest Expense (8,990) (7,836) (8,498) (8,100) (7,432)
----------- ----------- ----------- ----------- -----------
Net Interest Income 19,867 17,300 14,955 13,922 13,365
Recovery of (Provision for) Loan Losses -- 800 (760) (2,116) (8,332)
----------- ----------- ----------- ----------- -----------
Net Interest Income after Recovery of
(Provision for) Loan Losses 19,867 18,100 14,195 11,806 5,033
Other Operating Income 3,721 2,745 2,828 1,719 1,760
Other Operating Expense (15,887) (14,641) (12,797) (11,369) (12,233)
----------- ----------- ----------- ----------- -----------
Earnings (Loss) before Taxes 7,701 6,204 4,226 2,156 (5,440)
(Provision) Benefit for Taxes (2,658) (2,121) (1,225) (426) 2,703
----------- ----------- ----------- ----------- -----------
Net Earnings (Loss) $ 5,043 $ 4,083 $ 3,001 $ 1,730 $ (2,737)
=========== =========== =========== =========== ===========
Basic Earnings (Loss) Per Share * $ 1.51 $ 1.18 $ 0.87 $ 0.50 ($ 0.79)
=========== =========== =========== =========== ===========
Diluted Earnings (Loss) Per Share * $ 1.48 $ 1.18 $ 0.87 $ 0.50 $ 0.79)
=========== =========== =========== =========== ===========
Total Assets $ 391,628 $ 370,991 $ 343,309 $ 305,936 $ 264,621
=========== =========== =========== =========== ===========
Weighted Average Shares of Common Stock outstanding
Used for Basic Earnings Per Share Computation 3,345,403 3,459,615 3,452,985 3,450,795 3,449,995
=========== =========== =========== =========== ===========
Weighted Average Shares of Common Stock outstanding
Used for Diluted Earnings Per Share Computation 3,396,620 3,472,452 3,461,013 3,454,859 3,449,995
=========== =========== =========== =========== ===========
Return on Average Total Assets 1.35% 1.16% 0.96% 0.62% (1.05%)
Net Earnings/Average Equity 15.45% 12.83% 10.49% 6.70% (9.71%)
Net Earnings/Average Deposits 1.49% 1.29% 1.06% 0.69% (1.19%)
Average Loans/Average Deposits 55.67% 51.04% 49.12% 55.98% 66.85%
Average Equity to Average Total Assets 8.74% 9.08% 9.18% 9.18% 10.78%
- ------------------------------------------------------------------------------------------------------------------------------------
* Earnings per share have been restated as required by the Company's adoption of
SFAS No. 128, Earnings Per Share, which replaces APB Opinion 15, Earnings Per
Share.
17
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Company set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Forward-looking statements also
include statements in which words such as "expect," "anticipate," "intend,"
"plan," "believe," estimate," "consider," or similar expressions are used. 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
risks discussed under "Risk Factors That May Affect Results" on pages 10 through
15 herein and other risk factors discussed elsewhere in this Report.
The following statistical information and discussion should be read in
conjunction with the Selected Financial Data included in Part I (Item 6) and the
audited financial statements and accompanying notes included in Part II (Item 8)
of this Annual Report on Form 10-K.
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential
The following table summarizes the distribution, by amount (in thousands of
dollars) and percentage, of the daily average assets, liabilities, and
shareholders' equity of the Company for 2000, 1999 and 1998 (the date set forth
is for the Bank in reporting of period prior to May 19, 2000). Average balances
have been computed using daily balances. Tax-exempt income is not shown on a tax
equivalent basis.
2000 1999 1998
------------------------ ----------------------- -------------------------
Average Average Average
Balance Percent Balance Percent Balance Percent
--------- --------- --------- -------- ---------- ----------
ASSETS
- ------
Cash and Due From Banks $ 18,694 5.01% $ 18,115 5.17% $ 16,514 5.30%
Investment Securities:
U.S. Government Securities 33,117 8.87% 32,904 9.38% 33,389 10.71%
Obligations of States & Political
Subdivisions 64,826 17.37% 66,096 18.84% 61,351 19.67%
Other Securities 33,348 8.93% 27,179 7.75% 18,851 6.04%
Federal Funds Sold 20,267 5.43% 30,198 8.61% 30,719 9.85%
Loans 188,183 50.41% 161,246 45.97% 139,467 44.73%
Other Assets 14,857 3.98% 15,000 4.28% 11,522 3.70%
--------- ------- -------- ------ --------- -------
Total Assets $ 373,292 100.00% $ 350,738 100.00% $ 311,813 100.00%
========= ======= ======== ====== ========= =======
LIABILITIES &
- -------------
SHAREHOLDERS' EQUITY
- --------------------
Deposits:
Demand $ 89,385 23.95% $ 77,663 22.14% $ 64,957 20.83%
Interest-Bearing Transaction
Deposits 38,086 10.20% 35,620 10.16% 31,259 10.03%
Savings & MMDAs 99,908 26.76% 93,058 26.53% 78,816 25.28%
Time Certificates 110,669 29.65% 109,581 31.24% 108,873 34.91%
Borrowed Funds 1,191 0.32% 1,020 0.29% 1,006 0.32%
Other Liabilities 1,422 0.38% 1,962 0.56% (1,712) (0.55%)
Shareholders' Equity 32,631 8.74% 31,834 9.08% 28,614 9.18%
--------- ------- -------- ------ --------- -------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 373,292 100.00% $ 350,738 100.00% $ 311,813 100.00%
========= ======= ======== ====== ========= =======
===============================================================================================================================
1. Average Balances for Loans include nonaccrual loans and are net of the
allowance for loan losses.
18
Net Interest Earnings
---------------------
Average Balances, Yields and Rates
----------------------------------
(In thousands of dollars)
2000 1999 1998
------------------------------- ---------------------------- ------------------------------
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Average Income/ Rates Average Income/ Rates Average Income/ Rates
Assets Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ---------------------------- ------- ------- ------ ------- ------- ------ --------- -------- -------
Securities:
U.S. Government $ 33,117 $ 2,046 6.18% $ 32,904 $ 1,942 5.90% $ 33,389 $ 1,993 5.97%
Obligations of States
And Political 64,826 4,196 6.47% 66,096 4,128 6.25% 61,351 3,915 6.38%
Subdivisions/1/
Other Securities 33,348 2,297 6.89% 27,179 1,630 6.00% 18,851 1,133 6.01%
--------- ------- ------- --------- -------- ------- --------- -------- ------
Total Investment Securities 131,291 8,539 6.50% 126,179 7,700 6.10% 113,591 7,041 6.20%
Federal Funds Sold 20,267 1,236 6.10% 30,198 1,498 4.96% 30,719 1,636 5.33%
Loans/2/ 188,183 18,112 9.62% 161,246 14,787 9.17% 139,467 13,518 9.69%
Loan Fees -- 970 .52% -- 1,151 .71% -- 1,258 .90%
--------- ------- ------- --------- -------- ------- --------- -------- ------
Total Loans, Including
Loan Fees 188,183 19,082 10.14% 161,246 15,938 9.88% 139,467 14,776 10.59%
--------- ------- ------- --------- -------- ------- --------- -------- ------
Total Earning Assets 339,741 $28,857 8.49% 317,623 $ 25,136 7.91% 283,777 $23,453 8.26%
======== ======= ======== ======= ======== ======
Cash and Due from Banks 18,694 18,115 16,514
Premises and Equipment 6,228 6,215 6,481
Interest Receivable
and Other Assets 8,629 8,785 5,041
--------- --------- ---------
Total Assets $ 373,292 $350,738 $ 311,813
========= ========= =========
================================================================================
1. Interest income and yields on tax-exempt securities are not presented on a
tax equivalent basis.
2. Average Balances for Loans include nonaccrual loans and are net of the
allowance for loan losses, but nonaccrued interest thereon is excluded.
19
Continuation of
---------------
Net Interest Earnings
---------------------
Average Balances, Yields and Rates
(In thousands of dollars)
2000 1999 1998
------------------------------ -------------------------------- -----------------------------
Yields Yields Yields
Interest Earned/ Interest Earned/ Interest Earned/
Liabilities and Average Income/ Rates Average Income/ Rates Average Income/ Rates
Shareholders' Equity Balance Expense Paid Balance Expense Paid Balance Expense Paid
- ---------------------------- --------- ------- -------- ---------- -------- ------- -------- -------- -------
Interest-Bearing Deposits:
Interest-Bearing
Transaction $ 38,086 $ 593 1.56% $ 35,620 $ 526 1.48% $ 31,259 $ 597 1.91%
Deposits
Savings & MMDAs 99,908 2,804 2.81% 93,058 2,347 2.52% 78,816 2,236 2.84%
Time Certificates 110,669 5,523 4.99% 109,581 4,915 4.49% 108,873 5,604 5.15%
--------- ------- -------- ---------- -------- ------- -------- -------- -------
Total Interest-Bearing
Deposits 248,663 8,920 3.59% 238,259 7,788 3.27% 218,948 8,437 3.85%
Borrowed Funds 1,191 70 5.88% 1,020 48 4.71% 1,006 61 6.06%
--------- ------- -------- ---------- -------- ------- -------- -------- -------
Total Interest-Bearing
Deposits and Funds 249,854 8,990 3.60% 239,279 7,836 3.27% 219,954 8,498 3.86%
Demand Deposits 89,385 -- -- 77,663 -- -- 64,957 -- --
--------- ------- -------- ---------- -------- ------- -------- -------- -------
Total Deposits and
Borrowed Funds 339,239 $ 8,990 2.65% 316,942 $ 7,836 2.47% 284,911 $ 8,498 2.98%
========= ======= ======== ========== ======== ======= ======== ======== =======
Accrued Interest and
Other Liabilities 1,422 1,962 (1,712)
Shareholders' Equity 32,631 31,834 28,614
--------- ---------- --------
Total Liabilities and
Shareholders' Equity $ 373,292 $ 350,738 $ 311,813
========= ========== ========
Net Interest Income and
Net Interest Margin/1/ $ 19,867 5.85% $ 17,300 5.45% $ 14,955 5.27%
======= ======== ========
Net Interest Spread/2/ 4.89% 4.64% 4.40%
================================================================================
1. Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
2. Net interest spread represents the average yield earned on interest-earning
assets less the average rate paid on interest-bearing liabilities.
20
Analysis of Changes
-------------------
in Interest Income and Interest Expense
---------------------------------------
(In thousands of dollars)
Following is an analysis of changes in interest income and expense (in thousands
of dollars) for 2000 over 1999 and 1999 over 1998. Changes not solely due to
rate or volume have been allocated proportionately to rate and volume.
2000 Over 1999 1999 Over 1998
---------------------------------------- ---------------------------------------
Volume Rate Change Volume Rate Change
----------- ---------- ---------- ----------- --------- ----------
Increase (Decrease) in
Interest Income:
Loans $ 2,570 $ 755 $ 3,325 $ 1,933 $ (664) $ 1,269
Investment Securities 320 519 839 772 (113) 659
Federal Funds Sold (867) 605 (262) (27) (111) (138)
Loan Fees (181) -- (181) (107) -- (107)
----------- ---------- ---------- ----------- --------- ----------
$ 1,842 $ 1,879 $ 3,721 $ 2,571 $ (888) $ 1,683
=========== ========== ========== =========== ========= ==========
Increase (Decrease) in
Interest Expense:
Deposits:
Interest-Bearing
Transaction Deposits $ 38 $ 29 $ 67 $ 116 $ (187) $ (71)
Savings & MMDAs 178 279 457 295 (184) 111
Time Certificates 50 558 608 36 (725) (689)
Borrowed Funds 9 13 22 1 (14) (13)
----------- ---------- ---------- ----------- --------- ----------
$ 275 $ 879 $ 1,154 $ 448 $ (1,110) $ (662)
Increase (Decrease) in
----------- ---------- ---------- ----------- --------- ----------
Net Interest Income: $ 1,567 $ 1,000 $ 2,567 $ 2,123 $ 222 $ 2,345
=========== ========== ========== =========== ========= ==========
21
INVESTMENT PORTFOLIO
Composition of Investment Securities
The mix of investment securities at December 31, for the previous three fiscal
years is as follows (amounts in thousands of dollars):
2000 1999 1998
-------------- ------------- -------------
Investment securities available for sale:
U.S. Treasury Securities $ 5,550 14,986 28,646
Securities of U.S. Government
Agencies and Corporations 22,676 20,867 8,254
Obligations of State &
Political Subdivisions 65,230 65,950 66,945
Mortgage Backed Securities 7,645 9,995 9,707
Other Bonds, Notes and Debentures 25,537 23,654 13,997
-------------- ------------- -------------
Total Investments $ 126,638 135,452 127,549
============== ============= =============
Maturities of Investment Securities
The following table is a summary of the relative maturities (in thousands of
dollars) and yields of the Company's investment securities as of December 31,
2000. The yields on tax-exempt securities are shown on a tax equivalent basis.
Period to Maturity
------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years
------------------------- ----------------------- ------------------------
Security Amount Yield Amount Yield Amount Yield
- -------- -------- --------- -------- -------- ---------- ---------
U.S. Treasury Securities $ 2,264 6.44% $ 3,286 6.00% $ -- --
Securities of U.S. Government
Agencies and Corporations 2,994 6.09% 15,656 6.01% 4,026 6.14%
Obligations of State &
Political Subdivisions 3,386 8.18% 20,799 7.55% 31,633 7.05%
Mortgage Backed Securities 718 5.24% 3,958 6.86% 802 7.32%
Other Bonds, Notes and Debentures 1,728 5.59% 20,472 6.80% 1,015 7.08%
-------- --------- -------- -------- ---------- ---------
TOTAL $ 11,090 6.67% $ 64,171 6.81% $ 37,476 6.96%
======== ========= ======== ======== ========== =========
After Ten Years Total
------------------------ ----------------------
Security Amount Yield Amount Yield
- -------- -------- -------- --------- ------
U.S. Treasury Securities $ -- $ 5,550 6.18%
Securities of U.S. Government
Agencies and Corporations -- 22,676 6.04%
Obligations of State &
Political Subdivisions 9,412 6.97% 65,230 7.26%
Mortgage Backed Securities 2,167 6.82% 7,645 6.74%
Other Bonds, Notes and Debentures 2,322 7.57% 25,537 6.80%
-------- -------- --------- ------
TOTAL $ 13,901 7.05% $ 126,638 6.87%
======== ======== ========= ======
Securities Exceeding Ten Percent of Stockholders' Equity
--------------------------------------------------------
The Company held no investment securities of a single issuer that had an
aggregate book value that exceeded ten percent of stockholder's equity at
December 31, 2000.
22
LOAN PORTFOLIO
--------------
Composition of Loans
--------------------
The mix of loans, net of deferred origination fees and allowance for loan losses
at December 31, for the previous five fiscal years is as follows (amounts in
thousands of dollars) includes loans held for sale:
December 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ----------------------------
Balance Percent Balance Percent Balance Percent
------------- ---------- ------------ ----------- ------------- -----------
Commercial $ 82,714 38.1% $ 57,799 35.5% $ 42,659 28.1%
Agricultural 23,288 10.7% 21,951 13.5% 21,709 14.3%
Real Estate Mortgage 48,963 22.6% 42,796 26.3% 41,458 27.3%
Real Estate Construction 54,634 25.2% 34,235 21.0% 40,059 26.4%
Personal 7,528 3.4% 6,150 3.7% 5,774 3.9%
------------- ---------- ------------ ----------- ------------- -----------
TOTAL $ 217,127 100.0% $ 162,931 100.0% $ 151,659 100.0%
============= ========== ============ =========== ============= ===========
1997 1996
---------------------------- ---------------------------
Balance Percent Balance Percent
------------- ---------- ------------ -----------
Commercial $ 43,885 34.5% $ 68,249 47.1%
Agricultural 21,612 17.0% 24,453 16.9%
Real Estate Mortgage 24,450 19.3% 22,638 15.7%
Real Estate Construction 30,628 24.1% 22,979 15.9%
Personal 6,429 5.1% 6,311 4.4%
------------- ---------- ------------ -----------
TOTAL $ 127,004 100.0% $ 144,630 100.0%
============= ========== ============ ===========
Commercial loans are primarily for financing the needs of a diverse group of
businesses located in the Bank's market area. The Bank also makes loans to
individuals for investment purposes. Most of these loans are substantially
short-term and secured by various types of collateral. Real estate construction
loans are generally for financing the construction of single-family residential
homes for well-qualified individuals and builders. These loans are secured by
real estate and have short maturities.
As shown in the comparative figures for loan mix during 2000, the amounts of all
loans have increased over 1999. Total loans increased in 1999 compared to 1998
as a result of increases in commercial loans and real estate mortgage loans,
which were partially offset by a decrease in real estate construction loans.
Maturities and Sensitivities of Loans to Changes in Interest Rates
------------------------------------------------------------------
Loan maturities of the loan portfolio at December 31, 2000 are as follows
(amounts in thousands of dollars):
Fixed Variable
Maturing Rate Rate Total
-------------------------------- ---------------- ---------------- ----------------
Within one year $ 13,174 $ 65,947 $ 79,121
After one year through five years 14,345 52,275 66,620
After five years 57,208 14,178 71,386
---------------- ---------------- ----------------
Total $ 84,727 $ 132,400 $ 217,127
================ ================ ================
23
Nonaccrual, Past Due and Restructured Loans
-------------------------------------------
It is the Bank's policy to recognize interest income on an accrual basis.
Accrual of interest is suspended when a loan has been in default as to principal
or interest for 90 days, unless well secured by collateral believed by
management to have a fair market value that at least equals the book value of
the loan plus accrued interest receivable and in the process of collection. Real
estate acquired through foreclosure is written down to its estimated fair market
value at the time of acquisition and is carried as a nonearning asset until
sold. Any write-down at the time of acquisition is charged against the allowance
for loan losses; subsequent write-downs or gains or losses upon disposition are
credited or charged to noninterest income/expense. The Bank has made no foreign
loans.
The following table shows the aggregate amounts of assets (in thousands of
dollars) in each category at December 31, for the years indicated:
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------- -------------
Nonaccrual Loans $ 742 $ 528 $ 1,702 $ 2,064 $ 5,085
90 Days Past Due But Still Accruing -- 2 330 983 535
------------ ------------ ------------ ------------- -------------
Total Nonperforming Loans 742 530 2,032 3,047 5,620
Other Real Estate Owned, Net -- -- 906 1,821 1,698
------------ ------------ ------------ ------------- -------------
Total Nonperforming Assets $ 742 $ 530 $ 2,938 $ 4,868 $ 7,318
============ ============ ============ ============= =============
Performing Restructured Loans $ -- $ -- $ -- $ -- $ 1,257
============ ============ ============ ============= =============
If interest on nonaccrual loans had been accrued, such income would have
approximated $91,000, $32,000, and $133,000 during the years ended December 31,
2000, 1999 and 1998, respectively. Income actually recognized for these loans
approximated $64,000, $50,000 and $64,000 for the years ended December 31,2000,
1999 and 1998, respectively.
There was a $212,000 increase in nonperforming assets for 2000 over 1999. At
December 31, 2000, nonperforming assets included one nonaccrual agricultural
loan totaling $46,000 and seven nonaccrual commercial loans totaling $696,000.
There were no loans past due more than 90 days at December 31, 2000. There were
no Other Real Estate Owned ("OREO") properties at December 31, 2000.
Potential Problem Loans
-----------------------
In addition to the nonperforming assets described above, the Bank's Branch
Managers each month submit to the Loan Committee of the Board of Directors of
the Bank a report detailing the status of classified loans and those loans that
are past due over sixty days. Also included in the report are those loans that
are not necessarily past due, but the branch manager is aware of problems with
these loans which may result in a loss.
In addition, the Monthly Allowance for Loan Loss Analysis Report is prepared
based on Problem Loan/Possible Loss Reports, internal loan grading, regulatory
classifications and loan review classifications and is reviewed by the
Management Loan Committee of the Bank. The Management Loan Committee of the Bank
reviewed the report, dated December 31, 2000, on February 13, 2001. This report
included any nonperforming loan reported in the table above, if that loan
continued to be considered a problem loan or had some potential for loss. A
total of thirty-two loans with an aggregate balance of $7,862,000 were reported.
Thirteen of the thirty-two loans with an aggregate balance of $2,862,000 were
deemed by management to be fully collectable. Nineteen of the loans totaling
$5,000,000 may have some loss potential which management believes are
sufficiently covered by the Bank's existing loan loss reserve (Allowance for
Loan Losses). The ratio of the Allowance for Loan Losses to total loans at
December 31, 2000 was 3.21%.
24
SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
The Allowance for Loan Losses is maintained at a level believed by management to
be adequate to provide for losses that can be reasonably anticipated. The
allowance is increased by provisions charged to operating expense and reduced by
net charge-offs. The Bank makes credit reviews of the loan portfolio and
considers current economic conditions, loan loss experience, and other factors
in determining the adequacy of the reserve balance. The allowance for loan
losses is based on estimates and actual losses may vary from current estimates.
Analysis of the Allowance for Loan Losses
-----------------------------------------
(In Thousands of Dollars)
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
Balance at Beginning of Period $ 7,825 $ 8,144 $ 7,356 $ 8,403 $ 4,308
(Recovery of) Provision for Loan Losses -- (800) 760 2,116 8,332
Loans Charged-Off:
Commercial (819) (106) (635) (2,634) (844)
Real Estate Mortgage -- (40) (47) (968) (3,634)
Real Estate Construction -- -- -- -- --
Installment Loans to Individuals (33) (11) (100) (24) (38)
------------ ----------- ----------- ----------- ------------
Total Charged-Off (852) (157) (782) (3,626) (4,516)
------------ ----------- ----------- ----------- ------------
Recoveries:
Commercial 221 171 786 127 263
Real Estate Mortgage -- 438 6 330 7
Real Estate Construction -- -- -- -- --
Installment Loans to Individuals 34 29 18 6 9
------------ ----------- ----------- ----------- ------------
Total Recoveries 255 638 810 463 279
------------ ----------- ----------- ----------- ------------
Net Recoveries (Charge-Offs) (597) 481 28 (3,163) (4,237)
Balance at End of Period $ 7,228 $ 7,825 $ 8,144 $ 7,356 $ 8,403
============ =========== =========== =========== ============
Ratio of Net Recoveries (Charge-Offs)
During the period to Average Loans
Outstanding During the Period (0.32%) 0.30% 0.02% (2.24%) (2.75%)
============ =========== =========== =========== ============
25
Allocation of the Allowance for Loan Losses
-------------------------------------------
The Allowance for Loan Losses (the "Reserve") has been established as a general
reserve available to absorb possible future losses throughout the Loan
Portfolio. The following table is an allocation of the Reserve balance on the
dates indicated (amounts in thousands of dollars):
December 31, 2000 December 31, 1999 December 31, 1998
------------------------------- -------------------------------- --------------------------------
Allocation of Loans as a % Allocation of Loans as a % Allocation of Loans as a %
Reserve Balance of Total Loans Reserve Balance of Total Loans Reserve Balance of Total Loans
--------------- -------------- --------------- -------------- --------------- --------------
Loan Type:
Commercial $ 2,847 48.82% $ 3,233 48.95% $ 3,697 42.45%
Real Estate Mortgage 3,207 22.55% 3,272 26.27% 3,083 27.33%
Real Estate Construction -- 25.16% -- 21.01% -- 26.41%
Installment 90 3.42% 146 3.69% 142 3.61%
Other Loans -- 0.05% -- 0.08% -- 0.20%
Unallocated 1,084 -- 1,174 -- 1,222 --
------------- ----------- ------------ ---------- ------------- -----------
Total $ 7,228 100.00% $ 7,825 100.00% $ 8,144 100.00%
============= =========== ============ ========== ============= ===========
December 31, 1997 December 31, 1996
------------------------------- ---------------------------------
Allocation of Loans as a % Allocation of Loans as a %
Reserve Balance of Total Loans Reserve Balance of Total Loans
--------------- -------------- --------------- --------------
Loan Type:
Commercial $ 3,418 51.56% $ 3,356 64.10%
Real Estate Mortgage 2,695 19.25% 3,474 15.65%
Real Estate Construction -- 24.12% -- 15.89%
Installment 140 4.79% 313 4.23%
Other Loans -- 0.28% -- 0.13%
Unallocated 1,103 -- 1,260 --
---------- --------- ------------ ----------
Total $ 7,356 100.00% $ 8,403 100.00%
========== ========= ============ ==========
The Bank believes that any breakdown or allocation of the Reserve into loan
categories lends an appearance of exactness, which does not exist, because the
Reserve is available for all loans. The Reserve breakdown shown above is
computed taking actual experience into consideration but should not be
interpreted as an indication of the specific amount of actual charge-offs that
may ultimately occur.
26
DEPOSITS
The following table sets forth the average amount and the average rate paid on
each of the listed deposit categories (amounts in thousands of dollars):
2000 1999 1998
---------------------- -------------------- --------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
---------- -------- --------- -------- --------- --------
Deposit Type:
Noninterest-Bearing Demand $ 89,385 - $ 77,663 -- $ 64,957 --
Interest-Bearing Demand (NOW) $ 38,086 1.56% $ 35,620 1.48% $ 31,259 1.91%
Savings and MMDAs $ 99,908 2.81% $ 93,058 2.52% $ 78,816 2.84%
Time $ 110,669 4.99% $ 109,581 4.49% $ 5.15% 5.15%
The following table sets forth by time remaining to maturity the Bank's time
deposits in the amount of $100,000 for more (in thousands of dollars) as of
December 31, 2000:
2000
--------
Three months or less $ 18,659
Over three months through twelve months 20,666
Over twelve months 2,122
--------
Total $ 41,447
========
RETURN ON EQUITY AND ASSETS
---------------------------
The following table shows key financial ratios for the years indicated:
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Return on Average Total Assets 1.35% 1.16% 0.96% 0.62% (1.05%)
Return on Average Shareholders' Equity 15.45% 12.83% 10.49% 6.70% (9.71%)
Dividend Payout Ratio -/1/ -/1/ -/1/ -/1/ -/1/
Average Equity to Average Total Assets 8.74% 9.08% 9.18% 9.18% 10.78%
==========================================================================================
1. No Cash Dividends Paid
SHORT-TERM BORROWINGS
---------------------
The Company had no short-term borrowings at December 31, 2000.
27
Results of Operations
---------------------
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
---------------------------------------------------------------------
Net income for the year ended December 31, 2000, was $5,043,000, representing an
increase of $960,000, or 24% over net income of $4,083,000 for the year ended
December 31, 1999. The increase in net income is principally attributable to a
$2,567,000 increase in net interest income and an increase in other operating
income of $975,000, which increases were partially offset by an $800,000
increase in the provision for loan losses, a $762,000 increase in salaries and
employee benefits expenses, a $157,000 increase in stationery and supplies and a
$172,000 increase in other expense.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
---------------------------------------------------------------------
Net income for the year ended December 31, 1999, was $4,083,000, representing an
increase of $1,082,000, or 36% over net income of $3,001,000 for the year ended
December 31, 1998. The increase in net income is principally attributable to a
$2,345,000 increase in net interest income and a $1,560,000 decrease in the
provision for loan losses, which increases were partially offset by a $896,000
increase in salaries and employee benefits expenses, a $340,000 increase in
occupancy and equipment expenses and a $666,000 increase in other expense.
Net Interest Income
-------------------
Net interest income is the excess of interest and fees earned on the Bank's
loans, investment securities, federal funds sold and banker's acceptances over
the interest expense paid on deposits, mortgage notes and other borrowed funds.
It is primarily affected by the yields on the Bank's interest-earning assets and
loan fees and interest-bearing liabilities outstanding during the period. The
$2,567,000 increase in the Bank's net interest income in 2000 from 1999, and the
$2,345,000 increase in 1999 from 1998 were due to the combined effects of
interest rates, volume and mix of loans and deposits. The "Analysis of Changes
in Interest Income and Interest Expense" set forth on Page 21 of this Annual
Report on Form 10-K identifies the effects of interest rates and loan/deposit
volume. Another significant factor that contributed to the increase in net
interest income was the earning asset to total asset ratio. This ratio was 91.0%
in 2000, 90.6% in 1999 and 91.0% in 1998.
Interest income on loans (including loan fees) was $19,082,000 for 2000,
representing an increase of approximately $3,144,000, or 19.7% from $15,938,000
for 1999. This compared to an increase in 1999 of approximately $1,162,000 or
7.9% more than loan interest income earned in 1998. The increased interest
income on loans in 2000 over 1999 was the result of a 16.71% increase in loan
volume and a 45 basis point increase in loan interest rates, which was partially
offset by a decrease of approximately $181,000 in loan fees. As noted, loan fee
comparisons were impacted by net increases in deferred loan fees of $259,000 in
2000 and $254,000 in 1999.
Average outstanding federal funds sold fluctuated during this period, ranging
from $20,267,000 in 2000 to $30,198,000 in 1999 and $30,719,000 in 1998. At
year-end 2000 federal funds sold were $10,000,000. Federal funds are used
primarily as a short-term investment to provide liquidity for funding of loan
commitments or to accommodate seasonal deposit fluctuations. Interest rates on
federal funds sold in 2000 generally provided higher yields, compared to
investment securities rates, than in 1999. This rate spread between federal
funds and investment securities varied from 0.40% in 2000 to 1.14% in 1999 and
0.87% in 1998.
The average total level of investment securities increased $5,112,000 in 2000.
The level of securities interest income attributable to investment securities
increased to $8,539,000 in 2000 from $7,700,000 for 1999, due to the combined
effects of interest rates and volume. The Bank's strategy for this period has
emphasized the use of the investment portfolio to maintain the Bank's overall
level of income in an expected environment of stable to increasing loan demand.
The Bank continues to reinvest maturing securities to provide future liquidity
and to attempt to maximize the rate of return considering the current yield
curve.
The average total level of investment securities increased $12,588,000 in 1999,
with increases in all categories, except US Government Securities with a
$485,000 decrease. The level of securities interest income attributable to
investment securities increased to $7,700,000 in 1999 from $7,041,000 for 1998,
primarily because of the larger volume of investments.
28
Total interest expense increased to $8,990,000 in 2000 from $7,836,000 in 1999,
and decreased to $7,836,000 in 1999 from $8,498,000 in 1998, representing a
14.7% increase in 2000 over 1999 and a 7.8% decrease in 1999 over 1998. Changes
in interest expense resulted primarily from changes in rates and volume of total
deposits, and changes in the mix of deposits. The increase in total interest
expense from 2000 to 1999 was primarily due to a combination of increases in
deposits and interest rates paid on deposits. The decrease in total interest
expense in1999 is primarily due to a decrease in interest rates in 1999, which
was partially offset by an increase in deposits. The mix of deposits for the
previous three years is as follows (amounts are in thousands of dollars):
2000 1999 1998
--------------------- --------------------- --------------------
Average Average Average
Balance Percent Balance Percent Balance Percent
Noninterest-Bearing Demand $ 89,385 26.4% $ 77,663 24.5% $ 64,957 22.9%
Interest-Bearing Demand (NOW) 38,086 11.3% 35,620 11.3% 31,259 11.0%
Savings and MMDAs 99,908 29.6% 93,058 29.5% 78,816 27.8%
Time 110,669 32.7% 109,581 34.7% 108,873 38.3%
-------- ------ ---------- ------ ---------- ------
Total $ 338,048 100.0% $ 315,922 100.0% $ 283,905 100.0%
======== ====== ========== ====== ========== ======
- -------------------------------------------------------------------------------------------------
The three years ended December 31, 2000 has been characterized by fluctuating
interest rates. Loan rates and deposit rates both decreased in 1998 and 1999,
while loan rates and deposit rates both increased in 2000. The net spread
between the rate for total earning assets and the rate for total deposits and
borrowed funds increased 24 basis points in the period from 1998 to 1999 and
increased 25 basis points in the period from 1999 to 2000.
The Bank's net interest margin (net interest income divided by average earning
assets) was 5.85% in 2000, 5.45% in 1999 and 5.27% in 1998.
Provision for Loan Losses
-------------------------
The provision for loan losses is established by charges to earnings based on
management's overall evaluation of the collectibility of the loan portfolio.
Based on this evaluation there was no provision for loan losses in 2000 and the
provision was adjusted in 1999. The ($800,000) adjustment in 1999 was made
because of improved market conditions and loan quality in the Bank's loan
portfolio. The amount of loans charged-off increased in 2000 to $852,000 from
$157,000 in 1999 and recoveries decreased to $255,000 in 2000 from $638,000 in
1999. The ratio of the allowance for loan losses to total loans at December 31,
2000 was 3.2%. The ratio of the allowance for loan losses to total nonaccrual
loans and loans past due 90 days or more at December 31, 2000 was 974% compared
to 1,476% at December 31, 1999.
The provision for loan losses decreased to ($800,000) in 1999 from $760,000 in
1998, primarily as a result of a adjustment made because of improved market
conditions and loan quality in the Bank's loan portfolio. The amount of loans
charged-off decreased in 1999 to $157,000 from $782,000 in 1998, and recoveries
decreased to $638,000 in 1999 from $810,000 in 1998. The ratio of the allowance
for loan losses to total loans at December 31, 1999 was 4.6%. The ratio of the
allowance for loan losses to total nonaccrual loans and loans past due 90 days
or more at December 31, 1999 was 1,476% compared to 401% at December 31, 1998.
29
Other Income and Expenses
-------------------------
Other income consisted primarily of service charges on deposit accounts, net
realized gains on loans held for sale and other miscellaneous income. Service
charges on deposit accounts increased $290,000 in 2000 over 1999, and $59,000 in
1999 over 1998. The increase in 2000 was due, for the most part, to increased
nonsufficient funds and overdraft fees. Net realized gains on loans held for
sale decreased $42,000 in 2000 over 1999 and increased $106,000 in 1999 over
1998. Other miscellaneous income increased 745,000 in 2000 over 1999 and
decreased $262,000 in 1999 over 1998. The increase in other miscellaneous income
in 2000 was due, for the most part to recognition of a gain on sale of other
real estate owned in the amount of $531,000.
The Bank sold investment securities at net gains of $44,000 in 2000, $62,000 in
1999, and $49,000 in 1998.
Other operating expenses consist of salaries and employee benefits, occupancy
and equipment expense and other operating expenses. Other operating expenses
increased to $15,887,000 in 2000 from $14,641,000 in 1999, and increased to
$14,641,000 in 1999 from $12,797,000 in 1998, representing an increase of
$1,246,000, or 8.5% in 2000 over 1999, and an increase of $1,844,000, or 14.4%
in 1999 over 1998. As detailed below, the increases in other operating expenses
from 1999 to 2000 was primarily attributable to a combination of increases in
salaries and employee benefits; stationery and supplies; advertising and other
miscellaneous expenses.
Following is an analysis of the increase or decrease in the components of other
operating expenses (amounts are in thousands of dollars):
2000 over 1999 1999 over 1998
--------------------------------- ------------------------------
Amount Percent Amount Percent
------------ ------------ ----------- -------------
Salaries and Employee Benefits $ 762 8.9% $ 896 11.7%
Occupancy and Equipment 17 0.7% 341 17.1%
Data Processing 12 2.7% 88 25.1%
Stationery and Supplies 157 44.1% 29 8.9%
Advertising 110 39.6% (90) (24.5%)
Directors Fees 15 13.4% (7) (5.9%)
Other Real Estate Owned -- -- (78) (100.0%)
Other Expense 172 6.7% 665 35.2%
---------- --------- --------- ----------
Total 1,245 8.5% 1,844 14.4%
========== ========= ========= ==========
In 2000, salaries and employee benefits increased $762,000 to $9,324,000 from
$8,562,000 for 1999. This increase was due, for the most part, to increases in
number of employees, and increases in profit sharing distributions and incentive
compensation. The increases in other miscellaneous expenses were due to
increased marketing expenses, contributions and legal fees.
In 1999, salaries and employee benefits increased $896,000 to $8,562,000 from
$7,666,000 for 1998. This increase was due, for the most part, to increases in
number of employees, commissions paid for real estate loans and increases in
profit sharing distributions and incentive compensation. Occupancy and equipment
expense increased $341,000 to $2,341,000 in 1999 from $2,000,000 for 1998. This
increase was due to charges to depreciation for obsolete computer hardware and
software. The increases in other miscellaneous expenses were due to increased
consulting fees, in-house training and a credit to miscellaneous expense, in
1998, to reverse items expensed in 1996 for litigation contingencies.
30
Income Taxes
------------
The provision for income taxes is primarily affected by the tax rate, the level
of earnings before taxes and the amount of tax shelter provided by nontaxable
earnings. In 2000, taxes increased $537,000 to $2,658,000 from $2,121,000 for
1999. In 1999, taxes increased $896,000 to $2,121,000 from 1,225,000 for 1998.
The Bank's effective tax rate was 35%, 34% and 29% for the years ended December
31, 2000, 1999 and 1998, respectively. Nontaxable municipal bond income was
$1,201,000, $1,447,000 and $1,689,000 for the years ended December 31, 2000,
1999, and 1997, respectively.
Liquidity and Capital Resources
-------------------------------
The Bank needs to maintain appropriate liquidity and adequate capital. Liquidity
is measured by various ratios, the most common of which is the ratio of loans to
deposits. This ratio was 62.1% on December 31, 2000, 48.5% on December 31, 1999,
and 49.0% on December 31, 1998. The Company's primary source of liquidity on a
stand-alone basis is dividends from the Bank. The amount of such dividend is
subject to regulatory limitations.
As discussed in Part 1(Item 1) of this Annual Report of Form 10-K, the Bank does
experience seasonal swings in deposits, which impact liquidity. Management has
adjusted to this seasonal swing by scheduling investment maturities and
developing seasonal credit arrangements with the Federal Reserve Bank and
Federal Fund lines of credit with correspondent banks. In addition, the ability
of the Bank's real estate department to originate and sell loans into the
secondary market has provided another tool for the management of liquidity.
The capital of the Bank historically has been maintained at a level that is in
excess of regulatory guidelines. The policy of annual stock dividends has, over
time, allowed the Bank to match capital and asset growth through retained
earnings and a managed program of geographic growth.
31
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk is the risk to a bank's financial position resulting from adverse
changes in market rates or prices, such as interest rates, foreign exchange
rates or equity prices. The Bank has no exposure to foreign currency exchange
risk or any specific exposure to commodity price risk. The Bank's major area of
market risk exposure is interest rate risk ("IRR"). The Bank's exposure to IRR
can be explained, as the potential for change in the Bank's reported earnings
and/or the market value of its net worth. Variations in interest rates affect
earnings by changing net interest income and the level of other
interest-sensitive income and operating expenses. Interest rate changes also
affect the underlying economic value of the Bank's assets, liabilities and
off-balance sheet items. These changes arise because the present value of future
cash flows, and often the cash flows themselves, changes with the interest
rates. The effects of the changes in these present values reflect the change in
the Bank's underlying economic value and provide a basis for the expected change
in future earnings related to the interest rate. IRR is inherent in the role of
banks as financial intermediaries, however a bank with a high IRR level may
experience lower earnings, impair liquidity and capital positions, and most
likely, a greater risk of insolvency. Therefore, banks must carefully evaluate
IRR to promote safety and soundness in their activities.
The responsibility for the Bank's market risk sensitivity management has been
delegated to the Asset/Liability Committee ("ALCO"). Specifically, ALCO utilizes
computerized modeling techniques to monitor and attempt to control the influence
that market changes have on rate sensitive assets and rate sensitive
liabilities.
Market risk continues to be a major focal point of regulatory emphasis. In
accordance with regulation, each bank is required to develop an IRR management
program depending on its structure, including certain fundamental components,
which are mandatory to ensure IRR management. These elements include appropriate
board and management oversight as well a comprehensive risk management process
that effectively identifies, measures, monitors and controls risk. Should a bank
have material weaknesses in its risk management process or high exposure
relative to its capital, the bank regulatory agencies will take action to remedy
these shortcomings. Moreover, the level of a bank's IRR exposure and the quality
of its risk management process is a determining factor when evaluating a bank's
capital adequacy.
32
The Bank utilizes the tabular presentation alternative in complying with
quantitative and qualitative disclosure rules. The following tables summarize
the expected maturity, principal repricing, principal repayment and fair value
of the financial instruments that are sensitive to changes in interest rates.
Interest Rate Sensitivity Analysis at December 31, 2000
- -------------------------------------------------------------------------------------------------------------------------------
Expected Maturity/Repricing/Principal Total Fair
Payment
In Thousands Within 1 Year to 3 Years After 5 Balance Value
1 Year 3 Years to 5 Years
Years
- -------------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Federal funds sold 10,000 -- -- -- 10,000 10,000
Average interest rate 6.50% -- -- -- 6.50%
Fixed rate investments 11,090 36,361 27,810 51,377 126,638 126,638
Average interest rate 6.67% 6.81% 6.81% 6.98% 6.87%
Fixed rate loans (1) 6,589 8,071 6,274 57,208 78,142 76,574
Average interest rate 7.80% 7.30% 7.33% 8.33% 8.10%
Variable rate loans (1) 65,947 6,724 45,551 14,178 132,400 132,400
Average interest rate 10.22% 8.76% 9.77% 8.79% 9.84%
Loans held for sale 6,585 -- -- -- 6,585 6,629
Average interest rate 8.12% -- -- -- 8.12%
Interest-Sensitive Liabilities:
NOW account deposits (2) 12,298 10,976 8,781 11,850 43,905 43,905
Average interest rate 1.50% 1.50% 1.50% 1.50% 1.50%
Money market deposits (2) 15,668 13,057 13,057 10,446 52,228 52,228
Average interest rate 3.00% 3.00% 3.00% 3.00% 3.00%
Savings deposits (2) 16,614 9,494 11,866 9,494 47,448 47,448
Average interest rate 2.65% 2.65% 2.65% 2.65% 2.65%
Certificates of deposit 99,901 5,992 1,171 64,617 107,064 107,328
Average interest rate 4.79% 5.09% 5.24% 4.91% 4.94%
Interest-Sensitive Off-Balance
Sheet Items:
Commitments to lend -- -- -- -- 83,212 624
Standby letters of credit -- -- -- -- 2,912 29
- -------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000, federal funds sold of $10.0 million with a yield of 6.50%
and investments of $11.1 million with a weighted-average, tax-equivalent yield
of 6.67% were scheduled to mature within one year. In addition, net loans of
$79.1 million with a weighted-average yield of 9.85% were scheduled to mature or
reprice within the same timeframe. Overall, interest-earning assets scheduled to
mature within one year totaled $100.2 million with a weighted-average,
tax-equivalent yield of 9.15%. With respect to interest-bearing liabilities,
based on historical withdrawal patterns, NOW accounts, money market and savings
deposits, of $44.6 million with a weighted-average cost of 2.46% were scheduled
to mature with in one year. In addition, certificates of deposit totaling $99.9
million with a weighted-average cost of 4.79% were scheduled to mature in the
same timeframe. Total interest-bearing liabilities scheduled to mature within
one year equaled $144.5 million with a weighted-average rate of 5.88%.
Historical withdrawal patterns with respect to interest-bearing and noninterest
bearing transaction accounts are not necessarily indicative of future
performance as the volume of cash flows may increase or decrease. Loan
information is presented based on payment due dates and repricing dates, which
may materially differ from actual results due to prepayments.
33
Interest Rate Sensitivity Analysis at December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
Expected Maturity/Repricing/Principal Payment Total Fair
In Thousands Within 1 Year to 3 Years to After 5 Balance Value
1 Year 3 Years 5 Years Years
- ------------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Federal funds sold 37,300 -- -- -- 37,300 37,300
Average interest rate 5.50% -- -- -- 5.50%
Fixed rate investments 16,520 33,811 30,866 54,255 135,452 135,452
Average interest rate 6.20% 6.40% 6.40% 6.14% 6.27%
Fixed rate loans (1) 5,833 2,539 64 45,575 54,011 49,930
Average interest rate 8.38% 10.80% 10.80% 7.47% 7.73%
Variable rate loans (1) 83,524 14,739 -- -- 98,263 98,698
Average interest rate 9.89% 10.01% -- -- 9.91%
Loans held for sale - 10,657 -- -- 10,657 10,667
Average interest rate - 7.80% -- -- 7.80%
Interest-Sensitive Liabilities:
NOW account deposits (2) 10,261 9,072 7,266 9,695 36,284 36,284
Average interest rate 1.35% 1.35% 1.35% 1.35% 1.35%
Money market deposits (2) 15,800 13,166 13,166 10,540 52,672 52,672
Average interest rate 2.20% 2.20% 2.20% 2.20% 2.20%
Savings deposits (2) 17,446 9,970 12,462 9,967 49,845 49,845
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50%
Certificates of deposit 103,916 6,251 537 -- 110,704 110,404
Average interest rate 4.53% 4.94% 4.47% -- 4.55%
Interest-Sensitive Off-Balance
Sheet Items:
Commitments to lend -- -- -- -- 76,101 571
Standby letters of credit -- -- -- -- 3,600 36
- ------------------------------------------------------------------------------------------------------------------------------
(1) Based upon contractual maturity dates and interest rate repricing.
(2) NOW, money market and savings deposits do not carry contractual maturity
dates. The actual maturities of NOW, money market, and savings deposits
could vary substantially if future withdrawals differ from the Company's
historical experience.
The Bank controls interest rate risk by matching assets and liabilities. One
tool used to ensure market rate return is variable rate loans. Loans totaling
$79,121,000 or 36.44% of the total loan portfolio (including loans held for
sale) are subject to repricing within one year. Loan maturities in the after
five-year category increased to $71,386,000 at December 31, 2000 from
$48,128,000 at December 31, 1999. The reason for this increase was due, for the
most part, to increased loan volume.
The Bank is required by FASB 115 to mark to market the Available for Sale
investments at the end of each quarter. Mark to market resulted in a positive
capital entry of $2,479,000 as reflected on the December 31, 2000 balance sheet.
Mark to market impact on capital on December 31, 1999 was a negative $3,795,000.
These entries were the result of fluctuating interest rates.
34
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Financial Statement Schedules Filed:
-------------------------------------------------------------
Independent Auditors' Report Page 36
Balance Sheets as of December 31, 2000 and 1999 Page 37
Statements of Operations for years ended December 31, 2000, 1999, and 1998 Page 38
Statements of Stockholders' Equity and Comprehensive Income for years ended
December 31, 2000, 1999, and 1998 Page 39
Statements of Cash Flows for years ended December 31, 2000, 1999, and 1998 Page 40
Notes to Financial Statements Page 41-60
Schedules not included:
-----------------------
Schedule I - Securities: See Investment Portfolio (page 22)
Schedule II - Loans to Officers, Directors, Principal Security Holders and any
Associates of the Foregoing Persons: See Note 9 of Notes to Financial Statements
(page 51)
Schedule III - Loans: See Note 4 of Notes to Financial Statements (page 47).
Schedule IV - Bank Premises and Equipment: See Note 5 of Notes to Financial
Statements (page 48)
Schedule V - Investments in, Income From Dividends, and Equity in Earnings or
Losses of Subsidiaries and Associated Companies: Not Applicable
Schedule VI - Allowance for Possible Loan Losses: See Note 4 of Notes to
Financial Statements (page 48).
35
Independent Auditors' Report
The Board of Directors
First Northern Community Bancorp:
We have audited the accompanying consolidated balance sheets of First Northern
Community Bancorp and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Northern
Community Bancorp and subsidiary as of December 31, 2000 and 1999 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
January 26, 2001
36
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
Assets 2000 1999
Cash and due from banks $ 24,660,441 19,806,022
Federal funds sold 10,000,000 37,300,000
Investment securities - available for sale 126,637,586 135,451,683
Loans, net 210,542,475 152,273,772
Loans held for sale 6,584,562 10,656,803
Premises and equipment, net 6,147,921 6,031,711
Other assets 7,055,226 9,470,615
----------------- ---------------
Total assets $ 391,628,211 370,990,606
================= ===============
Liabilities and Stockholders' Equity
Deposits:
Demand $ 99,133,791 86,123,941
Interest-bearing transaction deposits 43,905,446 36,284,409
Savings and MMDAs 99,675,534 102,517,387
Time, under $100,000 65,617,644 67,478,374
Time, $100,000 and over 41,446,839 43,225,823
----------------- ---------------
Total Deposits 349,779,254 335,629,934
Accrued interest payable and other liabilities 5,312,055 3,287,969
----------------- ---------------
Total Liabilities 355,091,309 338,917,903
----------------- ---------------
Stockholders' Equity:
Common stock, no par value; 8000,000 shares
authorized; 3,092,273 shares issued and outstanding in 2000;
3,092,273 shares issued and outstanding in 1999 22,783,927 23,322,001
Additional paid-in capital 976,850 976,850
Retained earnings 12,035,961 9,513,151
Accumulated other comprehensive income (loss), net 740,164 (1,739,299)
Total stockholders' equity 36,536,902 32,072,703
----------------- ---------------
Commitments and contingencies
Total Liabilities and stockholders' equity $ 391,628,211 370,990,606
================= ===============
See accompanying notes to consolidated financial statements.
37
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------------- ---------- ----------
Interest income:
Interest and fees on loans $ 19,082,229 15,938,512 14,775,273
Federal funds sold 1,236,183 1,497,961 1,635,539
Investment securities:
Taxable 7,338,469 6,252,576 5,352,643
Nontaxable 1,200,548 1,446,919 1,688,825
----------------- ---------- ----------
Total interest income 28,857,429 25,135,968 23,452,280
Interest expense:
Time deposits $100,000 and over 2,289,195 2,146,492 2,301,017
Other deposits 6,631,411 5,641,060 6,135,881
Other borrowings 69,700 48,174 60,829
----------------- ---------- ----------
Total interest expense 8,990,306 7,835,726 8,497,727
----------------- ---------- ----------
Net interest income 19,867,123 17,300,242 14,954,553
(Recovery of) provision for loan losses -- (800,000) 760,000
----------------- ---------- ----------
Net interest income after (recovery of)
provision for loan losses 19,867,123 18,100,242 14,194,553
Other operating income:
Service charges on deposit accounts 1,444,197 1,154,148 1,094,758
Net realized gains on held-to-maturity securities -- -- 73,355
Net realized gains (losses) on available-for-sale securities 44,100 61,533 (24,056)
Net realized gains on loans held for sale 412,804 455,311 349,025
Net realized gains on other real estate owned 653,408 90,878 180,594
Other income 1,165,800 982,961 1,154,663
----------------- ---------- ----------
Total other operating income 3,720,309 2,744,831 2,828,339
----------------- ---------- ----------
Other operating expenses:
Salaries and employee benefits 9,324,187 8,561,921 7,666,086
Occupancy and equipment 2,358,491 2,340,653 2,000,316
Data processing 450,072 438,379 350,112
Stationery and supplies 512,702 355,907 326,573
Advertising 388,107 277,756 368,480
Directors fees 127,350 111,800 119,200
Other real estate owned 346 -- 77,717
Other 2,725,570 2,554,229 1,888,701
----------------- ---------- ----------
Total other operating expenses 15,886,825 14,640,645 12,797,185
----------------- ---------- ----------
Income before income tax expense 7,700,607 6,204,428 4,225,707
Provision for income tax expense 2,657,736 2,121,443 1,224,864
----------------- ---------- ----------
Net income $ 5,042,871 4,082,985 3,000,843
================= ========== ==========
Basic income per share $ 1.51 1.18 0.87
================= ========== ==========
Diluted income per share $ 1.48 1.18 0.87
================= ========== ==========
See accompanying notes to consolidated financial statements.
38
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other
Additional Comprehensive
Description Common Stock Comprehensive Paid-in Retained Income
Shares Amounts Income Capital Earnings (Loss) Total
- ---------------------------------------- --------- ----------- ------------- ---------- ----------- -------------- ----------
Balance at December 31, 1997 2,796,464 $19,144,851 976,850 6,518,342 206,309 26,846,352
Comprehensive income:
Net income $ 3,000,843 3,000,843 3,000,843
-------------
Other comprehensive income:
Unrealized holding gains
arising during the current
period, net of tax effect 1,834,803
of $1,223,203
Reclassification adjustment
due to losses realized,
net of tax effect of $9,622 14,434
-------------
Total other comprehensive
income, net of tax
effect of $1,232,825 1,849,237 1,849,237 1,849,237
-------------
Comprehensive income $ 4,850,080
=============
5% stock dividend 139,122 2,017,269 (2,017,269)
Cash in lieu of fractional shares (11,038) (11,038)
Stock options exercised 1,200 14,700 14,700
Common shares issued 7,088 83,568 83,568
--------- ----------- -------- ----------- ------------- ----------
Balance at December 31, 1998 2,943,874 21,260,388 976,850 7,490,878 2,055,546 31,783,662
Comprehensive income:
Net income $ 4,082,985 4,082,985 4,082,985
-------------
Other comprehensive income:
Unrealized holding losses
arising during the current
period, net of tax effect
of $2,505,283 (3,757,925)
Reclassification adjustment
due to gains realized,
net of tax effect of $24,613 (36,920)
-------------
Total other comprehensive
income, net of tax
effect of $2,529,896 (3,794,845) (3,794,845) (3,794,845)
-------------
Comprehensive income $ 288,140
=============
5% stock dividend 146,820 2,055,480 (2,055,480)
Cash in lieu of fractional shares (5,232) (5,232)
Common shares issued 7,725 89,104 89,104
Stock repurchase and retirement (6,146) (82,971) (82,971)
--------- ----------- -------- ----------- ------------- ----------
Balance at December 31, 1999 3,092,273 23,322,001 976,850 9,513,151 (1,739,299) 32,072,703
Comprehensive income:
Net income $ 5,042,871 5,042,871 5,042,871
-------------
Other comprehensive income:
Unrealized holding gains
arising during the current
period, net of tax effect
of $1,670,615 2,505,923
Reclassification adjustment
due to gains realized,
net of tax effect of $17,640 (26,460)
-------------
Total other comprehensive
income, net of tax
effect of $1,652,975 2,479,463 2,479,463 2,479,463
-------------
Comprehensive income $ 7,522,334
=============
5% stock dividend 184,532 2,514,249 (2,514,249)
Cash in lieu of fractional shares (5,812) (5,812)
Common shares issued 9,074 99,188 99,188
Stock repurchase and retirement (214,930) (3,151,511) (3,151,511)
--------- ----------- -------- ----------- ------------- ----------
Balance at December 31, 2000 3,070,949 $22,783,927 976,850 12,035,961 740,164 36,536,902
========= =========== ======== =========== ============= ==========
See accompanying notes to consolidated financial statements.
39
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------- ---------------- ------------
Cash flows from operating activities:
Net income $ 5,042,871 4,082,985 3,000,843
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
(Recovery of) provision for loan losses (800,000) 760,000
Depreciation and amortization 999,447 1,085,770 863,978
Accretion and amortization, net 49,521 291,654 317,987
Net realized gains on held-to-maturity securities -- -- (73,355)
Net realized (gains) losses on available-for-sale securities (44,100) (61,533) 24,056
Net realized gains on loans held for sale (412,804) (455,311) (349,025)
Gain on sale of OREO (653,408) (90,878) (180,594)
Provision for deferred income taxes 489,740 601,306 436,897
Proceeds from sales of loans held for sale 35,246,335 55,005,932 45,868,820
Originations of loans held for sale (30,761,290) (65,409,597) (65,453,411)
Increase in deferred loan origination fees 258,703 204,504 36,623
(Increase) decrease in accrued interest
receivable and other assets (26,964) 95,140 (423,372)
Increase (decrease) in accrued interest payable and other
liabilities 2,024,086 1,065,946 (1,037,392)
------------ ------------ -----------
Net cash provided by (used in) operating
activities 12,212,137 (4,384,532) (16,207,945)
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from maturities of available for sale securities 22,914,390 19,289,989 13,587,080
Proceeds from sales of available for sale securities 737,900 7,103,751 --
Purchase of available for sale securities (10,711,176) (40,851,006) (36,324,461)
Proceeds from maturities of held-to-maturity securities -- -- 5,130,535
Purchase of held-to-maturity securities -- -- (5,834,931)
Net (increase) decrease in loans (58,527,406) 182,723 (6,711,726)
Purchases of bank premises and equipment, net (816,019) (743,860) (912,261)
Proceeds from sale of other real estate owned 122,006 996,512 2,290,536
------------ ------------ -----------
Net cash used in investing activities (46,280,305) (14,021,891) (28,775,228)
------------ ------------ -----------
Cash flows from financing activities:
Net increase in deposits 14,680,722 26,326,844 33,473,228
Cash dividends paid in lieu of fractional shares (5,812) (5,232) (11,038)
Common stock issued 99,188 89,104 98,268
Repurchase of common stock (3,151,511) (82,971) --
------------ ------------ -----------
Net cash provided by financing activities 11,622,185 26,327,745 33,560,458
------------ ------------ -----------
Net change in cash and cash equivalents (22,445,587) 7,921,322 (11,422,715)
Cash and cash equivalents at beginning of year 57,106,022 49,184,700 60,607,415
------------ ------------ -----------
Cash and cash equivalents at end of year $ 34,660,441 57,106,022 49,184,700
============ ============ ===========
See accompanying notes to consolidated financial statements.
40
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies
First Northern Community Bancorp (the Company) is a bank holding company
whose only subsidiary, First Northern Bank of Dixon (the Bank), a
California state chartered bank, conducts general banking activities,
including collecting deposits and originating loans, and serves Solano,
Yolo, Sacramento, and El Dorado Counties. All intercompany transactions
between the Company and the Bank have been eliminated in consolidation.
On April 27, 2000, the shareholders of First Northern Bank of Dixon
approved a corporate reorganization which provided for the creation of a
bank holding company (First Northern Community Bancorp) in which the Bank
would become a wholly-owned subsidiary. This reorganization was effected
May 19, 2000.
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States of America
and general practices within the banking industry. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ from those estimates applied
in the preparation of the accompanying consolidated financial statements.
A summary of the significant accounting policies applied in the
preparation of the accompanying consolidated financial statements
follows.
(a) Cash Equivalents
For purposes of the statement of cash flows, the Company considers
due from banks, federal funds sold for one-day periods and
short-term bankers acceptances to be cash equivalents.
(b) Investment Securities
Investment securities consist of U.S. Treasury securities, U.S.
Agency securities, obligations of states and political
subdivisions, obligations of U.S. Corporations, mortgage backed
securities and other securities. At the time of purchase of a
security the Company designates the security as held-to-maturity
or available-for-sale, based on its investment objectives,
operational needs and intent to hold. The Company does not
purchase securities with the intent to engage in trading activity.
Held-to-maturity securities are recorded at amortized cost,
adjusted for amortization or accretion of premiums or discounts.
Available-for-sale securities are recorded at fair value with
unrealized holding gains and losses, net of the related tax
effect, reported as a separate component of stockholders' equity
until realized.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings and the corresponding
establishment of a new cost basis for the security. No such
declines have occurred.
Premiums and discounts are amortized or accreted over the life of
the related held-to-maturity or available-for-sale security as an
adjustment to yield using the effective interest method. Dividend
and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and
held-to-maturity are included in earnings and are derived using
the specific identification method for determining the cost of
securities sold.
41
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activity," effective October 1, 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
The Company does not hold any derivatives at December 31, 2000.
Under SFAS No. 133, a one-time transfer of held-to-maturity
securities to available-for-sale or held-for-sale is permitted.
During the year ended December 31, 1998, the Company transferred
$60,890,726 of held-to-maturity securities to available-for-sale
and as a result recorded a cumulative increase of $2,853,904 in
unrealized gains, which is a component of accumulated other
comprehensive income.
(c) Loans
Loans are reported at the principal amount outstanding, net of
deferred loan fees and the allowance for loan losses. A loan is
considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. For a loan that
has been restructured, the contractual terms of the loan agreement
refer to the contractual terms specified by the original loan
agreement, not the contractual terms specified by the
restructuring agreement. An impaired loan is measured based upon
the present value of future cash flows discounted at the loan's
effective rate, the loan's observable market price, or the fair
value of collateral if the loan is collateral dependent. Interest
on impaired loans is recognized on a cash basis. If the
measurement of the impaired loan is less than the recorded
investment in the loan, an impairment is recognized by a charge to
the allowance for loan loss.
Unearned discount on installment loans is recognized as income
over the terms of the loans by the interest method. Interest on
other loans is calculated by using the simple interest method on
the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which
represent an adjustment to interest yield are deferred and
amortized over the contractual term of the loan using the interest
method.
Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full
and timely collection of interest or principal or when a loan
becomes contractually past due by ninety days or more with respect
to interest or principal. When a loan is placed on nonaccrual
status, all interest previously accrued but not collected is
reversed against current period interest income. Interest accruals
are resumed on such loans only when they are brought fully current
with respect to interest and principal and when, in the judgment
of management, the loans are estimated to be fully collectible as
to both principal and interest. Restructured loans are loans on
which concessions in terms have been granted because of the
borrowers' financial difficulties. Interest is generally accrued
on such loans in accordance with the new terms.
(d) Loans Held for Sale
Loans originated and held for sale are carried at the lower of
cost or estimated market value in the aggregate. Net unrealized
losses are recognized through a valuation allowance by charges to
income.
42
(e) Allowance for Loan Losses
The allowance for loan losses is established through a provision
charged to expense. Loans are charged off against the allowance
for loan losses when management believes that the collectibility
of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in
existing loans, standby letters of credit, overdrafts and
commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, commitments, and current
and anticipated economic conditions that may affect the borrowers'
ability to pay. While management uses these evaluations to
recognize the provision for loan losses, future provisions may be
necessary based on changes in the factors used in the evaluations.
Material estimates relating to the determination of the allowance
for loan losses are particularly susceptible to significant change
in the near term. Management believes that the allowance for loan
losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition,
the Federal Deposit Insurance Corporation (FDIC), as an integral
part of its examination process, periodically reviews the Bank's
allowance for loan losses. The FDIC may require the Bank to
recognize additions to the allowance based on their judgment about
information available to them at the time of their examination.
(f) Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed substantially by the
straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are depreciated over the
estimated useful lives of the improvements or the terms of the
related leases, whichever is shorter. The useful lives used in
computing deprecation are as follows:
Buildings and improvements 15 to 50 years
Furniture and equipment 3 to 10 years
(g) Other Real Estate Owned
Other real estate acquired by foreclosure, is carried at the lower
of the recorded investment in the property or its fair value less
estimated selling costs. Prior to foreclosure, the value of the
underlying loan is written down to the fair value of the real
estate to be acquired by a charge to the allowance for loan
losses, if necessary. Fair value of other real estate owned is
generally determined based on an appraisal of the property. Any
subsequent operating expenses or income, reduction in estimated
values and gains or losses on disposition of such properties are
included in other operating expenses.
Revenue recognition on the disposition of real estate is dependent
upon the transaction meeting certain criteria relating to the
nature of the property sold and the terms of the sale. Under
certain circumstances, revenue recognition may be deferred until
these criteria are met.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
43
(i) Gain or Loss on Sale of Loans and Servicing Rights
Servicing assets and other retained interests in transferred
assets are measured by allocating the previous carrying amount of
the transferred assets between the assets sold, and retained
interests, if any, based on their relative fair value at the date
of transfer. Servicing assets and liabilities are amortized in
proportion to and over the period of estimated net servicing
income or loss and assessed for asset impairment or increased
obligation based on fair value. Fair values are estimated using
discounted cash flows based on a current market interest rate.
The Bank recognizes a gain and a related asset for the fair value
of the rights to service loans for others when loans are sold. In
accordance with SFAS No. 125, the fair value of the servicing
assets is estimated based upon the present value of the estimated
expected future cash flows. The Bank measures the impairment of
the servicing asset based on the difference between the carrying
amount of the servicing asset and its current fair value. As of
December 31, 2000 and 1999, there was no impairment in mortgage
servicing asset.
A sale is recognized when the transaction closes and the proceeds
are other than beneficial interest in the assets sold. A gain or
loss is recognized to the extent that the sales proceeds and the
fair value of the servicing asset exceed or are less than the book
value of the loan. Additionally, a normal cost for servicing the
loan is considered in the determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at
the closing date to the extent that the sales proceeds, less costs
to complete the sale, exceed or are less than the carrying value
of the servicing rights held.
(j) Income Taxes
The Company accounts for income taxes under the asset and
liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(k) Stock Option Plan
The Company accounts for stock-based compensation using the
intrinsic value method, under which compensation expense is
recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price.
(l) Earnings Per Share (EPS)
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings
of an entity.
(m) Comprehensive Income
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gain
and losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive
income.
44
(n) Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the current year's
presentation.
(2) Cash and Due From Banks
The Bank is required to maintain reserves with the Federal Reserve Bank
based on a percentage of deposit liabilities. No aggregate reserves were
required at December 31, 2000 and 1999. The Bank has met its average
reserve requirements during 2000 and 1999 and the minimum required
balance at December 31, 2000 and 1999.
(3) Investment Securities
The amortized cost and estimated market values of investments in debt and
other securities at December 31, 2000 are summarized as follows:
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------- --------------- ---------------- ----------------
Investment securities available
for sale:
U.S. Treasury securities $ 5,502,123 48,299 (279) 5,550,143
Securities of U.S. government
agencies and corporations 22,469,541 339,207 (132,668) 22,676,080
Obligations of U.S.
corporations 23,920,137 292,751 (487,508) 23,725,380
Obligations of states and
political subdivisions 64,091,233 1,509,228 (370,620) 65,229,841
Mortgage backed securities 7,556,984 91,509 (3,811) 7,644,682
------------------ --------------- ------------- ----------------
Total debt securities 123,540,018 2,280,994 (994,886) 124,826,126
Other securities 1,863,960 -- (52,500) 1,811,460
------------------ --------------- ------------- ----------------
$ 125,403,978 2,280,994 (1,047,386) 126,637,586
================== =============== ============= ================
45
The amortized cost and estimated market values of investments in debt and other
securities at December 31, 1999 are summarized as follows:
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------- --------------- ---------------- ------------------
Investment securities available
for sale:
U.S. Treasury securities $ 15,007,037 29,708 (50,895) 14,985,850
Securities of U.S. government
agencies and corporations 21,529,693 -- (662,663) 20,867,030
Obligations of U.S.
corporations 22,008,003 4,366 (535,027) 21,477,342
Obligations of states and
political subdivisions 67,460,152 466,866 (1,976,824) 65,950,194
Mortgage backed securities 10,168,828 125 (174,486) 9,994,467
--------------- ------------ -------------- ---------------
Total debt securities 136,173,713 501,065 (3,399,895) 133,274,883
Other securities 2,176,800 -- -- 2,176,800
--------------- ------------ -------------- ---------------
$ 138,350,513 501,065 (3,399,895) 135,451,683
=============== ============ ============== ===============
The Bank is a member of the Federal Home Loan Bank (FHLB) which requires
ownership of its stock which is carried at cost. The balance of the Bank's
investment in FHLB stock which is included in other securities was $753,900 and
$1,066,800 as of December 31, 2000 and 1999, respectively.
The amortized cost and estimated market value of debt and other securities at
December 31, 2000 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------------ ------------------
Due in one year or less $ 11,000,329 11,089,716
Due after one year through five years 63,574,550 64,171,133
Due five years through ten years 36,751,538 37,476,424
Due after ten years 14,077,561 13,900,313
---------------- ----------------
$ 125,403,978 126,637,586
================ ================
Investment securities carried at $39,772,808 and $17,464,268 at December 31,
2000 and 1999, respectively, were pledged to secure public deposits or for other
purposes as required or permitted by law.
46
(4) Loans
The composition of the Bank's loan portfolio at December 31, is as follows:
2000 1999
------------- ------------
Commercial $ 110,037,226 83,970,454
Real estate:
Mortgage 44,247,689 34,404,344
Construction 56,718,351 36,044,291
Installment 7,699,388 6,327,989
Other loans 114,185 139,182
------------- ------------
218,816,839 160,886,260
Allowance for loan losses (7,228,428) (7,825,255)
Net deferred origination fees (1,045,936) (787,233)
------------- ------------
Loans, net $ 210,542,475 152,273,772
============= ============
As of December 31, 2000, approximately 26% of the Bank's loans are for real
estate construction. Additionally 20% of the Bank's loans are mortgage type
loans which are secured by both commercial and residential real estate.
Approximately 50% of the Bank's loans are for general commercial uses
including professional, retail, agricultural and small businesses.
Generally, real estate loans are secured by real and commercial property
and other loans are secured by funds on deposit, business or personal
assets. Repayment is generally expected from the proceeds of the sales of
property for real estate construction loans, and from cash flows of the
borrower for other loans. The Bank's access to this collateral is through
foreclosure and/or judicial procedures. The Bank's exposure to credit loss
if the real estate or other security proved to be of no value is the
outstanding loan balance.
Loans which were sold and were being serviced by the Bank totaled
approximately $65,029,834 and $54,550,621 at December 31, 2000 and 1999,
respectively. The Bank's servicing assets related to sold loans were
immaterial at December 31, 2000 and 1999.
Effective July 1, and October 1, 1999, the Bank transferred $25,567,000 and
$3,656,000, respectively, from their loans held for sale portfolio to their
loans held to maturity portfolio.
Nonaccrual loans totaled approximately $742,000, $528,000, and $1,702,000
at December 31, 2000, 1999 and 1998, respectively. If interest on these
nonaccrual loans had been accrued, such income would have approximated
$91,000, $32,000 and $133,000 during the years ended December 31, 2000,
1999 and 1998, respectively.
The Bank did not restructure any loans in 2000 or 1999.
Impaired loans are loans for which it is probable that the Bank will not be
able to collect all amounts due. Impaired loans totaled approximately
$742,000 and $528,000 at December 31, 2000 and 1999, respectively, and had
valuation allowances of approximately $299,000 and $141,000 at December 31,
2000 and 1999, respectively. The average outstanding balance of impaired
loans was approximately $938,000, $1,131,000 and $2,139,000, on which
$64,000, $50,000 and $64,000 of interest income was recognized for the
years ended December 31, 2000, 1999 and 1998, respectively.
Loans in the amount of $1,102,956 and $1,145,852 at December 31, 2000 and
1999, respectively, were pledged to secure potential borrowings from the
Federal Reserve Bank.
47
Changes in the allowance for loan losses for the years ended December 31,
are summarized as follows:
2000 1999 1998
---------------- ------------- --------------
Balance, beginning of year $ 7,825,255 8,144,450 7,355,536
Provision (recovery credited) charged to
operations -- (800,000) 760,000
Loans charged-off (851,550) (156,945) (782,399)
Recoveries of loans previously charged-off 254,723 637,750 811,313
---------------- ------------- --------------
Balance, end of year $ 7,228,428 7,825,255 8,144,450
================ ============= ==============
(5) Premises and Equipment
Premises and equipment consist of the following at December 31:
2000 1999
------------- -------------
Land $ 1,394,455 1,394,455
Buildings 4,561,132 4,527,074
Furniture and equipment 6,038,324 7,840,540
Leasehold improvements 567,194 567,194
------------- -------------
12,561,105 14,329,263
Less accumulated depreciation 6,413,184 8,297,552
------------- -------------
$ 6,147,921 6,031,711
============= =============
Depreciation and amortization expense included in occupancy and equipment
expense, is $999,447, $1,085,770 and $863,978 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(6) Other Assets
Other assets consisted of the following at December 31:
2000 1999
------------- -------------
Accrued interest $ 3,950,101 3,582,710
Software, net of amortization 631,224 429,331
Prepaid and other 872,348 1,714,306
Deferred tax assets, net 1,601,553 3,744,268
------------- -------------
$ 7,055,226 9,470,615
============= =============
The Company amortizes capitalized software costs on a straight-line basis
using a useful life from three to five years.
The Bank did not hold any other real estate owned (OREO) as of December
31, 2000 and 1999 and had no allowance for losses on OREO recorded for
these periods. Changes in the allowance for losses on other real estate
owned at December 31, 1998 are summarized as follows:
Balance, beginning of year $ 1,929,992
Provision charged to operations --
Charge-offs, net of recoveries (1,929,992)
---------------
Balance, end of year $ --
===============
48
(7) Income Taxes
The provision for income tax expense consists of the following for the
years ended December 31:
2000 1999 1998
-------------- -------------- --------------
Current:
Federal $ 1,369,957 1,017,760 514,831
State 798,039 502,377 273,136
-------------- -------------- --------------
2,167,996 1,520,137 787,967
-------------- -------------- --------------
Deferred:
Federal 487,918 456,893 277,736
State 1,822 144,413 159,161
-------------- -------------- --------------
489,740 601,306 436,897
-------------- -------------- --------------
$ 2,657,736 2,121,443 1,224,864
============== ============== ==============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 consist of:
2000 1999
----------------- -----------------
Deferred tax assets:
Allowance for loan losses $ 2,321,918 2,196,918
Deferred compensation 86,304 105,509
Alternative minimum tax carryover 93,167 695,603
Current state franchise taxes 278,764 178,228
Investment securities unrealized losses -- 1,159,531
----------------- -----------------
Total deferred tax assets 2,780,153 4,335,789
Deferred tax liabilities:
Fixed assets 349,249 276,986
State franchise taxes 190,092 190,713
Other 145,815 123,822
Investment securities unrealized gains 493,444 --
----------------- -----------------
Total deferred tax liabilities 1,178,600 591,521
----------------- -----------------
Net deferred tax assets $ 1,601,553 3,744,268
================= =================
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company
will realize the benefits of these deductible differences.
49
A reconciliation of income taxes computed at the federal statutory rate
of 34% and the provision for income taxes is as follows:
2000 1999 1998
-------------- -------------- --------------
Income tax expense at statutory rates $ 2,618,203 2,109,506 1,436,740
Reduction for tax exempt interest (408,187) (475,051) (548,693)
State franchise tax, net of federal income
tax benefit 527,908 426,881 285,316
Change in beginning of year valuation
allowance -- (192,000) --
Other (80,188) 252,107 51,501
-------------- -------------- --------------
$ 2,657,736 2,121,443 1,224,864
============== ============== ==============
(8) Outstanding Shares and Earnings Per Share
On September 30, 1998, the Board of Directors authorized a two-for-one
stock split of the Company's common stock in which each share of the
Company's common stock was converted into two shares. Consequently, all
related information in this report has been restated to reflect the
effect of the stock split.
On January 18, 2001, the Board of Directors of the Company declared a 6%
stock dividend payable as of March 31, 2001. All income per share amounts
have been adjusted to give retroactive effect to the stock dividend.
Earnings Per Share (EPS)
Basic and diluted earnings per share for the years ended December 31,
2000, 1999 and 1998 were computed as follows:
2000 1999 1998
---------------- ---------------- ----------------
Basic earnings per share:
Net income $ 5,042,871 4,082,985 3,000,843
---------------- ---------------- ----------------
Weighted average common shares
outstanding 3,345,403 3,459,615 3,452,985
---------------- ---------------- ----------------
Basic EPS $ 1.51 1.18 0.87
================ ================ ================
Diluted earnings per share:
Net income $ 5,042,871 4,082,985 3,000,843
---------------- ---------------- ----------------
Denominator:
Weighted average common stock
outstanding 3,345,403 3,459,615 3,452,985
Effect of dilutive options 51,217 12,837 8,028
---------------- ---------------- ----------------
3,396,620 3,472,452 3,461,013
---------------- ---------------- ----------------
Diluted EPS $ 1.48 1.18 0.87
================ ================ ================
50
(9) Related Party Transactions
The Bank, in the ordinary course of business, has loan and deposit
transactions with directors and executive officers. In management's
opinion, these transactions were on substantially the same terms as
comparable transactions with other customers of the Bank. The amount of
such deposits totaled approximately $1,214,000 and $918,000 at December
31, 2000 and 1999, respectively.
The following is an analysis of the activity of loans to executive
officers and directors for the years ended December 31:
2000 1999 1998
---------------- ---------------- ----------------
Outstanding balance, beginning of year $ 288,000 586,000 2,100,000
Credit granted 659,000 341,000 377,000
Repayments (669,000) (639,000) (1,891,000)
---------------- ---------------- ----------------
Outstanding balance, end of year $ 278,000 288,000 586,000
================ ================ ================
(10) Profit Sharing Plan
The Bank maintains a profit sharing plan for the benefit of its
employees. Employees who have completed 12 months and 1,000 hours of
service are eligible. Under the terms of this plan, a portion of the
Bank's profits, as determined by the Board of Directors, will be set
aside and maintained in a trust fund for the benefit of qualified
employees. Contributions to the plan, included in salaries and employee
benefits in the statements of income, were $792,406, $653,915 and
$579,197 in 2000, 1999 and 1998, respectively.
(11) Stock Compensation Plans
At December 31, 2000, the Company has three stock-based compensation
plans, which are described below. Had compensation cost for the Company's
three stock-based compensation plans been determined consistent with the
fair value method, the Company's net income and income per share would
have been reduced to pro forma amounts indicated below:
2000 1999 1998
------------ ------------ ------------
Net income:
As reported $ 5,042,871 4,082,985 3,000,843
------------ ------------ ------------
Pro forma under SFAS No. 123 $ 4,967,463 4,034,402 2,964,142
------------ ------------ ------------
Basic earnings per share:
As reported $ 1.51 1.18 0.87
------------ ------------ ------------
Pro forma under SFAS No. 123 $ 1.48 1.17 0.86
------------ ------------ ------------
Diluted earnings per share:
As reported $ 1.48 1.18 0.87
------------ ------------ ------------
Pro forma under SFAS No. 123 $ 1.46 1.16 0.85
------------ ------------ ------------
51
Fixed Stock Option Plans
The Company has two fixed option plans. Under the 2000 Employee Stock
Option Plan, the Company may grant options to an employee for an amount
up to 25,000 shares of common stock each year. There are 584,325 shares
authorized under the plan. The plan will terminate February 27, 2007. The
Compensation Committee of the Board of Directors is authorized to
prescribe the terms and conditions of each option, including exercise
price, vestings or duration of the option. Options are granted at the
fair value of options on date of grant.
Under the 2000 Outside Directors Nonstatutory Stock Option Plan, the
Company may grant options to an outside director for an amount up to
7,011 shares of common stock. There are 175,297 shares authorized under
the Plan. The Plan will terminate February 27, 2007. The exercise price
of each option equals the market price of the Company's stock on the date
of grant, and an option's maximum term is five years. Options vest at the
rate of 20% per year beginning on the grant date. Other than a grant of
7,011 shares to a new director, any future grants require shareholder
approval. Options are granted at the fair value of options on date of
grant.
The weighted average fair value at date of grant for options granted
during years ended December 31, 2000, 1999 and 1998, was $5.76, $6.66 and
$4.36 per share, respectively. The fair value of each option grant was
estimated on the date of the grant using Black-Scholes option-pricing
model with the following assumptions:
2000 1999 1998
--------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 21.96% 23.00% 22.89%
Risk-free interest rate 5.16% 6.39% 4.73%
Expected term in years 9.4 10 5.5
52
Stock option activity for the outside directors stock option plan and the
employee stock option plan during the periods indicated is as follows:
Outside Directors Employee Stock
Stock Option Plan Option Plan
---------------------------------------- -------------------------------------
Weighted- Weighted-
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------------- --------------------- --------------- --------------------
Balance at December 31, 1997 70,112 $ 10.48 42,065 $ 11.98
Granted -- -- 67,893 12.74
Exercised (1,403) 10.48 -- --
Forfeited -- -- -- --
Expired -- -- -- --
------------- -------------- ----------- ------------
Balance at December 31, 1998 68,709 10.48 109,958 12.45
Granted -- -- 35,393 12.13
Exercised -- -- -- --
Forfeited (5,610) 10.48 -- --
Expired -- -- --
------------- -------------- ----------- ------------
Balance at December 31, 1999 63,099 10.48 145,351 12.37
Granted 7,011 13.44 47,700 12.85
Exercised -- -- -- --
Forfeited -- -- -- --
Expired -- -- -- --
------------- -------------- ----------- ------------
Balance at December 31, 2000 70,110 $ 10.78 193,051 $ 12.49
============= ============== =========== ============
At December 31, 2000, the range of exercise prices and weighted-average
remaining contractual life of all outstanding options was $10.48 - $13.44
and 5.25 years, respectively.
Options exercisable as of December 31 were 149,948 shares in 2000, 91,833
shares in 1999, and 45,160 shares in 1998, at a weighted-average exercise
price of $11.77, $12.32 and 12.57, respectively.
Employee Stock Purchase Plan
Under the 2000 Employee Stock Purchase Plan, the Company is authorized to
issue to an eligible employee shares of common stock. There are 584,325
shares authorized under the plan. The plan will terminate February 27,
2007. An eligible employee is one who has been continually employed for at
least ninety (90) days prior to commencement of a participation period.
Under the terms of the Plan, employees can choose to have up to 10 percent
of their compensation withheld to purchase the Company's common stock each
participation period. The purchase price of the stock is 85 percent of the
lower of the fair market value on the last trading day before the Date of
Participation or the fair market value on the last trading day during the
participation period. Approximately 50 percent of eligible employees are
participating in the Plan in the current participation period, which began
November 24, 2000. At the end of the participation period, which began
November 24, 1999 and ended November 22, 2000, there were $99,694 in
contributions, and 9,074 shares were purchased at $10.93 totaling $99,188.
53
(12) Commitments and Contingencies
The Company is obligated for rental payments under certain operating lease
agreements, some of which contain renewal options. Total rental expense
for all leases included in net occupancy and equipment expense amounted to
approximately $541,246, $464,403 and $471,251 for the years ended December
31, 2000, 1999 and 1998, respectively. At December 31, 2000, the future
minimum payments under noncancelable operating leases with initial or
remaining terms in excess of one year are as follows:
Year Ended
December 31:
-----------
2001 $ 347,448
2002 306,617
2003 251,465
2004 218,381
2005 156,079
------------
$ 1,279,990
============
At December 31, 2000, the aggregate maturities for time deposits are as
follows:
Year Ended
December 31:
-----------
2001 $ 99,901,149
2002 4,871,434
2003 1,120,457
2004 782,296
2005 389,147
------------
$ 107,064,483
============
The Company is subject to various legal proceedings in the normal course
of its business. In the opinion of management, after having consulted with
legal counsel, the outcome of the legal proceedings should not have a
material effect on the financial condition or results of operations of the
Company.
(13) Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit in the form of loans or through standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, are as follows:
2000 1999
----------------- -----------------
Undisbursed loan commitments $ 83,211,617 76,100,895
Standby letters of credit 2,911,534 3,600,611
----------------- -----------------
$ 86,123,151 79,701,506
================= =================
54
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Commitments to extend credit and standby letters of credit bear similar
credit risk characteristics as outstanding loans. As of December 31,
2000, the Company has no off-balance sheet derivatives requiring
additional disclosure.
(14) Capital Adequacy and Restriction on Dividends
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below).
First, a bank must meet a minimum Tier I Capital ratio (as defined in the
regulations) ranging from 3% to 5% based upon the bank's CAMELS (capital
adequacy, asset quality, management, earnings, liquidity and sensitivity
to market risk) rating.
Second, a bank must meet minimum Total Risk-Based Capital to
risk-weighted assets ratio of 8%. Risk-based capital and asset guidelines
vary from Tier I capital guidelines by redefining the components of
capital, categorizing assets into different risk classes, and including
certain off-balance sheet items in the calculation of the capital ratio.
The effect of the risk-based capital guidelines is that banks with high
exposure will be required to raise additional capital while institutions
with low risk exposure could, with the concurrence of regulatory
authorities, be permitted to operate with lower capital ratios. In
addition, a bank must meet minimum Tier I Capital to average assets
ratio.
Management believes, as of December 31, 2000, that the Bank meets all
capital adequacy requirements to which it is subject. As of December 31,
2000, the most recent notification from the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must meet the minimum ratios as set forth
above. There are no conditions or events since that notification that
management believes have changed the institution's category.
55
The Bank's actual capital amounts and ratios as of December 31, 2000 are
as follows:
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions:
--------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ---------- ------------ ----------- ------------ -----------
Total Risk-Based Capital (to $ 39,331,000 14.1% $ 22,321,000 8.0% $ 27,901,000 10.0%
Risk Weighted Assets)
Tier I Capital (to Risk
Weighted Assets) 35,797,000 12.8% 11,161,000 4.0% 16,741,000 6.0%
Tier I Capital (to Average
Assets) 35,797,000 9.2% 15,598,000 4.0% 19,497,000 5.0%
The Bank's actual capital amounts and ratios as of December 31, 1999 are
as follows:
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions:
--------------------------- ---------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ---------- ------------ ----------- ------------ -----------
Total Risk-Based Capital (to $ 35,454,000 14.9% $ 19,027,000 8.0% $ 23,784,000 10.0%
Risk Weighted Assets)
Tier I Capital (to Risk
Weighted Assets) 32,421,000 13.6% 9,514,000 4.0% 14,270,000 6.0%
Tier I Capital (to Average
Assets) 32,421,000 8.7% 14,962,000 4.0% 18,703,000 5.0%
Cash dividends are restricted under California state banking laws to the
lesser of the Bank's retained earnings or the Bank's net income for the
latest three fiscal years, less dividends previously declared during that
period.
(15) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and
short-term instruments are a reasonable estimate of fair value.
Investment securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Loans receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for other loans (e.g., commercial
real estate and rental property mortgage loans, commercial and
industrial loans, and agricultural loans) are estimated using
discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar
credit quality. The carrying amount of accrued interest receivable
approximates its fair value.
56
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or
otherwise settle the obligation with the counterparties at the
reporting date.
Deposit liabilities
The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts)
are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The fair values for
fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The
carrying amount of accrued interest payable approximates its fair
value.
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered
financial assets or liabilities include deferred tax liabilities,
property, plant, equipment and goodwill. In addition, the tax
ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates
and have not been considered in may of the estimates.
57
The estimated fair values of the Company financial instruments are
approximately as follows:
2000 1999
----------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and federal funds sold $ 34,660,000 34,660,000 57,106,000 57,106,000
Investment securities 126,638,000 126,638,000 135,452,000 135,452,000
Loans:
Net loans 210,543,000 203,386,000 152,274,000 148,628,000
Loans held for sale 6,585,000 6,629,000 10,657,000 10,667,000
Financial liabilities:
Deposits 349,779,000 314,526,000 335,630,000 335,330,000
2000
--------------------------------------------------------------
Contract Carrying Fair
Amount Amount Value
---------------- ---------------- ---------------
Unrecognized financial instruments:
Commitments to extend credit $ 83,212,000 -- 624,000
================ ---------------- ===============
Standby letters of credit $ 2,912,000 -- 29,000
================ ================ ===============
1999
-------------------------------------------------------------
Contract Carrying Fair
Amount Amount Value
---------------- ---------------- ---------------
Unrecognized financial instruments:
Commitments to extend credit $ 76,101,000 -- 571,000
================ ---------------- ===============
Standby letters of credit $ 3,600,000 -- 36,000
================ ================ ===============
(16) Supplemental Statements of Cash Flows Information
Supplemental disclosures to the Statements of CAsh Flows for the years
ended December 31, are as follows:
2000 1999 1998
----------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 8,903,488 7,923,311 8,436,720
----------- ---------- ----------
Income taxes $ 1,740,900 1,779,000 1,705,100
----------- ---------- ----------
Supplemental disclosure of noncash investing and
financing activities:
Loans transferred to other real estate $ -- -- 1,194,758
----------- ---------- ----------
Stock dividend distributed $ 2,514,249 2,055,480 2,017,269
----------- ---------- ----------
Loans held for sale transferred to loans $ -- 29,223,000 --
----------- ---------- ----------
58
(17) Quarterly Financial Information (Unaudited)
March 31, June 30, September 30, December 31
------------------- ------------------- -------------------- -------------------
2000:
Interest income $ 6,663,479 6,991,024 7,451,145 7,751,781
Net interest income 4,562,318 4,836,023 5,112,652 5,356,130
Provision for loan losses -- -- -- --
Other operating income 632,828 885,071 838,570 1,363,840
Other operating expense 3,648,893 3,891,355 3,926,381 4,420,196
Income before taxes 1,546,252 1,829,739 2,024,841 2,299,775
Net income 1,122,440 1,169,439 1,301,941 1,449,051
Basic earnings per share 0.34 0.36 0.42 0.39
Diluted earnings per share 0.34 0.36 0.42 0.36
1999:
Interest income 5,827,907 6,129,570 6,497,048 6,681,443
Net interest income 3,925,596 4,250,437 4,530,503 4,593,706
Provision for loan losses 75,000 -- (875,000) --
Other operating income 692,553 765,187 725,971 561,120
Other operating expense 3,494,121 3,581,520 4,188,189 3,376,815
Income before taxes 1,049,028 1,434,104 1,943,285 1,778,011
Net income 728,428 951,804 1,252,685 1,150,068
Basic earnings per share 0.22 0.29 0.38 0.29
Diluted earnings per share 0.22 0.29 0.38 0.29
Included in other operating income for the forth quarter of 2000 is
$531,000 related to a gain on sale of other real estate owned.
59
(18) Parent Company Financial Information
This information should be read in conjunction with the other notes to
the consolidated financial statements. The following presents a summary
balance sheet as of December 31, 2000 and summary statements of
operations and cash flows information for the year ended December 31,
2000.
Balance Sheet
Assets
Investment in wholly-owned subsidiary $ 36,525,751
Other assets 11,151
-------------------
Total assets $ 36,536,902
===================
Liabilities and stockholders' equity
Stockholders' equity 36,536,902
-------------------
Total liabilities and stockholders' equity $ 36,536,902
===================
Statement of Operations
Equity in income of subsidiary $ 5,059,598
Other operating expenses (27,878)
Income tax benefit 11,151
-------------------
Net income $ 5,042,871
===================
Statement of Cash Flows
Net income $ 5,042,871
Adjustments to reconcile net income to net cash provided by operating
activities
Increase in other assets (11,151)
Increase in equity of subsidiary (5,059,598)
-------------------
Net cash used in operating activities (27,878)
Cash flows from investing activities:
Proceeds from subsidiary dividends 27,878
-------------------
Net cash provided by investing activities 27,878
Cash flows from financing activities --
-------------------
Net change in cash --
Cash at formation of Company --
-------------------
Cash at end of year $ --
===================
60
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item with respect to director and officer
information is incorporated herein from the sections of the Company's proxy
statement for the 2001 Annual Meeting of Shareholders entitled "Security
Ownership of Management" and "Nomination and Election of Directors".
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference herein to
the sections of the Company's proxy statement for the 2001 Annual Meeting of
Shareholders entitled "Nomination and Election of Directors" and "Executive
Compensation."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference from
the sections of the Company's proxy statement for the 2001 Annual Meeting of
Shareholders entitled "Security Ownership of Management" and "Nomination and
Election of Directors".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference from
the sections of the Company's proxy statement for the 2001 Annual Meeting of
Shareholders entitled "Report of Compensation Committee of the Board of
Directors on Executive Compensation" - "Indebtedness of Management,"
"Indebtedness of Certain Directors" and "Transactions with Management."
61
PART IV
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Financial Statements and Financial Statement Schedules filed:
Reference is made to the Index to Financial Statements under Item 8 in Part
II of this Form 10-K
(B) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the last quarter of
the year ended December 31, 2000.
(C) Exhibits:
The following is a list of all exhibits filed as part of this Annual Report
on Form 10-K.
Exhibit
Number Exhibit
------ -------
3.1/1/ Articles of Incorporation of the Company.
3.3/1/ By-laws of the Company.
10.1/2/ First Northern Community Bancorp 2000 Stock Option Plan.
10.2/2/ First Northern Community Bancorp Outside Directors 2000
Nonstatutory Stock Option Plan.
10.3/2/ First Northern Community Bancorp 2000 Employee Stock Purchase
Plan.
10.4/2/ First Northern Community Bancorp 2000 Stock Option Plan Forms
"Incentive Stock Option Agreement" and "Notice of Exercise of
Stock Option".
10.5/2/ First Northern Community Bancorp 2000 Outside Directors 2000
Nonstatutory Stock Option Plan Forms "Nonstatutory Stock Option
Agreement" and "Notice of Exercise of Stock Option".
10.6/2/ First Northern Community Bancorp 2000 Employee Stock Purchase
Plan Forms "Participation Agreement" and "Notice of Withdrawal".
11 Statement of Computation of Per Share Earnings (See Page 44 of
this Form 10-K)
21 Subsidiaries of the Company.
24 Power of Attorney (See Page 63) of this Form 10-K)
- --------------------------------------------------------------------------------
1. Filed with the Company's Current Report on Form 8-K 12(G)(3) on May 24,
2000.
2. Filed with the Company's Registration Statement on Form S-8 on May 25,
2000.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Bank has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 26, 2001.
FIRST NORTHERN COMMUNITY BANCORP
By: /s/ OWEN J. ONSUM
------------------------
Owen J. Onsum
President/Chief Executive Officer/Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Owen J. Onsum, Louise A. Walker and Stanley R.
Bean, and each of them, his or her true and lawful attorneys-in-fact, each with
full power of substitution, for him or her in any and all capacities, to sign
any amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Federal Deposit
Insurance Corporation, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
President/Chief Executive Officer
/s/ OWEN J. ONSUN (Principal Executive Officer) and Director March 26, 2001
------------------------ --------------
Owen J. Onsum
/s / LOUISE A. WALKER Senior Vice President/Chief Financial Officer March 26, 2001
------------------------ --------------
(Principal Financial Officer)
Louise A. Walker
/s/ STANLEY R. BEAN March 26, 2001
------------------------ --------------
Stanley R. Bean Vice President/Controller
/s/ LORI J. ALDRETE Director March 26, 2001
------------------------ --------------
Lori J. Aldrete
/s/ FRANK J. ANDREWS, JR. Director and Vice Chairman of the Board March 26, 2001
------------------------ --------------
Frank J. Andrews, Jr.
/s/ JOHN M. CARBAHAL Director March 26, 2001
------------------------ --------------
John M. Carbahal
/s/ GREGORY DUPRATT Director March 26, 2001
------------------------ --------------
Gregory DuPratt
/s/ JOHN F. HAMEL Director March 26, 2001
------------------------ --------------
John F. Hamel
/s/ DIANE P. HAMLYN Director and Chairman of the Board March 26, 2001
------------------------ --------------
Diane P. Hamlyn
/s/ WILLIAM H. JONES, JR Director March 26, 2001
------------------------ --------------
William H. Jones, Jr.
/s/ FOY S. MCNAUGHTON Director March 26, 2001
------------------------ --------------
Foy S. McNaughton
/s/ DAVID W. SCHULZE Director March 26, 2001
------------------------ --------------
David W. Schulze
63