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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 0-265520

California Independent Bancorp
(Exact name of registrant as specified in its charter)

1227 Bridge St., Suite C, Yuba City, California 95991
(Address of principal executive offices)
(Zip Code)

(530) 674-6025
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

        This report contains 28 pages. The Exhibit Index is on pages 27.

PART I—FINANCIAL INFORMATION

PART II—OTHER INFORMATION

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PART I—Financial Information

ITEM 1.    FINANCIAL STATEMENTS

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2003, December 31, 2002, and September 30, 2002
(Dollars in thousands except share data)
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

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CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

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CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share data)
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

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CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-month Periods Ended September 30, 2003 and September 30, 2002
(Dollars in thousands)
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

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CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of Management, the unaudited consolidated financial statements contain all adjustments (consisting solely of recurring adjustments) that are necessary to present fairly the financial position of California Independent Bancorp ("CIB") and its subsidiaries (collectively, the "Company") at September 30, 2003, December 31, 2002, and September 30, 2002, the results of its operations for the three and nine-month periods ended September 30, 2003 and September 30, 2002, and cash flows for the nine-month periods ended September 30, 2003 and September 30, 2002.

        Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with SEC rules or regulations. The results of operations for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the operating results for the full year ending December 31, 2003. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

Note 2—Principles of Consolidation

        The consolidated financial statements include the accounts of CIB and its wholly owned subsidiaries, Feather River State Bank, E.P.I. Leasing Company, Inc., and CIB Capital Trust. Significant intercompany transactions and balances have been eliminated in consolidation.

Note 3—Commitments and Contingent Liabilities

        In the normal course of business there are various outstanding commitments and contingent liabilities, such as commitments to extend credit and letters of credit that are not reflected in the financial statements. Management does not anticipate any material loss as a result of these transactions.

        The contract amount of commitments not reflected on the balance sheet at September 30, 2003 and September 30, 2002 were as follows:

Note 4—Cash and Stock Dividends

        In February, May, August, and November of 2002, CIB paid an eleven-cent ($0.11) per share cash dividend and in February, May, and August of 2003, CIB paid a twelve and one-half cent ($0.125) per share cash dividend.

Note 5—Stock-Based Compensation

        At September 30, 2003, the Company had three stock-based compensation plans: the Feather River State Bank 1989 Amended and Restated Stock Option Plan, the California Independent Bancorp 1996 Stock Option Plan, and the California Independent Bancorp 2000 Stock Option Plan (the "Plans"). The Company accounts for the Plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-

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based compensation cost is reflected in net income, as all options granted under the Plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

        For purposes of pro forma disclosures, the estimated fair value of stock-based compensation is recognized to expense primarily over the vesting period. The following tables illustrate the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.

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        The fair value of each option granted during the periods indicated was estimated on the date of grant using an option-pricing model with the following assumptions:

        There were no option grants made for the three-month period ended September 30, 2003.

Note 6—Earnings Per Share

        Basic earnings per share ("EPS"), which excludes dilution, is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock, which shares in the earnings of the Company. All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and the treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS.

Note 7—Comprehensive Income

        For the Company, total comprehensive income or loss includes net income and unrealized changes in the fair value, net of applicable taxes, of its Available-for-Sale investment securities. Total comprehensive income (loss) for the three and nine months ended September 30, 2003 and September 30, 2002 was ($121,000) and $1,647,000, respectively, and $1,176,000 and $3,096,000, respectively, as shown in the following table.

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Note 8—Financial Accounting Pronouncements

        In November 2002, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability for the fair value of an obligation for guarantees issued or modified after December 31, 2002 be recorded in the financial statements of the guarantor. Guarantees existing before the implementation of FIN 45 are required to be disclosed in financial statements issued after December 15, 2002. While the Company has various guarantees included in contracts in the normal course of business, primarily in the form of indemnities, these guarantees would only result in immaterial increases in future costs, and do not represent significant commitments or contingent liabilities of the indebtedness of others.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which requires the consolidation of variable interest entities, as defined. FIN 46 is currently applicable to variable interest entities created after January 31, 2003. In October 2003, the FASB agreed to defer the effective date of FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. This deferral is to allow time for certain implementation issues to be addressed through the issuance of a potential modification to the interpretation. The deferral revised the effective date for consolidation of these entities to the period ended December 31, 2003 for calendar year end companies. Based on the current rules, the Company does not believe that the implementation of the interpretation will have a material impact on the Company's financial position or results of operations.

        In December 2002, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" ("SFAS No. 148"). This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reporting containing financial statements for interim periods beginning after December 15, 2002. Because the Company accounts for the compensation cost associated with its stock option plans under the intrinsic value method, the alternative methods of transition will not apply to the Company. The additional disclosure requirements of the statement are included in these financial statements. Management does not believe that the adoption of this Statement had a material impact on the Company's consolidated financial position or results of operations.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies the accounting for derivative instruments by providing guidance related to circumstances under which a contract with a net investment meets the characteristics of a derivative as discussed in Statement 133. The Statement also clarifies when a derivative contains a financing component. The Statement is intended to result in more consistent reporting for derivative contracts and must be applied prospectively for contracts entered into or modified after June 30, 2003, except for hedging relationships designated after June 30, 2003. Management does not believe that the adoption of this Statement had a material effect on the Company's consolidated financial position or results of operations.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It

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requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has previously accounted for its mandatorily redeemable cumulative trust preferred securities in a manner consistent with the Statement and, in management's opinion, adoption of this Statement did not have a material effect on the Company's consolidated financial position or results of operations.

Note 9—Reclassifications

        Certain reclassifications have been made to amounts previously reported to conform to current presentation methods. Such reclassifications have no effect on net income or shareholders' equity previously reported.

Note 10—Merger

        On August 11, 2003, the Company entered into a definitive Agreement and Plan of Merger with Humboldt Bancorp. Under the terms of the merger agreement, the Company will merge into Humboldt Bancorp and Feather River State Bank will merge in Humboldt Bank although it will operate as a division of Humboldt Bank retaining its local identity.

        Based on the closing value for a share of Humboldt Bancorp as of on the date of the merger agreement, the transaction is valued at approximately $80 million, or $35.50 per share of the Company. Company shareholders may elect to exchange each share held for cash or stock, although elections may be subject to proration if the results of all shareholders' elections differ from Humboldt's targeted stock-cash split of 60%-40%. The aggregate cash consideration will be approximately $32 million, or 40% of the total consideration, and a total of approximately 3.28 million shares of Humboldt common stock will be issued, representing 60% of the total consideration.

        The companies anticipate that the transaction will qualify as a tax-free reorganization, and in general, expect that Company shareholders will not recognize income to the extent they exchange all of their shares of common stock of the Company for Humboldt stock and do not receive cash in lieu of any fractional shares, although shareholders should consult their own tax advisors for the consequences of the merger to them.

        Subject to receipt of regulatory and shareholder approval, CIB expects this transaction will be completed during the first quarter of 2004.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        California Independent Bancorp ("CIB") is a California corporation located in Yuba City, California and the holding company for Feather River State Bank ("the Bank"). The Bank was incorporated as a California state banking corporation on December 1, 1976, and commenced operations on April 6, 1977. CIB was incorporated on October 28, 1994, and became the holding company for the Bank on May 2, 1995. The Bank engages in a broad range of financial services activities, and its primary market is located in the Sacramento Valley, with a total of nine branches. The main source of income for the Bank is from lending activities, including commercial, agricultural, real estate, consumer, and installment loans and leases. CIB formed a nonbank subsidiary, CIB Capital Trust, on October 2, 2002, for the sole purpose of issuing trust preferred securities.

        CIB has entered into an agreement with Humboldt Bancorp pursuant to which CIB will merge with and into Humboldt Bancorp. Further details may be found in the Form S-4 filed with the SEC by Humboldt Bancorp on October 20, 2003. The Special Meeting of CIB shareholders, at which the principal terms of the transaction will be submitted for approval, will take place on December 15, 2003.

        Certain statements in the quarterly report on Form 10-Q and in Management's Discussion and Analysis of Financial Condition and Results of Operations (excluding statements of fact or historical financial information) involve forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry; reduction in net interest margins due to changes in the interest rate environment; general economic conditions, either nationally or regionally that may result in, among other things, a deterioration in credit quality and an increase in the provision for possible loan and lease losses; the loss of key personnel; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; lending concentration in real estate; volatility in agricultural lending; and asset/liability matching risks and liquidity risks.

        The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to California Independent Bancorp's and Feather River State Bank's (CIB and the Bank are collectively, the "Company") financial condition, operating results, asset and liability management, and liquidity and capital resources; and should be read in conjunction with the Consolidated Financial Statements of the Company and its accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002.

OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS

        Total assets at September 30, 2003 were $375,901,000, an increase of 2.4% over $367,083,000 at December 31, 2002 and an increase of 11.0% over $338,705,000 at September 30, 2002.

        Gross loans and leases were $204,391,000 at September 30, 2003, a decrease of 4.7% from $214,428,000 at December 31, 2002, and a decrease of 8.0% from $222,214,000 at September 30, 2002. The decrease in loans over the past twelve-month period is due to refinancing of loans, resulting from the unprecedented low interest rate environment, intense competitive pressure in the loan market, and the Bank's continued emphasis on credit quality, high underwriting standards, and conservative pricing.

        The Company's investment portfolio at September 30, 2003 was $119,320,000, compared to $100,239,000 at December 31, 2002, and $91,032,000 at September 30, 2002. Increases in the Company's investment portfolio during the first nine months of 2003 were due to the Company

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investing in qualified Available-for-Sale Securities with excess funds. Cash and cash equivalents, which consisted of cash and due from banks and federal funds sold, were $34,295,000 at September 30, 2003, $40,046,000 at December 31, 2002, and $13,850,000 at September 30, 2002. The increased balance of cash and cash equivalents at September 30, 2003 and December 31, 2002 was primarily due to the growth in total deposits and the issuance of trust preferred securities in the fourth quarter of 2002.

        Total deposits of the Company were $316,575,000, $306,726,000, and $282,030,000 at September 30, 2003, December 31, 2002, and September 30, 2002, respectively. The increase at September 30, 2003 from December 31, 2002 and September 30, 2002 is primarily due to the Bank's focus on customer service, growth of newer branches, relationship banking, as well as new customer-centered product development.

        The ratio of gross loans to deposits was 64.6%, 69.9%, and 78.8% at September 30, 2003, December 31, 2002, and September 30, 2002, respectively.

Loans and Leases

        The Company continues to emphasize real estate, real estate construction, commercial, agricultural, and consumer lending activities. The Company has proactively intensified its focus on real estate secured and commercial lending to meet customers' needs in its geographic market segments. The Company lends primarily to small and medium sized businesses, small to large-sized farms, professionals, and consumers within its market area, which is principally comprised of Sutter, Yuba, Colusa, Yolo, and Placer counties; and, secondarily, Sacramento, El Dorado, Butte, and Glenn counties.

        Due to the loan and lease portfolio's composition, the Company sustains moderate variations in outstanding loan totals. More specifically, certain seasonal variations are expected to occur in the agricultural and construction loan portfolios. The table below sets forth the composition of the Company's loan and lease portfolio as of September 30, 2003, December 31, 2002, and September 30, 2002.

COMPOSITION OF LOAN AND LEASE PORTFOLIO
(Dollars in thousands)

        The principal changes in the loan and lease portfolio between September 30, 2003, December 31, 2002, and September 30, 2002 are discussed below:

        The Bank makes commercial and small business loans (including lines of credit) that are secured by the assets of the business. Commercial loans decreased $6,079,000, or 24.0%, from December 31, 2002, and decreased $5,280,000, or 21.5%, from September 30, 2002. The decrease in the first nine

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months of 2003, as well as the decrease over the year is due to increased refinancing of existing loans outside the Bank, intensified competition and the softening of commercial loan market demand in the Bank's core market areas.

        The Bank provides agricultural production lines of credit and other agricultural loans that are secured by crops, crop proceeds, and other collateral. Agricultural loans increased $1,464,000, or 8.3%, over December 31, 2002 but decreased $1,247,000, or 6.2% from September 30, 2002. The increase since December 31, 2002 is due to the seasonality of agricultural loan demand resulting from the agricultural cycle.

        The Bank makes real estate construction loans, primarily to finance a variety of commercial, office, and retail projects, as well as for the construction of single-family homes. At September 30, 2003, real estate construction loans increased $1,341,000, or 3.8%, over December 31, 2002, and increased $1,340,000, or 3.8%, over September 30, 2002. The increase over December 31, 2002 and September 30, 2002 is due to the Bank's business development efforts in its primary market area.

        Mortgage loans secured by commercial, residential, and agricultural real estate decreased $1,755,000, or 1.4%, from December 31, 2002, and decreased $6,170,000, or 4.8%, from September 30, 2002. At September 30, 2003, the real estate mortgage portfolio was 60.1% of the total loan portfolio. Increased portfolio limits have been approved as a result of enhanced monitoring analysis and limitations set on the sub-classifications within this portfolio segment.

        Lease financing receivables declined $3,684,000, or 52.7%, between September 30, 2002 and September 30, 2003 and $2,583,000, or 43.8%, from December 31, 2002. This decline is the direct result of the Bank's decision in the first quarter of 2000 to discontinue originating and purchasing leases through E.P.I. Leasing Company, Inc. Consequently, the reduction of the Bank's lease portfolio was primarily due to scheduled lease portfolio principal reductions.

        The Company makes consumer loans, including secured and unsecured loans and lines of credit, to finance a variety of consumer needs. Consumer loans decreased $841,000, or 18.5%, between September 30, 2002 and September 30, 2003 and $692,000, or 15.8%, from December 31, 2002. The decrease in this loan category was due to increased competition in the Bank's core market area and special pricing programs for new car financing by automakers and other financial institutions. Further, the Bank's Consumer lending group has focused on home equity and home improvement loans through a promotional product that is recorded in the real estate loan category.

        During the first nine months of 2003, there were no significant changes in the Bank's loan management, lending philosophy, or credit delivery procedures. The Company continues to emphasize high credit quality and superior customer service as two key components of its strategic direction.

Loan and Lease Quality

        The Company places loans and leases on nonaccrual status when either principal or interest has been past due for 90 days or more. Exceptions to this policy can be made if the loan or lease is well secured and in the process of collection. The Company also places loans and leases on nonaccrual when payment in full of principal or interest is not expected, or the financial condition of the borrower has significantly deteriorated. At the time that a loan or lease is placed on nonaccrual, any accrued but uncollected interest is reversed and additional income is recorded on a cash basis as payments are received as long as principal is not impaired. Loans or leases that are in the process of renewal in the normal course of business, or that are well secured and in the process of collection may not be placed on nonaccrual status at the discretion of Management. A nonaccrual loan or lease may be restored to an accrual basis when interest and principal payments are current and the prospects for future payments are no longer in doubt.

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        Nonperforming loans and leases consist of accruing loans and leases past due 90 days or more and nonaccrual loans and leases. The table below summarizes the composition of nonperforming loans and leases as of September 30, 2003, December 31, 2002, and September 30, 2002, as well as the changes between the periods. There were no loans and leases that were accruing interest that were past due as to principal or interest for 90 days or more at September 30, 2003, December 31, 2002, or September 30, 2002.

Nonperforming Assets
(Dollars in thousands)

        Total nonperforming loans and leases have decreased $2,766,000, or 55.1%, since September 30, 2002 and $2,136,000, or 48.6%, since December 31, 2002. This decrease corresponds with the increase in nonperforming assets due to one large commercial real estate secured loan transitioning to other real estate from nonperforming loans. Management continues its emphasis on reducing classified assets and enhancing quality control in the management of the loan and lease portfolios.

        The composition of the Company's nonaccrual loans and leases remain limited primarily to two borrowers. At September 30, 2003, 88.3% of the Company's total nonaccrual loans and leases were concentrated with these two borrowers. One of the relationships totaling $1,119,000, or 49.6%, is a commercial construction real estate relationship while the other totaling $874,000, or 38.7%, is a commercial real estate relationship. Each of these nonaccrual loan relationships is in the process of collection and in management's opinion is adequately supported by collateral.

        As of December 31, 2002, $4,108,000, or 93.5%, of the Company's total nonaccrual loans and leases were concentrated in three relationships, consisting of a real estate construction loan relationship totaling $2,443,000, or 55.6%, an agricultural loan relationship for $747,000, or 17.0%, and a commercial real estate loan relationship for $918,000, or 20.9%.

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        The Company maintains an allowance for loan and lease losses ("ALLL ") to absorb probable losses inherent in the loan and lease portfolio and is based upon management's estimated range of those losses. The ALLL is established through a provision for loan and lease losses and is increased by provisions charged against current earnings and reduced by net charge-offs. Actual losses for these loans can vary significantly from this estimate. The methodology and assumptions used to calculate the allowance are continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change. The Company's ALLL totaled $5,975,000, or 2.9% of gross loans and leases, as of September 30, 2003. This amount compares to $6,532,000, or 3.0% of gross loans and leases, as of December 31, 2002 and $5,913,000, or 2.7% of gross loans and leases, as of September 30, 2002.

        The adequacy of the ALLL and the level of the related provision for loan and lease losses is determined based on management's judgment after consideration of numerous factors including but not limited to: (i) local and regional economic conditions, (ii) borrowers' financial condition, (iii) loan impairment and the related level of expected charge-offs, (iv) evaluation of industry trends, (v) industry and other concentrations, (vi) loans which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, (vii) continuing evaluations of the performing loan portfolio, (viii) ongoing review and evaluation of problem loans identified as having loss potential, (ix) quarterly review by the Board of Directors, and (x) assessments by banking regulators and other third parties. Management and the Board of Directors evaluate the ALLL and determine its desired level considering objective and subjective measures, such as knowledge of the borrowers' businesses, valuation of collateral, the determination of impaired loans or leases and exposure to potential losses.

        The Company establishes general reserves in accordance with Statement of Accounting Standards ("SFAS") No. 5., "Accounting for Contingencies," and specific reserves in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The ALLL is maintained by categories of the loan portfolio based on loan type and loan rating; however, the entire allowance is available to cover actual loan and lease losses. While Management uses available information to recognize possible losses on loans and leases, future additions to the allowance may be necessary, based on changes in economic conditions and other matters. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination.

        The adequacy of the ALLL is determined based on three components. First considered is the dollar weighted risk rating of the loan portfolio, including all outstanding loans and leases. Every extension of credit has been assigned a risk rating based upon a comprehensive definition intended to measure the inherent risk of lending money. Each rating has an assigned risk factor expressed as a reserve percentage. Secondly, established specific reserves consistent with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" are assigned to individually impaired and adversely graded loans. These are estimated potential losses associated with specific borrowers based upon estimated cash flows or collateral value and events affecting the risk rating. Thirdly, the Company maintains a reserve for qualitative factors that may affect the portfolio as a whole, such as those factors described above, including a reserve for model imprecision consistent with SFAS No. 5, "Accounting for Contingencies."

        Provisions to the ALLL are made to maintain an ALLL level deemed adequate by Management. No provision to the ALLL was made during the three-month period ended September 30, 2003, while a provision to the ALLL of $150,000 was made for the three-month period ended September 30, 2002. Provisions to the ALLL totaled $10,000 and $450,000 for the nine-month periods ended September 30, 2003 and September 30, 2002, respectively. Total provisions to the ALLL for the year ended

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December 31, 2002 equaled $550,000. Loan and lease charge-offs for the three months ended September 30, 2003 totaled $36,000, compared to $172,000 for the three months ended September 30, 2002. Loan and lease charge-offs for the nine months ended September 30, 2003 totaled $728,000, compared to $369,000 for the nine months ended September 30, 2002. Loan and lease recoveries were $48,000 for the three months ended September 30, 2003, compared to $119,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003 and September 30, 2002, loan and lease recoveries were $161,000 and $334,000, respectively. The following table illustrates the activity in the Bank's ALLL for the three and nine months ended September 30, 2003 and September 30, 2002.

        The decrease in provisions made to the ALLL in 2003 is primarily due to the improvement in asset quality and reduction in total outstanding loans.

Activity in Allowance for Loan and Lease Losses
(Dollars in thousands)

Investments

        The Company's investment portfolio was $119,320,000 at September 30, 2003, compared to $100,239,000 at December 31, 2002, and $91,032,000 at September 30, 2002. The increase of $28,288,000, or 31.1%, from September 30, 2002 to September 30, 2003, is primarily due to the Company investing its excess funds in qualified Available-for-Sale Securities.

        As of September 30, 2003, the Company's "available-for-sale" category adjustment reflected a net unrealized loss of $100,000, net of taxes. The approximate market value of the Company's investment

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portfolio at September 30, 2003 was $119,138,000. As of September 30, 2002, the Company's "available-for-sale" category adjustment reflected a net unrealized gain of $1,087,000, net of taxes, and the approximate market value of the Company's investment portfolio was $93,008,000. The $1,187,000 change in the unrealized gain/loss, net of taxes, between the two periods is primarily the result of the interest rate environment and changes in the portfolio's composition.

RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2003
Compared with
Three and Nine Months Ended September 30, 2002

        The Company recognized net income of $2,694,000 for the nine-month period ended September 30, 2003, resulting in diluted earnings per share of $1.23. Net income for the three months ended September 30, 2003 was $770,000, resulting in diluted earnings per share of $0.35. Net Income and diluted earnings per share for the nine-month period ended September 30, 2003 were higher than the same period in 2002, while net income and diluted earnings per share for the three-month period ended September 30, 2003 were lower that the comparable period in 2002 due to merger and acquisition related expenses. Net income for the three and nine-month periods ended September 30, 2002 were $981,000 and $2,539,000, respectively. The diluted earnings per share for the same three and nine-month periods were $0.44 and $1.14, respectively. The return on average equity and the return on average assets for the three-month period ended September 30, 2003 were 11.17% and 0.82%, respectively, as compared to 13.39% and 1.18%, respectively, for the same period in 2002. The return on average equity and the return on average assets for the nine-month period ended September 30, 2003 were 12.58% and 0.98%, respectively, as compared to 11.92% and 1.05%, respectively, for the same period in 2002.

        Net interest income for the three and nine months ended September 30, 2003 were $3,567,000 and $11,154,000, respectively, compared to $3,911,000 and $11,521,000, respectively, for the same three and nine-month periods in 2002. The change in net interest income for three and nine months ended September 30, 2003 reflects the combined effect of a variety of factors, including the average loan balance and interest rates, affecting interest income and interest expense as shown and described below.

18

Average Daily Balance Sheets
(Dollars in thousands, except percentages)