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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to __________________
Commission file number 0-26552
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California Independent Bancorp
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(Exact name of registrant as specified in its charter)
California 68-0349947
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1227 Bridge St. Suite C, Yuba City, California 95991
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (530) 674-4444
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
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. [X] Yes [ ] 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. [X]
Aggregate market volume of Common Stock held by non-affiliates of California
Independent Bancorp at February 28, 1998: $30,179,338
Number of shares of Common Stock outstanding at February 28, 1998: 1,651,131
Documents Incorporated by Reference
Proxy Statement for 1998 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A.
Part III, Items 10, 11, 12 and 13
THIS REPORT INCLUDES A TOTAL OF 59 PAGES
EXHIBIT INDEX IS ON PAGE 57
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I N D E X
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DESCRIPTION PAGE NO.
ITEM 1. BUSINESS ........................................................ 4
ITEM 2. PROPERTIES ...................................................... 22
ITEM 3. LEGAL PROCEEDINGS ............................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS .........................................23
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS ............................ 24
ITEM 6. SELECTED FINANCIAL DATA ......................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
RESULTS OF OPERATIONS ...................................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA ....................................................... 37
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ................................................. 53
ITEM 11. EXECUTIVE COMPENSATION .......................................... 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................ 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ............................................... 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K ........................................ 54
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PART I
ITEM 1. BUSINESS
GENERAL
California Independent Bancorp ("Company") is a California corporation
and the bank holding company for Feather River State Bank ("Bank"), both
located in Yuba City, California. The Bank was incorporated as a California
state banking corporation on December 1, 1976, and commenced operations on
April 6, 1977. The Company was incorporated on October 28, 1994 and became
the bank holding company for Feather River State Bank (the "Bank") on May 2,
1995 pursuant to the Bank Holding Company Act ("BHC Act").
On October 1, 1996, the Company acquired E.P.I. Leasing Co., Inc., an
equipment lessor ("EPI").
GENERAL BANKING SERVICES
The Bank engages in a broad range of financial services activities, and
its primary market is located in the northern portion of the Sacramento
Valley, with a total of seven branches in Yuba City, Marysville, Colusa,
Arbuckle, Wheatland and Woodland, California, serving Sutter, Yuba, Colusa
and Yolo Counties. The total population base in these four counties is
approximately 1.6 million people, the majority of which is in Sacramento
County which has 1.1 million people. The Bank's branch in Wheatland,
California opened on March 6, 1997, in a temporary facility. Bank of America
closed its branch in Wheatland on March 21, 1997, which was the only other
banking facility in Wheatland. Wheatland is primarily an agricultural area.
In addition, the Bank operates three loan production offices ("LPOs") in
Madera, California in Madera County, in Citrus Heights, California in
Sacramento County, and in Chico, California in Butte County. These LPOs
emphasize residential mortgage and construction lending and equipment leasing
through EPI.
With the exception of Sacramento County, whose main economic force is
government, the Bank's operating territory is predominantly agricultural in
nature. A wide variety of food crops are produced in the area. The leading
agricultural commodities produced in the Bank's trade area include peaches,
tomatoes, prunes, rice and almonds. Plentiful irrigation water and quality
soils result in excellent agricultural diversification.
The Bank's branches in Yuba City, Marysville, Wheatland and Woodland
(Sutter, Yuba and Yolo Counties) are in areas which are at the periphery of
housing for those individuals who work in the growing Sacramento area.
The Bank currently has no applications pending to open additional branch
offices or LPOs, but the Bank may increase the number of its banking
facilities in the Bank's trade areas when such expansion is appropriate. The
Bank's expansion program is, of course, dependent on obtaining
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the necessary governmental approvals, a continued earnings pattern and
absence of adverse effects from economic conditions, governmental monetary
policies or competition. No assurance can be given that all or any part of
the Bank's expansion program can be accomplished without the Bank being
required to raise additional capital in the future.
The Bank conducts a commercial banking business including accepting
demand, savings and time deposits, making commercial, real estate,
agricultural and consumer loans, and factoring accounts receivable. It also
offers installment note collection, issues cashier's checks and money orders,
sells traveler's checks, and provides bank-by-mail, night depository, safe
deposit boxes, ATMs and other customary banking services. In addition, the
Bank offers equipment leasing through its subsidiary, EPI. In 1997 the Bank
introduced home banking whereby its customers can make transfers between
accounts, pay bills, make balance inquiries and receive statements via PC or
phone. The Bank also introduced Visa debit cards to its demand deposit
customers. In connection with the relocation of the Bank's Agricultural and
Real Estate Departments in March 1997 to a separate building on Tharp Road in
Yuba City, which formerly was a bank branch, it has installed two ATMs at
this building. The Bank is a member of the Federal Deposit Insurance
Corporation and each depositor's account is insured up to $100,000. The Bank
does not offer international banking services and does not plan to do so in
the near future.
DEPOSITS
Most of the Bank's deposits are attracted from individuals, small and
medium-sized businesses and professionals. A material portion of the Bank's
deposits has not been obtained from a single person or a few persons, the
loss of any one or more of which would not have a materially adverse effect
on the business of the Bank.
LENDING ACTIVITIES
The Bank engages in a full complement of lending activities, including
commercial, agricultural, real estate and consumer loans.
Agricultural loans are primarily made to finance agricultural production
expenses generally as non-revolving lines of credit that are drawn upon when
crop expenses are incurred and are repaid as crop sale proceeds are received.
These loans are typically secured by crops and crop proceeds. The Bank
generally requires a repayment margin of 25% for permanent plantings (i.e.,
tree and vine crops) and 20% for row crops. As of December 31, 1997, the Bank
had agricultural production loans outstanding of $30,132,000 which
represented 17.9% of the Bank's loan portfolio.
The Bank makes real estate loans secured by residential, agricultural
and commercial property. Residential loans are made to purchase or refinance
single family residences or multi-family residential properties and are
secured by a first deed of trust on the property, except for loans to improve
existing properties which are secured by junior liens. The maximum
loan-to-value ratio for these loans is 80%. Loans secured by agricultural
property include mortgages, loans for farm residences and other improvement
loans and are secured by a first lien on real
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estate. The maximum loan-to-value ratio for farmland is 65%. Commercial real
estate loans are made primarily to owner-occupied businesses for such
purposes as offices, warehouses, professional buildings, retail and storage
facilities. The maximum loan-to-value ratio for commercial properties is also
65%. As of December 31, 1997, these types of real estate secured loans
totaled $27,083,000 or 16.1% of the Bank's loan portfolio.
The Bank also makes real estate construction and development loans for
acquisition of raw land to be developed into subdivisions and for the
construction of single family and multi-family housing. These loans are
secured by a first deed of trust and have maximum loan-to-value ratios
ranging from 65% to 80%. As of December 31, 1997, the Bank had outstanding
construction and development loans of $38,085,000 for these purposes,
representing 22.6% of the Bank's loan portfolio as compared to $29,521,000 or
19.5% as of December 31,1996. This increase reflects the economic expansion
in the real estate sector of the Sacramento Valley.
The Bank makes a variety of commercial and industrial loans to
small-to-medium-sized businesses for working capital, inventory, accounts
receivable, equipment and general improvements. Typically, the Bank obtains a
security interest in the collateral being financed or in other available
assets of the customer. Loan-to-value ratios vary but generally do not exceed
75%. As of December 31, 1997, the Bank had outstanding loans for these
purposes of $36,665,000, representing 21.8% of the Bank's loan portfolio.
With the acquisition of EPI in October of 1996, the Bank has increased
its lending activity in the commercial lease market. The Company originates
commercial and industrial equipment leases through EPI. Leases are made to a
wide variety of businesses including professional, agricultural, industrial
and construction. Lease financing receivables as of December 31, 1997 totaled
$33,465,000 or 19.9% of the Bank's portfolio.
Consumer and installment loans are made for household, family and other
personal expenditures. These loans are made on both a secured and unsecured
basis. As of December 31,1997, the Bank had a total of $2,152,000, or 1.2% of
its loan portfolio in consumer and installment loans.
The Bank originates mortgage loans on residential and farm properties
which it sells into the secondary market in order to divest itself of the
interest rate risk associated with these mostly fixed interest rate products.
The underwriting criteria for residential and agricultural mortgage loans
sold in the secondary market are established by the purchasers of the loans.
The Company accounts for these loans in accordance with Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers of Financial
Assets and Extinguishment of Liabilities." These loans are sold without
recourse. As of December 31, 1997, 1996 and 1995, total loans serviced by the
Bank were $151,619,000, $107,637,000 and $107,141,759. For the years ended
December 31, 1997, 1996 and 1995, total loans sold by the Bank were
$66,953,000, $45,614,000 and $17,617,000.
Being located in a prime agricultural area, the Bank participates in the
Farmer Mac I loan program, pursuant to which it makes and then sells
agricultural real estate loans to the Travelers
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Realty Insurance Company and the Federal Agricultural Mortgage Corporation
("Farmer Mac"). In addition, the Bank participates in the Farmer Mac II loan
program, pursuant to which it makes Farm Service Agency "FSA" guaranteed farm
real estate loans and subsequently sells the 90% guaranteed portion of these
loans directly to Farmer Mac and retains the servicing of these loans. The
Bank is one of the largest lenders in the U.S. in the Farmer Mac program.
The Bank's real estate department makes mortgage and construction loans.
Its mortgage loans are typically 15 year and 30 year loans with either
adjustable or fixed interest rates. These mortgage loans are pre-sold to
minimize the Bank's interest rate risk. The Bank sells mortgage loans to
Fannie Mae, Freddie Mac and other mortgage lenders. The loans sold on the
secondary market are typically sold servicing released where the Bank does
not perform loan servicing but receives a higher compensation upon the sale
of the loan. The Bank makes mortgage loans throughout the Sacramento Valley
and the Greater Fresno area.
Pursuant to California law, the Bank's legal lending limit to any one
borrower is 15% of its shareholders' equity and allowance for loan losses for
unsecured loans and 25% for secured loans.
As of January 1, 1997, the Bank adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers of Financial Assets
and Extinguishment of Liabilities." This statement requires entities, under
certain circumstances, to recognize as a separate asset an amount related to
the right to service mortgage loans. The adoption of this statement had an
immaterial impact on the Company's financial position and results of
operations.
The Bank has made Small Business Administration ("SBA") loans since its
inception. The Bank offers both SBA 7(a) and SBA 504 real estate guaranteed
loans ranging from amounts of $50,000 to $2,000,000. SBA 7(a) loans are for
such purposes as working capital, inventory and other purposes, and are
guaranteed up to 80% by SBA. SBA 504 loans are made to finance commercial
real estate. The SBA loan program is continually subject to political and
budgetary uncertainty which, in recent years, has resulted in a reduction of
the guaranteed portion of SBA loans and lower maximum loan amounts.
The Bank also offers business and industrial guaranteed loans through
the Rural Development Administration ("RDA"). These loans are designated for
businesses that create jobs in rural areas. RDA loans are in amounts up to
$10 million and are 90% guaranteed by the RDA. The Bank sells the guaranteed
portion of its SBA and RDA loans in the secondary market.
The risks associated with commercial banking consist primarily of
interest rate risk and credit risk. The Bank attempts to manage its interest
rate risk by making variable rate loans and by interest rate gap analysis.
Credit risk relates to the ability of borrowers to repay the principal and
interest on their loan in a timely manner. This risk is managed by adherence
to credit standards and the taking of collateral to secure most of the Bank's
loans.
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The majority of the Bank's loan portfolio consists of loans with
variable interest rates. The following table illustrates the composition of
the Bank's loan portfolio as of December 31,1997, as it pertains to
interest-rate sensitivity:
FIXED RATE LOANS
Total Loan Variable Rate
Portfolio Loans Under 1 Year Over 1 Year
- ----------- ------------- ------------ ------------
$167,788,000 $109,932,000 $10,951,000 $46,905,000
This table indicates that a total of $120,883,000 of the Bank's loans
are repriceable within one year.
On a monthly basis, the Bank calculates its interest-rate gap position
whereby interest-rate sensitive assets are compared with interest-rate
sensitive liabilities for specific periods to determine if the Bank is
susceptible to significant earnings changes as a result of changes in
interest rates. If the gap percentage is positive, the Bank's interest
earnings would increase during a period of increasing interest rates and the
Bank's interest earnings would decrease during a period of declining interest
rates. The reverse would be true if the Bank has a negative gap. The Bank
puts more emphasis on its gap position for periods up to one year, as it is
felt that a longer horizon gives the Bank more time and flexibility to
reposition its assets and liabilities to counteract any potential earnings
decrease.
Management's objective is to maintain the stability of the net interest
margin in times of fluctuating interest rates by maintaining an appropriate
mix of interest rate sensitive assets and liabilities.
Management does not manage its interest rate sensitivity to maximize
income based on its prediction of interest rates, but rather to minimize
interest rate risk to the Company by stabilizing the Company's net interest
margin in all interest rate environments.
Additionally, the Company is subject to considerable competitive
pressure in generating deposits and loans at rates and terms prevailing in
the Company's market areas.
Management has developed a matrix that calculates pre-tax impact on
earnings as determined by its gap position. The analysis takes into
consideration delays in the timing of repricing based on actual experience.
The matrix is of a static nature and assumes that Management and market
forces effect no changes and leave the rate-sensitive balance sheet virtually
unchanged.
The following chart illustrates the gap position of the Bank as of
December 31, 1997:
MATURE OR
REPRICE 1-90 91-365
IMMEDIATELY DAYS DAYS
----------- ------ -------
(IN THOUSANDS)
Rate-sensitive Assets $145,336 $196 $17,941
Rate-sensitive Liabilities $108,923 $33,273 $49,031
Interest Rate Sensitivity Gap $36,413 $(33,077) $(31,090)
Cumulative Interest Rate Sensitivity Gap $36,413 $3,336 $(27,754)
Cumulative Gap as a Percentage of
Total Assets 12.5% 1.14% (9.52%)
Most of the Bank's deposits are attracted by the Bank's established
reputation in the communities it serves and through advertising in the local
media. A material portion of the Bank's deposits has not been obtained from a
single person or a few persons, the loss of any or more of which would not
have a materially adverse effect on the business of the Bank.
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INVESTMENT POLICY
The Bank's investment policy is to provide the Bank with the maximum
return on its investment securities consistent with safety and liquidity.
In accordance with this policy and state laws regarding permissible
investments the Bank invests in U.S. Treasury and Agency securities with a
maturity of 10 years or less, tax-free municipal bonds rated "A" or better by
Moody's with a maturity not to exceed 13 years, and corporate bonds rated "A"
or better by Standard and Poors or Moody's with a maturity not to exceed 7
years. The Bank also invests in Federal funds.
The Bank's investment securities may also be used as collateral for
public deposits and for other borrowings.
OTHER SERVICES
The Bank also offers other financial products and services including
annuities, mutual funds, mutual fund advisory service, IRA's, brokerage and
custodial services, 401(k) plans, estate plans, asset management, asset
consulting, charitable remainder trusts, fiduciary services, pension plans,
nonqualified deferred compensation, retirement plans and trust services. All
of these investments and/or financial services are offered by a registered
investment representative through the Bank's affiliation with Select
Advisors, Inc., a registered broker/dealer and a member of the National
Association of Securities Dealers ("NASD") and the Securities Investor
Protection Corporation ("SIPC"). Trust services are provided by the Boston
Safe Deposit and Trust Company of California.
The Bank's primary service area consists of Colusa, Sutter, Yolo and
Yuba Counties. It is estimated that this service area contains 45 competitive
banking offices, of which 15 offices are owned by other independent banks. It
is estimated that the primary service area also contains 8 offices of savings
and loan associations, credit unions and thrifts. Based upon total bank
deposits as of June 30, 1997 (the last period for which data are available),
the Bank is second in market share in Sutter County, third in Yuba and Colusa
counties and eleventh in Yolo County, which the Bank entered in 1993.
The banking business in California generally, and in the Bank's primary
service area specifically, is highly competitive with respect to both loans
and deposits, and is dominated by a relatively small number of major banks
with many offices operating over a wide geographic area. Among the advantages
such major banks have over the Bank is their ability to finance wide ranging
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Such institutions offer certain services such as
trust services and international banking which are not offered directly by
the Bank (but are offered indirectly through correspondent institutions) and,
by virtue of their greater total capitalization (legal lending limits to any
one borrower are limited to a percentage of a bank's shareholders' equity),
they have substantially higher lending limits than does the Bank. Other
entities, both governmental and in private industry, seeking to raise capital
through the issuance and sale of debt or equity securities also provide
competition for the Bank in the acquisition of deposits. The Bank also
competes with money-market funds for deposits.
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In order to compete with major financial institutions and other competitors
in its primary service area, the Bank relies upon the experience of its
executive and senior officers in serving businesses and individuals, and upon
its specialized service, 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 to
extend such loans on a participation basis with correspondent banks. In this
manner, the Bank is able to close the loan while selling a portion of the
credit to a participant bank. The Bank's lending limit to any one borrower is
15% of its shareholders' equity and allowance for loan losses for unsecured
loans and 25% of its shareholders' equity and allowance for loan losses for
unsecured and secured loans.
SUPERVISION AND REGULATION
The Bank is chartered under the banking laws of the State of California
and is subject to the supervision of, and is regularly examined by, the
Superintendent and the FDIC.
The Company is a bank holding company within the meaning of the BHC
Act, is registered as such with and is subject to the supervision of the
Federal Reserve Board ("FRB") and regularly files proxy statements, periodic
and other reports with the Securities and Exchange Commission as a registered
company under Section 12 of the Securities Exchange Act of 1934, as amended.
Certain legislation and regulations affecting the businesses of the
Company and the Bank are discussed below.
GENERAL
As a bank holding company, the Company is subject to the BHC Act. The
Company reports to, registers with, and is examined by the FRB. The FRB also
has the authority to examine the Company's subsidiaries which includes the
Bank.
The FRB requires the Company to maintain certain levels of capital. See
"Capital Standards" herein. 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" herein.
Under the BHC Act, a company generally must obtain the prior approval of
the FRB before it exercises a controlling influence over, 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 FRB's approval.
The Company is generally prohibited under the BHC Act from acquiring
ownership or control of more than 5% of the voting shares of any company that
is not a bank or bank holding
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company and from engaging directly or indirectly in activities other than
banking, managing banks, or providing services to affiliates of the holding
company. 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.
Transactions between the Company, the Bank and any future subsidiaries
of the Company 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).
Additionally, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit, sale or lease of property, or furnishing of services. 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.
CAPITAL STANDARDS
The FRB, FDIC and other 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
reported 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
business loans.
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 and minority interests in certain subsidiaries, less most
other intangible assets. Tier 2 capital may consist of a limited amount of
the allowance for possible loan and lease losses 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. Since December 31, 1992, the
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federal banking agencies have required 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 risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage 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 is 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 is at least 100 to 200 basis points above the 3% minimum.
Thus, the effective minimum leverage ratio, for all practical purposes, is 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.
The following tables present the capital ratios for the Company and the
Bank as of December 31, 1997.
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
COMPANY BANK
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------
Tier 1 Capital $ 21,151 8.99% $ 21,040 8.96%
Tier 1 Capital minimum
requirement 9,413 4.00% 9.390 4.00%
-------- ------ -------- ------
Excess $ 11,738 4.99% $ 11,650 4.96%
-------- ------ -------- ------
-------- ------ -------- ------
Total Capital 24,124 10.25% 24,006 10.23%
Total Capital minimum
requirement 18,826 8.00% 18,780 8.00%
-------- ------ -------- ------
Excess $ 5,298 2.25% $ 5,226 2.23%
-------- ------ -------- ------
Risk-adjusted assets $235,330 $234,750
-------- ------ -------- ------
-------- ------ -------- ------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly
average total assets $ 21,151 7.43% $ 21,040 7.40%
Minimum leverage requirement 11,384 4.00% 11,377 4.00%
-------- ------ -------- ------
Excess $ 9,767 3.43% $ 9,663 3.40%
-------- ------ -------- ------
-------- ------ -------- ------
Total Quarterly average assets $284,598 $284,423
-------- --------
-------- --------
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SAFETY AND SOUNDNESS STANDARDS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") implemented certain specific restrictions on transactions and
required the 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, the use of
brokered deposits and the aggregate extension of credit by a depository
institution to an executive officer, director, principal stockholder or
related interest, and reduces deposit insurance coverage for deposits offered
by undercapitalized institutions for deposits by certain employee benefits
accounts.
The federal financial institution agencies published a final rule
effective on August 9, 1995, implementing safety and soundness standards. The
FDICIA added a new Section 39 to the Federal Deposit Insurance Act which
required the agencies to establish safety and soundness standards for insured
financial institutions covering (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit underwriting;
(4) interest rate exposure; (5) asset growth; (6) compensation, fees and
benefits; (7) asset quality, earnings and stock valuation; and (8) excessive
compensation for executive officers, directors or principal shareholders
which could lead to material financial loss. The agencies issued the final
rule in the form of guidelines only for operational, managerial and
compensation standards and reissued for comment proposed standards related to
asset quality and earnings which are less restrictive than the earlier
proposal in November 1993. Unlike the earlier proposal, the guidelines under
the final rule do not apply to depository institution holding companies and
the stock valuation standard was eliminated. If an agency determines that an
institution fails to meet any standard established by the guidelines, the
agency may require the financial institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If the agency
requires submission of a compliance plan and the institution fails to timely
submit an acceptable plan or to implement an accepted plan, the agency must
require the institution to correct the deficiency. Under the final rule, an
institution must file a compliance plan within 30 days of a request to do so
from the institution's primary federal regulatory agency. The agencies may
elect to initiate enforcement action in certain cases rather than rely on an
existing plan particularly where failure to meet one or more of the standards
could threaten the safe and sound operation of the institution.
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.
The FRB has issued a policy statement that a bank holding company should
not declare or pay a cash dividend to its stockholders if the dividend would
place undue pressure on the capital
- 13 -
of its subsidiary banks or if the dividend could be funded only through
additional borrowings or other arrangements that might adversely affect the
financial position of the bank holding company. Specifically, 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 consistent with
its capital needs, asset quality and overall financial condition. Further,
the Company is expected to act as a source of financial strength for each of
its subsidiary banks and to commit resources to support each subsidiary bank
in circumstances when it might not do so absent such policy.
The Company's ability to pay dividends depends in large part on the
ability of the Bank to pay management fees and dividends to the Company. The
ability of its subsidiary banks to pay dividends is subject to restrictions
set forth in the California Banking Law and regulations of the FDIC.
The payment of dividends by a state bank is further restricted by
additional provisions of state law. Under Section 642 of the California
Financial Code, funds available for cash dividend payments by a bank are
restricted to the lesser of: (i) retained earnings or (ii) the bank's net
income for its three fiscal years (less any distributions to stockholders
made during such period). However, under Section 643 of the California
Financial Code, with the prior approval of the Superintendent, a bank may pay
cash dividends in an amount not to exceed the greater of the (1) retained
earnings of the bank, (2) net income of the bank for its last fiscal year, or
(3) net income of the bank for its current fiscal year. However, if the
Superintendent finds that the stockholders' equity of the bank is not
adequate or that the payment of a dividend would be unsafe or unsound, the
Superintendent may order such bank not to pay a dividend to stockholders.
Currently, it is permissible for the Bank to pay cash dividends without the
Superintendent's prior approval.
Additionally, under FDICIA, a bank may not make any capital
distribution, including the payment of dividends, if after making such
distribution the bank would be in any of the "under-capitalized" categories
under the FDIC's Prompt Corrective Action regulations.
Also, under the Financial Institution's Supervisory Act, the FDIC also
has the authority to prohibit a bank from engaging in business practices
which the FDIC considers to be unsafe or unsound. It is possible, depending
upon the financial condition of a bank and other factors, that the FDIC could
assert that the payment of dividends or other payments in some circumstances
might be such an unsafe or unsound practice and thereby prohibit such payment.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. This
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that adequately capitalized and adequately managed bank holding
companies may acquire banks in any state, even in those jurisdictions that
currently bar acquisition by out-of-state institutions, subject to deposit
concentration limits. The deposit concentration limits provide that
regulatory approval by the Federal Reserve Board may not be granted for a
proposed interstate acquisition if after the acquisition, the acquiror on a
consolidated basis would control more than 10% of the total deposits
nationwide or would control
- 14 -
more than 30% of deposits in the state where the acquiring institution is
located. The deposit concentration state limit does not apply for initial
acquisitions in a state and in every case, may be waived by the state
regulatory authority. Interstate acquisitions are subject to compliance with
the Community Reinvestment Act ("CRA"). States are permitted to impose age
requirements not to exceed five years on target banks for interstate
acquisitions.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing
de novo branches in another state. Interstate branching is also subject to a
30% statewide deposit concentration limit on a consolidated basis, and a 10%
nationwide deposit concentration limit. The laws of the host state regarding
community reinvestment, fair lending, consumer protection (including usury
limits) and establishment of branches apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state.
The establishment of an initial de novo branch in a state is subject to the
same conditions as apply to initial acquisition of a bank in the host state
other than the deposit concentration limits.
The Interstate Act permits bank subsidiaries of a bank holding company
to act as agents for affiliated depository institutions in receiving
deposits, renewing time deposits, closing loans, servicing loans and
receiving payments on loans and other obligations. A bank acting as agent for
an affiliate shall not be considered a branch of the affiliate. Any agency
relationship between affiliates must be on terms that are consistent with
safe and sound banking practices. The authority for an agency relationship
for receiving deposits includes the taking of deposits for an existing
account but is not meant to include the opening or origination of new deposit
accounts. Subject to certain conditions, insured savings associations which
were affiliated with banks as of June 1, 1994, may act as agents for such
banks. An affiliate bank or savings association may not conduct any activity
as an agent which such institution is prohibited from conducting as principal.
If an interstate bank decides to close a branch located in a low-or
moderate-income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in
the affected community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies have
implemented regulations prohibiting interstate branches from being used as
"deposit production offices." The regulations include a provision to the
effect that if loans made by an interstate branch are less than fifty percent
of the average of all depository institutions in the state, then the
regulator must review the loan portfolio of the branch. If the regulator
determines that the branch is not meeting the credit needs of the community,
it has the authority to close the branch and to prohibit the bank from
opening new branches in the state.
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995, effective October 2, 1995, (the "Caldera Act") amends
the California Financial Code to,
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among other matters, regulate the operations of state banks to eliminate
conflicts with and to implement the Interstate Act discussed above. The
Caldera Act includes (1) an election to permit early interstate merger
transactions; (2) a prohibition against interstate branching through the
acquisition of a branch business unit located in California without
acquisition of the whole business unit of the California bank; and (3) a
prohibition against interstate branching through de novo establishment of
California branch offices. The Caldera Act mandates that initial entry into
California by an out-of-state institution be accomplished by acquisition of
or merger with an existing whole bank which has been in existence for at
least five years.
COMMUNITY REINVESTMENT ACT
In October 1994, the federal financial institution regulatory agencies
proposed a comprehensive revision of their regulations implementing the
Community Reinvestment Act ("CRA"), enacted in 1977 to promote lending by
financial institutions to individuals and businesses located in
low- and moderate-income areas. In May 1995, the proposed CRA regulations were
published in final form effective as of July 1, 1995. The revised regulations
included transitional phase-in provisions which generally require mandatory
compliance not later than July 1, 1997, although earlier voluntary compliance
is permissible. Under the former CRA regulations, compliance was evaluated by
an assessment of the institution's methods for determining, and efforts to
meet, the credit needs of such borrowers. This system was highly criticized
by depository institutions and their trade groups as subjective, inconsistent
and burdensome, and by consumer representatives for its alleged failure to
aggressively penalize poor CRA performance by financial institutions. The
revised CRA regulations emphasize an assessment of actual performance rather
than of the procedures followed by a bank, to evaluate compliance with the
CRA. Overall CRA compliance continues to be rated across a four-point scale
from "outstanding" to "substantial noncompliance," and continues to be a
factor in review of applications to merge, establish new branches or form
bank holding companies. In addition, any bank rated in "substantial
noncompliance" with the revised CRA regulations may be subject to enforcement
proceedings.
The regulations provide that "small banks," which are defined to include
any independent bank with total assets of less than $50 million, are to be
evaluated by means of a so-called "streamlined assessment method" unless such
a bank elects to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may be summarized
as follows:
(1) The "streamlined assessment method" presumptively applicable to
small banks requires that a bank's CRA compliance be evaluated pursuant to
five "assessment criteria," including its (i) loan-to-deposit ratio (as
adjusted for seasonal variations and other lending-related activities, such
as sales to the secondary market or community development lending); (ii)
percentage of loans and other lending-related activities in the bank's
service area(s); (iii) distribution of loans and other lending-related
activities among borrowers of different income levels, given the demographic
characteristics of its service area(s); (iv) geographic distribution of
- 16 -
loans and other lending-related activities within its service area(s); and
(v) record of response to written complaints, if any, about its CRA
performance.
(2) The "lending, investments and service tests method" is applicable
to all banks larger than $250 million which are not wholesale or limited
purpose banks and do not elect to be evaluated by the "strategic plan
assessment method." Central to this method is the requirement that such
banks collect and report to their primary federal banking regulators detailed
information regarding home mortgage, small business and farm and community
development loans which is then used to evaluate CRA compliance. At the
bank's option, data regarding consumer loans and any other loan distribution
it may choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending practices
to meet low- and moderate-income credit needs and, at the bank's election,
lending by affiliates or through consortia or third-parties in which the bank
has an investment interest; (ii) investment performance by measure of the
bank's "qualified investments," that is, the extent to which the bank's
investments, deposits, membership shares in a credit union, or grants
primarily to benefit low- or moderate-income individuals and small businesses
and farms, address affordable housing or other needs not met by the private
market, or assist any minority- or women-owned depository institution by
donating, selling on favorable terms or provisioning on a rent-free basis any
branch of the bank located in a predominately minority neighborhood; and
(iii) service performance by evaluating the demographic distribution of the
bank's branches and ATMs, its record of opening and closing them, the
availability of alternative retail delivery systems (such as telephone
banking, banking by mail or at work, and mobile facilities) in low- and
moderate-income geographies and to low- and moderate-income individuals, and
(given the characteristics of the bank's service area(s) and its capacity and
constraints) the extent to which the bank provides "community development
services" (services which primarily benefit low- and moderate-income
individuals or small farms and businesses or address affordable housing needs
not met by the private market) and their innovativeness and responsiveness.
(3) Wholesale or limited purpose banks which do not make home mortgage,
small farm or business or consumer loans to retail customers may elect,
subject to agency approval of their status, to be evaluated by the "community
development test method," which assesses the number and amount of the bank's
community development loans, qualified investments and community development
services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the "strategic plan
assessment method" by submitting a strategic plan for review and approval.
Such a plan must involve public participation in its preparation, and contain
measurable goals for meeting low- and moderate-income credit needs through
lending, investments and provision of services. Such plans generally will be
evaluated by measuring strategic plan goals against standards similar to
those which will be applied in evaluating a bank according to the "lending,
investments and service test method."
- 17 -
The federal institution regulatory agencies issued a final rule
effective as of January 1, 1996 to make certain technical corrections to the
revised CRA regulations. Among other matters, the rule clarifies the
transition from the former CRA regulations to the revised CRA regulations by
confirming that when an institution either voluntarily or mandatorily becomes
subject to the performance tests and standards of the revised regulations,
the institution must comply with all of the requirements of the revised
regulations and is no longer subject to the provisions of the former CRA
regulations.
DEPOSIT INSURANCE
On December 11, 1996 the FDIC finalized a rule lowering the rates on
assessments paid to the Savings Association Insurance Fund ("SAIF"),
effective October 1, 1996. As a result of the special assessment required by
the Deposit Insurance Funds Act of 1996 ("Funds Act"), the SAIF must be
capitalized at the target designated reserve ratio ("DRR") of 1.25 percent of
estimated insured deposits on October 1, 1996. Section 7 of the Federal
Deposit Insurance Act, as amended by the Funds Act, requires the FDIC to set
assessments in order to maintain the target DRR. Therefore, the FDIC has
lowered the rates on assessments paid to the SAIF, while simultaneously
widening the spread between the lowest and highest rates to improve the
effectiveness of the FDIC's risk-based premium system. The FDIC also
established a process, similar to that which has applied to the Bank
Insurance Fund ("BIF"), for adjusting the rate schedules for both the SAIF
and BIF within a limited range without notice and comment to maintain each of
the fund balances at the targeted DRR. The Funds Act also separates,
effective January 1, 1997, the Financing Corporation ("FICO") assessment to
service the interest on its bond obligations from the SAIF assessment. The
amount assessed on individual institutions by the FICO will be in addition to
the amount paid for deposit insurance according to the FDIC's risk-related
assessment rate schedules.
The final rule establishes a SAIF assessment rate schedule of 0 to 27
basis points effective for all institutions beginning January 1, 1997.
The Funds Act also provides that the assessment rates for SAIF members may
not be less than the assessment rates for BIF members which pose a comparable
risk to the Deposit Insurance Fund. The Funds Act provides that assessments
are authorized only if necessary to maintain the DRR of a Deposit Insurance
Fund. In the event the balance in a Deposit Insurance Fund is in excess of
the DRR of such fund, such excess amount shall be refunded to insured
depository institutions by the FDIC on such basis as the FDIC determines to
be appropriate, taking into account the factors considered under the
risk-based assessment system. In the case of any payment of an assessment by
an insured depository institution in excess of the amount due to the FDIC,
the FDIC may refund the amount of the excess payment to the insured
depository institution or credit such excess amount toward the payment of
subsequent semi-annual assessments until such credit is exhausted. The Funds
Act also provides that the BIF and the SAIF shall be merged into one Deposit
Insurance Fund effective January 1, 1999, if no insured depository
institution is a savings association on that date.
- 18 -
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT OF 1996
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Regulatory Reduction Act"), was enacted in September 1996. The Regulatory
Reduction Act streamlines many banking laws and Federal bank regulatory
agencies are in the process of promulgating regulations to implement the law.
The Regulatory Reduction Act changes: (i) the procedures for merging,
acquiring or assuming all or a part of another depository institution have
been simplified for banks with the two highest regulatory ratings. The
regulators have streamlined their internal approval procedures and expedited
the review process for proposals. Top rated banks and well run bank holding
companies qualify for the expedited treatment; (ii) the new rules eliminate
the requirement for well capitalized and well managed banks to obtain prior
approval for investment in bank premises or the stock of a corporation
holding bank premises; (iii) per branch capital requirements are eliminated
for well performing banks as are the requirement that a bank file a branch
application for ATMs; (iv) the approval requirement for divestitures by well
run banks have been eliminated. The process for acquisition of an interest in
certain nonbank activities has been simplified by eliminating notice
requirements for well capitalized and well managed banks. Acquisitions are
still limited to permitted nonbank activities. Permitted nonbank activities
have been greatly expanded. The acquisition is limited in size to ten percent
of the consolidated total risk-weighted assets of the acquiring bank; (v) a
qualified bank holding company may engage in permissible activities listed in
12 USC 1843(c)(8) without prior notification to its federal regulator, but
must still give notification within 10 days of commencing the activity; (vi)
banks meeting minimum capital requirements may appoint directors without
giving prior notice to their regulator. A bank that does not meet its minimum
capital requirements must give notice to its regulator 30 days prior to an
appointment. Once the notice is received, the federal regulator has 90 days
to file an objection to the appointment; (vii) the prohibitions against dual
service of management officials for large banks have been amended to increase
the size of the bank. The effect of this change is to exempt some of the
smaller banks from this particular part of the management interlock
prohibitions. Those persons who were grandfathered under the old regulations
have had five years added to the grandfathering statute; (viii) the
requirements for notice to the regulators and to customers for the closure of
an ATM site is eliminated. Relocation or consolidation of branches no longer
require notice if the relocation or consolidation occurs within the immediate
neighborhood or it does not substantially affect the nature of the business
or customers served; (ix) the Regulatory Reduction Act expanded the
eligibility of some banks to qualify for an 18 month examination schedule by
increasing the total asset size for those banks rated outstanding or good
from $175,000,000 to $250,000,000; (x) all federal regulatory agencies are
required to review regulations for outdated or otherwise unnecessary
regulatory requirements not less frequently than once every 10 years; (xi) in
order to encourage self testing and correction of regulatory errors, the
Regulatory Reduction Act establishes a privilege for information accumulated
during self testing of regulatory compliance. Information obtained by a bank
during self testing may not be used in any civil action, examination or
investigation, and generally may not be obtained by any agency or department
for use in such a proceeding. If the bank elects to disclose this information
in connection with a particular action, it may not be used in any other
actions; and (xii) as a result of the passage of the Regulatory Reduction Act
the federal bank regulators have begun a process of regulatory simplification.
- 19 -
The Real Estate Settlement Procedures Act ("RESPA") regulations and the
Truth-in-Lending Act ("TILA") regulations have been changed to adopt matching
definitions for common terms.
ASSET CONSERVATION, LENDER LIABILITY AND DEPOSIT INSURANCE PROTECTION ACT OF
1996
Environmental Protection Agency regulations excluding financial
institutions from liability for the clean up of toxic materials on property
held as collateral for loans were overturned by the federal courts. Due to
concerns expressed by interested parties (owners, realtors and lenders)
Congress passed amendments to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") to reinstate certain
safeguards for fiduciaries and lenders. A bank or other party acting as a
fiduciary may hold property in such capacity and shall have no liability for
the release or threatened release of a hazardous substance in excess of the
value of the property held in a fiduciary capacity. For example, a bank
acting as trustee under the terms of a written trust agreement, will not have
any liability in excess of the actual value of the assets in that particular
trust. The assets of the Bank will not be at risk for a release occurring on
property belonging to the trust. This amendment does not limit the liability
of the fiduciary to private parties that may have a cause of action outside
of the scope of CERCLA. Fiduciary as used in CERCLA includes trustees,
executors, administrators, custodians, guardians, receivers, conservators
and personal representatives.
The amendments to CERCLA include changes in the definitions contained in
42 USC 9601(20) entitled definitions. A major change in the definition of
"owner" or "operator" has the effect of limiting the liability of a financial
institution that does not participate in management of an environmentally
impaired property. Section 9607 of CERCLA states that owners and operators of
a vessel or facility are liable for damages arising out of discharge of a
hazardous substance on property. The amendment specifically states that a
financial institution holding a deed of trust on real property that does not
participate in the management of the operations carried out on the property
is not an owner or an operator under the statute. The amendments further
state that a financial institution that forecloses on such property does not
incur liability simply by the act of foreclosing on the property or through
the subsequent sale of the property to a third party.
INTER-COMPANY BORROWINGS
Bank holding companies are also restricted as to the extent to which
they and their subsidiaries can borrow or otherwise obtain credit from one
another, or engage in certain other transactions. The "covered transactions"
that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following
amounts: (1) in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its
subsidiaries cannot exceed 10% of the capital stock and the surplus of the
insured depository institution; and (ii) in the case of all affiliates, the
aggregate amount of covered transactions of the insured depository
institution and its subsidiaries cannot exceed 20% of the capital stock and
surplus of the insured depository institution. In addition,
- 20 -
extensions of credit that constitute covered transactions must be
collateralized in prescribed amounts.
"Covered transactions" are defined by statute to include a loan or
extension of credit to the affiliate, a purchase of securities issued by an
affiliate, a purchase of assets from the affiliate (unless otherwise exempted
by the Federal Reserve Board), the acceptance of securities issued by the
affiliate as collateral for a loan and the issuance of a guarantee,
acceptance, or letter of credit for the benefit of an affiliate. Further, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits
and other borrowings, and the interest rate earned by banks on loans,
securities and other interest-earning assets comprises the major source of
banks' earnings. Thus, the earnings and growth of banks are subject to the
influence of economic conditions generally, both domestic and foreign, and
also to the monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required
level of reserves for financial institutions subject to reserve requirements
and through adjustments to the discount rate applicable to borrowings by
banks which are members of the FRB. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates. The nature and timing of any future changes in such policies
and their impact on the Company cannot be predicted. In addition, adverse
economic conditions could make a higher provision for loan losses a prudent
course and could cause higher loan loss charge-offs, thus adversely affecting
a bank's net earnings.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued SFAS No.
125, "Accounting for the Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities" effective for transactions occurring after
December 31, 1996. SFAS NO. 125 requires that an asset seller must meet
defined conditions to demonstrate that it has surrendered control over the
assets. The failure to meet these conditions usually results in
on-balance-sheet treatment for the assets and a liability for the sale
proceeds received. SFAS No. 125 also requires that contracts to service are
recorded as an asset or a liability based on fair value or on an allocation
of the carrying amount of the financial asset. SFAS 125 covers subsequent
accounting, including impairments, and eliminates the distinction between
excess and normal servicing. In December 1996, the FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" to defer for one year the effective date of implementation for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending and other similar transactions. The Company
does not believe that adoption of these standards will have a significant
impact on its financial position or results of operations.
In February 1997, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 128, "Earnings per Share," which establishes standards for
computing and presenting earnings per share (EPS). It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The
statement is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement for all periods presented.
The implementation of this statement did not have a material effect on the
Bank's reported financial position or net income in 1997.
- 21 -
GENERAL
On June 25, 1984, the Bank formed Yuba-Sutter Financial Services
Corporation ("Yuba-Sutter") as a wholly-owned subsidiary. This subsidiary is
inactive.
There has been no material effect upon the Bank's capital expenditures,
earnings, or competitive position as a result of federal, state or local
provisions regarding the discharge of materials into the environment.
At December 31, 1997, the Company employed 178 persons, including 6
part-time employees, 4 executive officers and 51 other officers. None of the
Company's employees is presently represented by a union or covered under a
collective bargaining agreement. Management of the Company believes that its
employee relations are excellent.
ITEM 2. PROPERTIES
The Bank currently conducts its banking operations from an
administrative office, seven (7) branch offices and three loan production
offices.
The Bank's principal office in Yuba City, California, is located at 777
Colusa Avenue in a modern, single story, shopping center end building which
has drive-up windows and off-street parking for its customers. This office
was opened in 1982.
In 1991, the Bank purchased a building located at 1005 Stafford Way,
Yuba City, California, located directly behind its main branch. The Bank's
note department moved from the Bank's Colusa Avenue office to this location
in the third quarter of 1997, as the Company's headquarters moved to another
location.
The Bank purchased land for the Bank's office at 1221 Bridge Street,
Yuba City, in 1978. In 1991, the Bank purchased a combined retail and office
building with parking located at 1227 Bridge Street, adjacent to the Bank's
Bridge Street branch. Presently, the Bank's Data Center, the headquarters for
the Company, administrative services and financial consulting services are
located in this building.
The new location of the Bank's Marysville office is 700 "E" Street in
Marysville. The Bank purchased this building, which was a branch of another
bank, in September 1995 for a purchase price of $405,000 including all of the
improvements, furniture, fixtures and equipment which were located there.
The Bank's Colusa branch office is located at 655 Fremont Street in an
office building which was converted to banking quarters. The Bank owns the
land and premises for the branch.
In 1985, the Bank purchased premises for its Arbuckle office located at
the corner of Amanda and Sixth Streets. The Bank moved its Arbuckle office to
this location in June 1986. The Bank leases 1,800 square feet plus a common
area of these premises to an unaffiliated party.
- 22 -
In 1993, the Bank purchased the building which is now the location of
its new Woodland branch office located at 203 Main Street. This was formerly
the site of the Security Pacific Bank branch. The purchase price for this
building of approximately 4,000 square feet was $430,100, and the Bank spent
$154,381 remodeling the building.
The Bank opened a branch in Wheatland, California in March 1997. The
Bank leases the land for $1,100 per month. The initial term was six months,
and has been renewed on a month-to-month basis. In addition, the Bank leases
a Module which was placed on the property for the use of a branch office at a
rate of $2,255 per month.
The Bank vacated its Roseville LPO and opened a new office in Citrus
Heights in October 1997. The rent is $1,114 per month for this office. The
initial term of the lease is two years.
In May 1997, the Bank jointly with EPI opened a new production office in
Madera, California. Upon market research the decision was made to enter into
this central California market and offer agricultural, residential real
estate, construction, SBA and commercial loans, in addition to equipment
leasing programs.
On December 1, 1997, the Bank's Chico LPO relocated to 500 Main Street
in Chico. The lease is for three years at a rent of $1,732 per month.
On December 2, 1996, the Bank purchased a former bank branch located at
995 Tharp Road in Yuba City, California for a purchase price of $650,000.
After remodeling, the Bank relocated its Agricultural Real Estate and
Residential Real Estate Departments at this location.
In connection with the purchase of EPI, the Bank entered into a
17-month lease commencing August 1, 1996 for premises where EPI is located at
6929 Sunrise Boulevard in Citrus Heights. The lease has been extended to
December 31, 1999 at a monthly rent of $3,449.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings incidental to its
business. In addition, the Bank is a party to a lawsuit titled FRSB v. Thiara
Enterprises, etux. and the corresponding cross complaint titled Thiara
Enterprises, etux. v. FRSB which could be considered material pending
litigation. This suit stems from a defaulted loan obligation. FRSB took legal
action against the debtor to enforce the terms of its loan agreements. The
Bank's suit lists various causes of action including foreclosure of real and
personal property, temporary restraining order, permanent injunction and
certain fraud counts. The debtor's cross complaint alleges breach of contract
and seeks punitive damages. Litigation by its nature is subject to inherent
uncertainties, and there can be no assurance that any ongoing legal
proceedings or those that may arise in the future will not have any material
adverse effects on the Company's consolidated financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is trading on the NASDAQ National Market
under the trading symbol "CIBN". The Company's Common Stock began trading on
the NASDAQ National Market on July 31, 1996. Prior to that time, the
Company's Common Stock was listed on the NASDAQ Bulletin Board and was the
subject of limited trading.
Set forth below is information regarding trading in the Company's Common
Stock for the last two years.
The prices indicated below may not necessarily represent actual
transactions.
SALE PRICE OF COMMON STOCK
--------------------------
PERIOD ENDED 1997 BID ASK
------ ------
March 31 $26.25 $28.00
June 30 26.75 28.50
September 30 25.00 27.00
December 31 24.13 26.25
PERIOD ENDED 1996 BID ASK
------ ------
March 31 $18.59 $19.50
June 30 17.24 20.86
September 30 21.67 21.90
December 31 22.86 23.81
Cash dividends paid on the Company's Common Stock were $.42 per share
for the year ending December 31, 1997, and $.40 per share for the year ending
December 31, 1996, both adjusted to reflect the 5 percent stock dividends
paid in 1997 and 1996.
It is currently the intention of the Board of Directors of the Company
to pay cash dividends on a quarterly basis. However, there is no assurance
that cash dividends will be paid in the future as they are dependent upon the
earnings, financial condition and capital requirements of the Company and the
Bank, as well as legal and regulatory requirements. As of December 31, 1997,
the Company had $4,314,633 available for payment of dividends to its
shareholders without any restrictions.
As of February 28, 1998, there were 1,157 holders of record of the
Company's Common Stock.
- 24 -
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARY
AS OF YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1997 1996 1995 1994 1993
------------ ------------ ----------- ----------- -----------
Interest income $ 23,392,573 $ 20,574,833 $19,002,834 $15,120,346 $12,805,981
Interest expense 9,288,694 7,448,898 6,316,594 4,502,067 4,388,018
------------ ------------ ----------- ----------- -----------
Net interest income 14,103,879 13,125,935 12,686,240 10,618,279 8,417,963
Provision for loan losses 6,153,000 385,000 875,000 347,000 155,000
------------ ------------ ----------- ----------- -----------
Net interest income after
provision for loan losses 7,950,879 12,740,935 11,811,240 10,271,279 8,262,963
Noninterest income 5,057,284 3,136,423 2,226,967 1,878,349 2,353,021
Noninterest expense (13,582,493) (10,269,529) (8,936,485) (8,189,991) (7,118,212)
------------ ------------ ----------- ----------- -----------
Income before provision
for income taxes (574,330) 5,607,829 5,101,722 3,959,637 3,497,772
Provision for income taxes (412,900) 2,206,778 2,036,000 1,540,000 1,309,000
------------ ------------ ----------- ----------- -----------
Net income $ (161,430) $ 3,401,051 $ 3,065,722 $ 2,419,637 $ 2,188,772
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
PER COMMON SHARE DATA
Basic earnings per share $ (0.10) $ 2.20 $ 1.93 $ 1.45 $ 1.30
Cash dividends $ 0.42 $ 0.40 $ 0.39 $ 0.34 $ 0.28
Book value $ 12.94 $ 13.49 $ 11.68 $ 10.31 $ 9.21
Dividend payout ratio (428.44)% 19.05% 21.70% 23.80% 21.50%
AVERAGE COMMON
SHARES OUTSTANDING 1,637,712 1,560,949 1,629,474 1,588,874 1,600,926
FINANCIAL RATIOS
Return on average assets (0.06)% 1.51% 1.56% 1.33% 1.34%
Return on average common
shareholders' equity (0.71)% 16.71% 17.54% 15.92% 17.88%
Net interest margin 4.91% 5.64% 5.45% 4.96% 4.25%
Net charge-offs to
average loans, net 2.7 % 0.16% 0.19% 0.12% 0.34%
Allowance for loan loss
as a percent of net loans 3.29% 2.68% 3.05% 2.57% 2.87%
Efficiency ratio 70.89% 63.05% 59.92% 65.54% 66.09%
- 25 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1997
CALIFORNIA INDEPENDENT BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1997
THE COMPANY
The Company, through the Bank, engages in a broad range of financial service
activities. The Bank commenced operations in 1977. The Company was formed in
1994 and, after receiving regulatory and shareholder approval, became the
holding company for the Bank in May 1995. In October 1996, the Bank acquired
EPI Leasing Co., Inc. ("EPI") and operates it as a subsidiary.
SUMMARY OF FINANCIAL RESULTS
In 1997, the Company suffered a net operating loss of $161,430, representing
a decrease in earnings of $3,562,841 or 104.7% from 1996. This decrease,
after fourteen consecutive annual increases, was the result of a total
contribution to Loan Loss Reserves of $6,153,000 made in the second and
fourth quarters, which was required to recognize the increased risk exposure
in a small number of sizeable loans in the Bank's portfolio. This action
resulted in the operating loss for 1997.
In 1996, earnings were $3,401,000, an increase of 10.9% over 1995. Earnings
per share in 1997 were ($.10), a decrease of 104.5% as compared to earnings
of $2.20 per share in 1996 which in turn was an increase of 14.0% from 1995.
The Company paid cash dividends of $.39 per share in 1995, $.40 per share in
1996 and $.42 in 1997, and 5% stock dividends in 1995, 1996 and 1997.
Earnings per share have been adjusted retroactively to reflect the stock
dividends.
The increase in the Company's net interest income from 1995 to 1997
(excluding the significant 1997 contributions to Loan Loss Reserves)
generally reflects an increase in the volume of interest-earning assets and
the economic recovery in Northern California.
Certain information concerning the Company's average balances, yields and
rates on average interest-earning assets and interest-bearing liabilities is
set forth in the table that follows.
The Company's average interest-earning assets increased from $175,020,000 in
1995, to $201,233,000 in 1996, and to $243,808,000 in 1997, while the average
yield on these assets declined in 1996 to 10.22% from 10.86% in 1995, and
decreased in 1997 to 9.59%. Average interest-bearing liabilities, consisting
of interest paid on interest-bearing deposits, increased from $141,339,000 in
1995, to $162,582,000 in 1996, and $198,616,000 in 1997, while the average
rate paid on these deposits was 4.47%, 4.58% and 4.68% respectively. The
increase in interest rates on deposits is reflective of the increase in
market rates.
Noninterest-bearing demand accounts, consisting primarily of business
checking accounts, have increased from $35,864,000 in 1995, to $40,128,000 in
1996, and to $49,283,000 in 1997. The increase in both interest-bearing and
noninterest-bearing deposits from 1996 to 1997, reflects the opening of the
Bank's new office in Wheatland, California, the marketing efforts of the
Bank, and the acquisition of deposits resulting from branch consolidations
and closings in the Company's market area by large national banks.
Management believes that the Company has adequate liquidity to meet its
needs, such as funding the undisbursed portion of borrower's lines of credit,
withdrawals by depositors, managing interest and market rate risk in the
event of significant changes in interest rates, and meeting its cash needs.
Federal Funds Sold is the means by which the Company invests its excess cash
overnight with other banks.
- 26 -
AVERAGE BALANCE SHEETS
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST AVERAGE YIELD/ INTEREST
BALANCE RATE AMOUNT BALANCE RATE AMOUNT BALANCE RATE AMOUNT
--------------------------------- --------------------------------- ---------------------------------
ASSETS
Earning Assets
Short-term investments:
Federal funds sold $ 29,191,325 5.39% $ 1,573,312 $ 27,962,872 5.30% $ 1,482,801 $ 12,305,263 5.73% $ 705,422
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Total 29,191,325 5.39% 1,573,312 27,962,872 5.30% 1,482,801 $ 12,305,263 5.73% $ 705,422
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Investment securities:
Taxable 35,319,174 6.55% 2,313,612 20,654,011 7.70% 1,591,086 26,081,024 6.99% 1,823,710
Nontaxable 5,202,958 5.28% 274,620 4,322,277 6.36% 274,808 4,741,005 6.61% 313,293
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Total 40,522,132 6.39% 2,588,232 24,976,288 7.47% 1,865,894 30,822,029 6.39% 2,137,003
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Loans: 174,094,049 11.04% 19,231,028 148,293,868 11.62% 17,226,138 131,892,742 12.25% 16,160,409
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Total earning assets 243,807,506 9.59% 23,392,572 201,233,028 10.22% 20,574,833 175,020,034 10.86% 19,002,834
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Allowance for
possible loan losses (4,137,285) (3,952,228) (3,592,222)
Nonearning assets
Cash and due from banks 16,352,541 13,751,241 11,579,838
Premises and equipment 7,944,483 6,769,581 6,214,843
Other 9,641,086 7,140,684 7,225,503
------------ ------------ ------------
Total nonearning assets 33,938,110 27,661,506 25,020,184
Total assets $273,608,331 $224,942,306 $196,447,996
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing deposits:
Demand, savings and
money market $104,673,000 3.73% $ 3,904,112 $ 92,765,254 3.80% $ 3,524,331 $ 87,893,048 3.65% $ 3,211,937
Time certificates 93,321,953 5.74% 5,360,741 68,959,042 5.64% 3,891,406 52,245,879 5.82% 3,041,354
Other 621,054 3.84% 23,841 858,176 3.86% 33,161 1,200,548 5.27% 63,303
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Total 198,616,007 4.68% 9,288,694 162,582,472 4.58% 7,448,898 141,339,475 4.47% 6,316,594
------------ ------ ----------- ------------ ------ ------------ ------------ ------ -----------
Noninterest-bearing deposits
and other liabilities:
Demand,
noninterest-bearing 49,283,416 40,127,679 35,863,668
Other liabilities 3,017,102 1,881,981 1,768,835
Shareholders' equity 22,691,806 20,350,174 17,476,018
------------ ------------ ------------
Total 74,992,324 62,359,834 55,108,521
------------ ------------ ------------
Total liabilities and
shareholders' equity $273,608,331 $224,942,306 $196,447,996
------------ ------------ ------------
------------ ------------ ------------
Net interest income $ 14,103,878 $ 13,125,935 $12,686,240
Net interest margin 4.91% 5.64% 6.39%
------ ------ ------
NET INTEREST INCOME
Net interest income, the difference between interest earned on loans and
investments and the interest paid on deposits and other sources of funds, is
the principal component of the Company's earnings. The preceding table shows
the composition of average earning assets and average interest-bearing
liabilities, average yields and rates, and the Company's net interest margin.
Interest income increased from $19,003,000 in 1995, to $20,575,000 in 1996,
and $23,393,000 or 8.27% in 1997 and 13.70% in 1997. The average interest
rate earned on loans was 11.04% in 1997, versus 11.62% in 1996 and 12.25% in
1995. The Company's loan portfolio consists mainly of loans that reprice
immediately with changes in the bank reference rate and, therefore, closely
follow interest rate trends. The increase in interest income in 1997 is a
result of the increase in the volume of interest-earning assets as both
average yield and the net interest margin decreased.
- 27 -
Average Federal Funds Sold were $12,305,000 in 1995, $27,963,000 in 1996, and
$29,191,000 in 1997, representing increases of 127% in 1996 and 4.39% in
1997. The increase in Federal Funds Sold in 1997 is due to an increase in
both interest- and noninterest-bearing deposits of $29,039,000.
Total interest expense increased from $6,317,000 in 1995, to $7,449,000 in
1996, and to $9,289,000 in 1997, or an increase of 17.9% in 1996, and 24.7%
in 1997. The volume of average interest-bearing liabilities increased by
22.2% in 1997 and 15.0% in 1996. The increase in the Company's cost of funds
is due to increases in both volume and rate.
The Company's net yield on interest-earning assets is affected by changes in
the rates earned and paid and the volume of interest-earning assets and
interest-bearing liabilities. The impact of changes in volume and rate on net
interest income in 1997 and 1996 is shown in the following table. Changes
attributable to both volume and rate have been allocated to rate.
CHANGES IN VOLUME/RATE
1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------------------ ---------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- --------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Federal funds sold $ 65 $ 25 $ 90 $ 897 $ (119) $ 778
Investment securities:
Taxable 1,129 (406) 723 (379) 146 (233)
Nontaxable 56 (56) - (28) (10) (38)
Loans 2,998 (993) 2,005 2,009 (943) 1,066
--------- ----------- --------- -------- ---------- ----------
Total $ 4,248 $ (1,430) $ 2,818 $ 2,499 $ (926) $ 1,573
--------- ----------- --------- -------- ---------- ----------
--------- ----------- --------- -------- ---------- ----------
Demand, savings and
money market 453 (73) 380 178 134 312
Time certificates 1,374 96 1,470 973 (123) 850
Other (9) 0 (9) (18) (12) (30)
--------- ----------- --------- -------- ---------- ----------
Total $ 1,818 $ 23 $ 1,841 $ 1,133 $ (1) $ 1,132
--------- ----------- --------- -------- ---------- ----------
Increase (decrease)
in net interest income $ 2,430 $ (1,453) $ 977 $ 1,366 $ (925) $ 441
--------- ----------- --------- -------- ---------- ----------
--------- ----------- --------- -------- ---------- ----------
LOANS
Outstanding total loans averaged $174,094,000 in 1997, as compared to
$148,294,000 in 1996 and $131,893,000 in 1995. This represents increases of
$25,800,000 or 17.4% in 1997, $16,401,000 or 12.4% in 1996, and $12,937,000
or 10.9% in 1995. The Company continues to emphasize its agricultural, real
estate and commercial lending activities. In addition, with the acquisition
of EPI in October of 1996, the Company has increased its lending activity in
the commercial lease market. The increase in average total loans during 1997
primarily reflects increases in lease financing and the commercial and
agricultural loan category. The Company originates commercial and industrial
equipment leases through the Bank's subsidiary, EPI. The average yield on
leases is in excess of 10%. The increase in commercial and agricultural loans
is attributable to increased market share in the Sacramento and San Joaquin
Valleys.
The following table summarizes the composition of the loan portfolio as of
December 31 for the years indicated:
COMPOSITION OF LOAN PORTFOLIO
1997 1996 1995 1994 1993
Commercial and agricultural $ 79,384,520 $ 71,527,482 $ 74,355,093 $ 69,143,245 $ 51,166,003
Real estate-construction 23,927,538 29,916,204 18,048,005 12,647,669 15,619,506
Real estate-mortgage 28,032,552 28,564,640 28,288,337 33,450,751 37,435,688
Consumer 1,956,254 2,983,939 2,814,717 3,111,243 2,923,728
Lease financing 33,465,023 15,892,783 3,216,140 6,501,110 23,844
Other 1,021,665 2,214,574 1,522,174 3,109,201 464,524
--------------- --------------- --------------- -------------- --------------
Total $ 167,787,552 $ 151,099,622 $ 128,244,466 $ 127,963,219 $ 107,633,293
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
- 28 -
The Company lends to consumers, small- to medium-sized businesses and small-
to medium-sized farmers within its market area, which is comprised
principally of Sutter, Yuba, Colusa and Yolo counties and, secondarily,
Butte, Glenn, Sacramento, Placer, Madera and Fresno counties.
A significant portion of the Company's loan portfolio consists of loans
secured by residential, commercial and agricultural real estate.
Real estate mortgage and construction loans, including loans secured by
agricultural real estate, equaled $51,960,000 or 31% and $58,481,000 or 38.7%
of the total loan portfolio at December 31, 1997 and 1996, respectively.
These loans are secured by real estate, and advances are limited to 65% to
80% of appraised value depending on the type of loan.
The Company makes agricultural production loans and other agricultural loans
that are secured by crops and crop proceeds. These loans generally are at
their peak in the third quarter of each year. The Company had $30,132,000 or
18.0% and $46,786,000 or 31.0% of its loan portfolio in agricultural
production loans outstanding at December 31, 1997 and 1996, respectively.
Approximately 4% of these loans are guaranteed by the Farm Service Agency.
The Company originates mortgage loans on residential and agricultural
properties which it sells into the secondary market to divest itself of the
interest rate risk associated with these mostly fixed-interest rate products.
The Company accounts for these loans in accordance with Statement of
Financial Accounting Standards No. 125 "Accounting for Transfers of Financial
Assets and Extinguishment of Liabilities."
As of December 31, 1997, 1996 and 1995, total loans serviced by the Company
were $151,619,000, $107,637,000 and $107,142,000. Total loans sold by the
Company were $66,953,000 in 1997, and $45,614,000 in 1996, an increase of
31.9%. Total loans sold in 1995 were $8,735,000. The significant increase in
loans sold in 1996 is a function of an increase in demand for these loan
products coupled with a change in the procedures regarding the sale of Farmer
Mac loans. The Farmer Mac secondary market began purchasing farm mortgage
loans directly from originators during 1996 thus making it easier and less
time consuming for the Company to sell these loans. The increase in loans
sold in the secondary market during 1997 is attributed to an increase in the
demand for these products, as well as a conscious effort by the Company to
aggressively pursue new mortgage loan business. The Company moderately
expanded its mortgage origination departments during 1997.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the relationship between market interest rates
and net interest income due to the repricing characteristics of assets and
liabilities. If more liabilities than assets reprice in a given period (a
liability sensitive position), market interest rate changes will be reflected
more quickly in liability rates. If interest rates decline, a liability
sensitive position will benefit net income. Alternatively, where assets
reprice more quickly than liabilities in a given period (an asset sensitive
position), a decline in market rates will have an adverse effect on net
interest income.
Management's objective is to maintain the stability of the net interest
margin in times of fluctuating interest rates by maintaining an appropriate
mix of interest rate sensitive assets and liabilities.
Management does not manage its interest rate sensitivity to maximize income
based on its prediction of interest rates, but rather to minimize interest
rate risk to the Company by stabilizing the Company's net interest margin in
all interest rate environments.
The following table presents the interest rate sensitivity of the Company as
of December 31, 1997.
INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 1997
REPRICING OPPORTUNITY
0-90 91-365 1 YEAR- OVER
DAYS DAYS 3 YEARS 3 YEARS TOTAL
(DOLLARS IN THOUSANDS)
Federal funds sold $ 35,600 $ - $ - $ - $ 35,600
Loans 109,932 10,951 14,207 32,698 167,788
Taxable investments - 4,620 9,819 35,780 50,219
Nontaxable investments - 2,370 1,960 2,649 6,979
----------- ----------- ----------- ----------- -----------
Total earning assets $ 145,532 $ 17,941 $ 25,986 $ 71,127 $ 260,586
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Interest-bearing demand 40,133 - - - 40,133
Savings and money market deposits 68,790 - - - 68,790
Time certificates 33,273 49,031 9,378 4,102 95,784
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 142,196 49,031 9,378 4,102 204,707
----------- ----------- ----------- ----------- -----------
Gap $ 3,336 $ (31,090) $ 16,608 $ 67,025 $ 55,879
----------- ----------- ----------- ----------- -----------
Cumulative gap 3,336 (27,754) (11,146) 55,879
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- 29 -
Additionally, the Company is subject to considerable competitive pressure in
generating deposits and loans at rates and terms prevailing in the Company's
market areas.
Management has developed a matrix that calculates pre-tax impact on earnings
as determined by its gap position. The analysis takes into consideration
delays in the timing of repricing based on actual experience. The matrix is
of a static nature and assumes that Management and market forces effect no
changes and leave the rate-sensitive balance sheet virtually unchanged.
On December 31, 1997, the matrix indicates that if interest rates increased
by 100 basis points, the Company's one-year pre-tax earnings would increase
by $409,000. Conversely, if the interest rates decreased by 100 basis points,
one-year pre-tax earnings would decrease by $409,000.
QUALITY OF LOANS
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan
extended and the creditworthiness of the borrower. To reflect the estimated
risks of loss associated with its loan portfolio, provisions are made to the
Company's allowance for loan losses. As an integral part of this process, the
allowance for loan losses is subject to review and possible adjustment as a
result of regulatory examinations conducted by governmental agencies and
through Management's assessment of risk.
The Company uses the allowance method in providing for loan losses. Loan
losses are charged to the allowance for loan losses and recoveries are
credited.
The allowance for loan losses at December 31, 1997, was $5,514,000 or 3.29%
of total loans outstanding as compared to $4,053,000 or 2.68% of total loans
outstanding at December 31, 1996. Management, after a third party loan review
and thorough examinations by the FDIC and State Banking department, believes
that the allowance for loan losses at December 31, 1997, was adequate to
provide for losses that can be reasonably anticipated.
Additions to the allowance for loan losses are made by provisions for
possible loan losses. The provision for possible loan losses is charged to
operating expense and is based upon past loan loss experience and estimates
of potential losses which, in Management's judgment, deserve current
recognition. Management determines the appropriate size of the allowance for
loan losses based upon specific allocations for classified and impaired loans
and a general allocation for other loans based upon the loss experience
during the past twelve rolling months for each particular type of loan. Other
factors considered by Management include growth, composition and overall
quality of the loan portfolio, and current economic conditions that may
affect the borrower's ability to pay. Actual losses may vary from current
estimates. The estimates are reviewed periodically, and adjustments, as
necessary, are charged to operations in the period in which they became known.
The trend in nonperforming loans has escalated over the past year as
nonperforming loans increased from 2.0% of the portfolio on December 31,
1996, to 4.8% of the portfolio on December 31, 1997. This trend is primarily
attributable to increased credit risk exposure in five loan relationships.
Upon identifying the increased level of credit risk exposure, Management
determined that additional contributions to Loan Loss Reserves were
necessary. Management allocated to Loan Loss Reserves $3,200,000 during the
second quarter of 1997 and $2,817,000 during the fourth quarter of 1997.
As a result, Management believes that the total allowance for loan losses is
adequate, particularly when considering the Company's historically low level
of loan losses. While Management uses available information to provide for
loan loss reserve allocations, future additions to the allowance may be
necessary based upon changes in economic conditions and other variables.
ACTIVITY IN ALLOWANCE FOR LOAN LOSSES
1997 1996 1995 1994 1993
---------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Total loans outstanding $ 167,788 $ 151,100 $ 128,244 $ 127,963 $ 107,633
Average net loans 169,957 148,294 131,893 118,956 115,394
BALANCE, JANUARY 1 4,053 3,911 3,288 3,087 3,320
Charge-offs by loan category:
Commercial and other 4,311 323 413 29 133
Consumer 73 - 46 43 8
Real Estate 335 4 96 125 300
--------- ----------- ----------- ----------- -----------
Total 4,719 327 555 197 441
--------- ----------- ----------- ----------- -----------
Recoveries by loan category:
Commercial and other 19 53 249 48 18
Consumer 3 31 44 3 5
Real Estate 5 - 10 - 30
--------- ----------- ----------- ----------- -----------
Total 27 84 303 51 53
--------- ----------- ----------- ----------- -----------
CONTINUED ON NEXT PAGE
- 30 -
ACTIVITY IN ALLOWANCE FOR LOAN LOSSES CONTINUED
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net charge-offs (recoveries) $ 4,692 $ 243 $ 252 $ 146 $ 388
Provision charged to expense 6,153 385 875 347 155
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31 $ 5,514 $ 4,053 $ 3,911 $ 3,288 $ 3,087
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Ratios:
Net charge-offs (recoveries)
to average loans 2.70% 0.16% 0.19% 0.12% 0.34%
Allowance to loans at end of year 3.29% 2.68% 3.05% 2.57% 2.87%
ALLOWANCE FOR LOAN LOSSES
The Company had loan charge-offs of $4,719,000 in 1997, $327,000 in 1996, and
$555,000 in 1995, and net loan charge-offs (which include recoveries) of
$4,692,000, $243,000 and $252,000 in 1997, 1996 and 1995, respectively. These
net charge-offs are equal to 2.70%, .16% and .19% of average loans for 1997,
1996 and 1995. In the second quarter, the Company made a contribution of
$3,200,000. In the fourth quarter, the Company made an additional
contribution of $2,817,000 to Loan Loss Reserves to recognize current credit
risk exposure and planned loan growth.
The charged-off loans and leases sustained during 1997 were centered in five
credit relationships and a group of twenty-two leases. This grouping of
credits comprised 93% of total loan and lease losses. Of the five loans, two
were agricultural loans (total charge-off of $2,218,260), two were commercial
loans (total charge-off of $1,406,253) and one was a real estate development
loan (total charge-off of $343,424). The aggregate lease losses totaled
$401,921.
The Company is taking all reasonable measures to attempt recovery of these
charged-off loans and leases but there can be no assurance that the Company
will recover the full amount.
- 31 -
ALLOCATION OF ALLOWANCE
1997 1996 1995 1994 1993
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
-------------- -------------- -------------- -------------- ---------------
$ % $ % $ % $ % $ %
------ ------- ------ ------- ------- ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
LOANS IN EACH CATEGORY
TO TOTAL LOANS
Balance applicable to:
Commercial and
agricultural $3,423 62.07% 1,918 47.34% 2,267 57.98% $1,776 54.03% $1,467 47.54%
Real Estate-
construction 897 16.28% 802 19.80% 550 14.07% 325 9.88% 448 14.51%
Real Estate-mortgage 392 7.11% 766 18.90% 863 22.06% 860 26.14% 1,074 34.78%
Consumer 31 0.56% 80 1.97% 86 2.19% 80 2.43% 84 2.72%
Leases 656 11.89% 364 8.97% - - - - - -
Other 115 2.09% 123 3.02% 145 3.70% 247 7.52% 14 .45%
------ ------- ------ ------- ------- ------- ------ ------- ------ -------
Total $5,514 100.00% $4,053 100.00% $3,911 100.00% $3,288 100.00% $3,087 100.00%
------ ------- ------ ------- ------- ------- ------ ------- ------ -------
------ ------- ------ ------- ------- ------- ------ ------- ------ -------
NONPERFORMING LOANS
Loans accounted for on
a nonaccrual basis $7,585 $ 846 $ 293 $1,110 $1,355
Other loans contractually
past due 90 days or more 328 2,202 60 50 317
------ ------ ------- ------ ------
Total $7,913 $3,048 $ 353 $1,160 $1,672
------ ------ ------- ------ ------
------ ------ ------- ------ ------
- 32 -
Any allocation or breakdown in the allowance for loan losses lends an
appearance of exactness that does not exist. Thus, the allocation above
should not be interpreted as an indication of expected amounts or categories
where charge-offs will occur. The allocation of the allowance for loan losses
as of the end of the last five fiscal years is summarized in the table above.
NONPERFORMING LOANS
Loans are generally placed on nonaccrual status when they are 90 days past
due as to either interest or principal. At that time, any accrued but
uncollected interest is reversed, and additional income is recorded on a cash
basis as payments are received. However, loans that are in the process of
renewal in the normal course of business, or are well-secured and in the
process of collection, may not be placed on nonaccrual status, at the
discretion of Management. A nonaccrual loan may be restored to an accrual
basis when interest and principal payments are current and the prospects for
future payments are no longer in doubt.
At December 31, 1997, nonaccrual loans amounted to $7,585,000 or 4.5% of
total loans compared to $846,000 or .56% of total loans at December 31, 1996,
and $293,000 or .23% of total loans at December 31, 1995.
A significant increase in nonaccrual loans was sustained at December 31,
1997. The Company's nonaccrual assets included twelve loan relationships and
ten leases. However, 92% of these nonaccrual loans were concentrated in five
credit relationships. The largest nonaccrual loan complex is an agricultural
loan. Nonaccrual loans to this borrower comprised forty-two percent of the
Company's total nonaccrual loans as of December 31, 1997. The Company is
presently in negotiation with this debtor to create a plan for debt
repayment. In the event these negotiations are unsuccessful, alternative
measures will be pursued. Twenty-one percent of the Company's nonaccrual
loans were extended to a real estate developer. The Company has restructured
this credit relationship and expects to collect these loans over a two-year
period. Nineteen percent of the Company's nonaccrual loans existed in a loan
to a livestock producer. The Company has entered into an arrangement with
this borrower to restructure the repayment terms and the remaining nonaccrual
balance is scheduled to be repaid during the second quarter of 1998. The
remaining balance of the December 31, 1997, nonaccrual loans is distributed
amongst a number of smaller loans and leases. These loans are either in the
process of collection or in the process of being restructured.
Loans on accrual status that were past due 90 days or more as to principal
and interest decreased in 1997 to $328,281 as compared to $2,202,000 on
December 31, 1996, and $60,000 on December 31, 1995. The significant decrease
in 90-day delinquencies as of December 31, 1997 is a positive development.
However, the past due loan totals as of December 31, 1996 were high due to
some special circumstances surrounding certain loans at that time. Management
believes that this category of delinquency returned to normal levels at
December 31, 1997. Six loans and four leases comprised the 90-day delinquent
balance of $328,281 as of December 31, 1997. The loans consisted primarily of
commercial credits that were either in the process of collection or renewal.
The Company is negotiating with these borrowers to fully collect the balances
owed. The four delinquent leases as of December 31, 1997, amounted to
$109,243 or 33% of the total 90-day delinquencies. All of these leases were
purchased from two nonaffiliated leasing companies from which the Company
purchases leases. The Company is in the process of collecting these leases
through either borrower performance or lease liquidation.
INVESTMENTS
In 1997, the Company's investment portfolio was $57,198,000 or 19.5% of total
assets, an increase from $34,664,000 or 13.2% of total assets in 1996, and
from $27,428,000 or 12.8% of total assets in 1995. At December 31, 1997, 1996
and 1995, Federal Funds Sold were $35,600,000, $41,300,000 and $30,000,000,
respectively. Federal Funds Sold are overnight deposits with other banks. In
1997, the increase in investment securities was due to the transfer of funds
from overnight funds to longer term investments that yield a higher rate. In
addition, the increase in the investment portfolio was due to deposits
growing at a faster pace than loans. In 1996, the increase in investment
securities and Federal Funds Sold represent the investment of additional cash
as growth in deposits exceeded the growth in loans.
Under Statement of Financial Accounting Standard No. 115 (SFAS 115),
investments of a bank in debt and equity securities must be classified in
three different categories: "Trading," "Available-for-Sale," and
"Held-to-Maturity," and there are different accounting methods for each
category. The Company has classified all of its investment securities as
either "Available-for-Sale" or "Held-to-Maturity." SFAS 115 requires that any
unrealized gain or loss of the "Available-for-Sale" category be reported as
an adjustment to the Company's equity capital, even though this gain or loss
would only be realized if the investment were actually sold.
If the investment is in the "Held-to-Maturity" category, no unrealized gains
or losses need be reported.
- 33 -
The following table summarizes the distribution of the Company's investment
securities as of December 31, 1997 and 1996.
INVESTMENTS
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
December 31, 1997 Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $38,044,044 $ 26,287 $(28,474) $38,041,857
----------- -------- --------- -----------
----------- -------- --------- -----------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 10,751,994 49,638 (1,050) 10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 - 7,012,911
Corporate obligations and other securities 1,424,875 6,765 - 1,431,640
----------- -------- --------- -----------
Total $19,156,186 $ 89,997 $ (1,050) $19,245,133
----------- -------- --------- -----------
----------- -------- --------- -----------
December 31, 1996 Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $11,405,179 $ 5,915 $(36,631) $11,374,463
----------- -------- --------- -----------
----------- -------- --------- -----------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 15,720,573 140,302 (1,158) 15,859,717
Obligations of states and political subdivisions 3,576,412 92,434 (22,159) 3,646,687
Corporate obligations and other securities 3,992,185 27,109 - 4,019,294
----------- -------- --------- -----------
Total $23,289,170 $259,845 $(23,317) $23,525,698
----------- -------- --------- -----------
----------- -------- --------- -----------
As of December 31, 1997, the Company's "Available-for-Sale" category
adjustment reflected a net unrealized loss of $1,202 net of taxes, and the
approximate market value of the Company's total investment portfolio was
$57,287,000, reflecting an unrealized gain of $86,760.
As of December 31, 1996, the Company's "Available-for-Sale" category
adjustment reflected a net unrealized loss of $18,000 net of taxes, and the
approximate market value of the Company's total investment portfolio was
$34,900,000, reflecting an unrealized gain of $206,000.
The Company had investment securities pledged as collateral for certain
deposits, typically deposits of government entities of $11,652,000,
$10,375,000, and $10,410,000 at December 31, 1997, 1996 and 1995,
respectively.
FUNDING
Total deposits at December 31, 1997, 1996 and 1995 were $266,931,000,
$237,892,000 and $193,296,000, an increase of $29,039,000 or 12.2% during
1997 and $44,596,000 or 23.1% during 1996. Average total deposits were
$247,899,000 in 1997, $202,710,000 in 1996 and $177,203,000 in 1995. The
increase in deposits in 1997 and 1996 reflects both normal growth and the
acquisition of deposits resulting from branch consolidations and closings in
the Company's market area by large statewide banks. In addition, 1997
reflects deposits gained from a newly opened branch. Average deposits in time
certificates increased from $52,246,000 in 1995 to $68,959,000 or 31.99% in
1996, and to $93,322,000 or 35.3% in 1997. The increase in 1996 primarily
reflects the acquisition of new deposits, and depositors shifting funds from
other interest-bearing accounts at the Company to higher yielding time
certificates. The Company has been able to attract deposits by providing
interest rates on deposits competitive with other financial institutions in
its market area.
The table below sets forth information for the last three fiscal years
regarding the Company's average deposits and the average rate paid on each of
the deposit categories.
- 34 -
AVERAGE DEPOSITS
1997 1996 1995
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Demand, noninterest-bearing $49,283 - $40,128 - $35,864 -
Demand, savings, and
money market, interest-bearing 104,673 3.73% 92,765 3.80% 87,893 3.65%
Time certificates 93,322 5.74% 68,959 5.64% 52,246 5.82%
The remaining maturities of the Company's certificates of deposit in amounts
of $100,000 or more, including public time deposits, as of December 31, 1997,
are indicated in the table. Interest expense on these certificates of deposit
totaled $2,187,000 in 1997.
MATURITY OF CERTIFICATES OF DEPOSITS $100,000 OR MORE
DECEMBER 31, 1997
-----------------------
(DOLLARS IN THOUSANDS)
Three months or less $14,692
Over three months through twelve months 20,714
Over one year through three years 3,558
Over three years 1,798
-------
Total $35,406
-------
-------
NONINTEREST INCOME
Noninterest income for 1997 was $5,057,000 an increase of 61.3% and for 1996
was $3,136,000 an increase of 40.8%.
The table below sets forth the components of noninterest income for the years
indicated:
NONINTEREST INCOME
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on
deposit accounts $1,009 $ 917 $ 859
Service charges and
fees on loans 572 487 482
Brokered loan fees 1,028 557 348
Gains on sale of OREO 11 240 31
Lease commissions 1,671 271 -
Other 766 664 507
------ ------ ------
Total $5,057 $3,136 $2,227
------ ------ ------
------ ------ ------
Service charges and fees on deposit accounts, one of the primary components
in noninterest income, increased in 1997 to $1,009,000 or 10.0% over the 1996
amount of $917,000. This additional income was due to increased activity in
both years. Loan servicing fees in 1997 were $572,000, and $487,000 in 1996.
Brokered loan fees, another primary source of noninterest income, were
$1,028,000 in 1997, an increase of 84.7% over 1996, a result of increased
business volume in both residential and agricultural mortgage loans and EPI
brokered commissions. Brokered loan fees in 1996 were $557,000, an increase
of 60% over 1995. This was the result of a higher volume of residential and
agricultural mortgage loans sold into the secondary market, the sale of a
significant portion of these loans on a servicing released basis, and EPI
brokered commission income. In 1997, the Company's gain on sale of OREO was
$11,184 versus $240,000 in 1996. In both years, the gain on sale of OREO
reflects the market value compared to the book value of the real estate
property at the time the asset was sold.
Lease commissions increased to $1,671,000 or 519% over 1996 commissions of
$271,000. This increase was due to a higher volume of leases by the Bank's
subsidiary, EPI. The Bank purchased EPI in October 1996, therefore,
commissions income was reported for three months in 1996 compared to twelve
months of income in 1997.
NONINTEREST EXPENSE
1997
-----------------------------------
PERCENTAGE
OF AVERAGE
AMOUNT EARNING ASSETS
---------- ------------------
(DOLLARS IN THOUSANDS)
Salaries and benefits $ 7,768 3.86%
Occupancy 735 0.37%
Equipment 1,293 0.64%
Advertising and promotion 370 0.18%
Stationery and supplies 310 0.15%
Telephone expense 395 0.20%
Directors fees 219 0.11%
Other 2,492 1.24%
------- -----
Total $13,582 6.75%
------- -----
------- -----
1996
-----------------------------------
Salaries and benefits $ 5,513 2.74%
Occupancy 572 0.28%
Equipment 998 0.50%
Advertising and promotion 342 0.17%
Stationery and supplies 253 0.13%
Telephone expense 236 0.12%
Directors fees 391 0.19%
Other 1,964 0.97%
------- -----
Total $10,269 5.10%
------- -----
------- -----
CONTINUED ON NEXT PAGE
- 35 -
NONINTEREST EXPENSE CONTINUED
1995
-----------------------------------
PERCENTAGE
OF AVERAGE
AMOUNT EARNING ASSETS
---------- ------------------
(DOLLARS IN THOUSANDS)
Salaries and benefits $4,673 2.67%
Occupancy 598 0.34%
Equipment 791 0.45%
Advertising and promotion 286 0.16%
Stationery and supplies 212 0.12%
Telephone expense 184 0.11%
Directors fees 300 0.17%
Other 1,893 1.08%
------ -----
Total $8,937 5.10%
------ -----
------ -----
NONINTEREST EXPENSE
Noninterest expense for 1997 of $13,582,000 increased by 32.3% as compared to
$10,269,000 in 1996, or an increase of 14.9%. Salaries and employee benefits
of $7,768,000 in 1997, $5,513,000 in 1996 and $4,673,000 in 1995 represent
increases of 40.9% and 17.98% in 1997 and 1996, respectively. The increase in
1997 reflects salary and benefit expense for a full twelve months for EPI
Leasing, which was acquired by the Bank in October 1996. This increase in
1997 over 1996 amounted to approximately $1,100,000. The increase in 1996
reflects an increase in employment to accommodate the growth in the Company's
asset size and the addition of 17 employees upon the acquisition of EPI in
October 1996.
In addition, the Bank recognized an increase in salaries due to commissions
paid to its real estate sales staff. The Bank recognized a substantial volume
increase in real estate mortgage refinancing, which in turn increased income
to the Bank and commissions paid to generate that increased volume. The Bank
also restructured its salaries to a level that is competitive with other
banks in its operating areas.
INCOME TAXES
The provision (benefit) for income taxes was ($413,000) in 1997, $2,207,000 in
1996 and $2,036,000 in 1995. The Company's effective tax rate was (71.9)% for
1997, 39.4% for 1996 and 39.9% for 1995.
CAPITAL
Despite a small loss for the year, the Company is well capitalized as defined
by federal banking agencies, with a Total Risk-Based Capital ratio of 10.25%.
The Company maintained this level of capitalization while shareholders'
equity decreased by $516,000 or (2.0)% to $21,370,000 in 1997 and increased
by $3,011,000 or 15.95% to $21,886,000 in 1996, after paying cash dividends
of $.42 and $.40 per share in 1997 and 1996, respectively.
The Company and the Bank are subject to requirements of the Federal Reserve
Board and FDIC, respectively, governing capital adequacy. These guidelines
are intended to reflect the degree of risk associated with both on- and
off-balance sheet items. Financial institutions are expected to comply with a
minimum ratio of qualifying total capital to risk-weighted assets of 8%, at
least half of which must be in Tier 1 Capital.
Federal regulatory agencies have also adopted a minimum leverage ratio of 4%,
which is intended to supplement the risk-based capital requirements and to
ensure that all financial institutions continue to maintain a minimum level
of core capital.
The risk-based and leverage-capital ratios for the Company and the Bank at
December 31, 1997, are set forth below. Both the Company and the Bank exceed
the minimum capital requirements.
CAPITAL RATIO
RISK-BASED CAPITAL RATIO AS OF DECEMBER 31, 1997
COMPANY BANK
AMOUNT RATIO AMOUNT RATIO
----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Tier 1 Capital $ 21,151 8.99% $ 21,040 8.96%
Tier 1 Capital minimum requirement 9,413 4.00% 9,390 4.00%
-------- ------ -------- ------
Excess $ 11,738 4.99% $ 11,650 4.96%
-------- ------ -------- ------
-------- ------ -------- ------
Total Capital 24,124 10.25% 24,006 10.23%
Total Capital minimum requirement 18,826 8.00% 18,780 8.00%
-------- ------ -------- ------
Excess $ 5,298 2.25% $ 5,226 2.23%
-------- ------ -------- ------
-------- ------ -------- ------
Risk-adjusted assets $235,330 $234,750
-------- --------
-------- --------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly average total assets $ 21,151 7.43% $ 21,040 7.40%
Minimum leverage requirement 11,384 4.00% 11,377 4.00%
-------- ------ -------- ------
Excess $ 9,767 3.43% $ 9,663 3.40%
-------- ------ -------- ------
-------- ------ -------- ------
Total quarterly average assets $284,598 $284,423
-------- --------
-------- --------
INFLATION
It is Management's opinion that the effects of inflation on the Company's
financial statements for the years ended December 31, 1997, 1996 and 1995 are
not material.
- 36 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF CALIFORNIA INDEPENDENT BANCORP:
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEETS OF CALIFORNIA
INDEPENDENT BANCORP (A CALIFORNIA CORPORATION) AND SUBSIDIARIES AS OF
DECEMBER 31, 1997 AND 1996, AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997. THESE FINANCIAL STATEMENTS
ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO
EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO
OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE
OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS,
EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS.
AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND
SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL
FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A
REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF CALIFORNIA INDEPENDENT
BANCORP AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996, AND THE RESULTS OF
THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997, IN CONFORMITY WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
/s/ Arthur Andersen LLP
SACRAMENTO, CALIFORNIA
FEBRUARY 13, 1998
- 37 -
CONSOLIDATED FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
ASSETS
Cash and due from banks $ 18,425,047 $ 22,927,881
Federal funds sold 35,600,000 41,300,000
------------ ------------
Cash and cash equivalents 54,025,047 64,227,881
Investment securities held-to-maturity 19,156,186 23,289,170
Investment securities available-for-sale 38,041,857 11,374,463
------------ ------------
Total investments 57,198,043 34,663,633
Loans and leases 131,673,564 134,574,987
Loans held-for-sale 36,113,988 16,524,635
Less - allowance for loan and lease losses (5,514,299) (4,052,783)
------------ ------------
Net loans 162,273,253 147,046,839
Premises and equipment, net 8,177,800 7,420,387
Interest receivable 2,670,933 2,213,083
Other real estate owned 917,535 1,081,620
Other assets 6,266,985 5,948,888
------------ ------------
Total assets $291,529,596 $262,602,331
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 62,224,350 $ 55,117,230
Interest-bearing 204,706,508 182,775,038
------------ ------------
Total deposits 266,930,858 237,892,268
Interest payable 1,814,197 1,406,031
Other liabilities 1,414,227 1,417,852
------------ ------------
Total liabilities 270,159,282 240,716,151
------------ ------------
COMMITMENTS
Shareholders' equity:
Common stock, no par value-
Authorized -- 20,000,000 shares
Issued and outstanding -- 1,651,131 shares in 1997
and 1,623,336 shares in 1996 13,587,419 11,088,190
Retained earnings 7,864,097 10,935,806
Debt guarantee of ESOP (80,000) (120,000)
Net unrealized gain (loss) on securities available-for-sale (1,202) (17,816)
------------ ------------
Total shareholders' equity 21,370,314 21,886,180
------------ ------------
Total liabilities & shareholders' equity $291,529,596 $262,602,331
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
- 38 -
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
--------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans and leases $ 19,231,028 $ 17,226,138 $ 16,160,409
Interest on investments-
Taxable interest income 2,313,613 1,591,086 1,823,710
Nontaxable interest income 274,620 274,808 313,293
Interest on federal funds sold 1,573,312 1,482,801 705,422
--------------- -------------- --------------
Total interest income 23,392,573 20,574,833 19,002,834
--------------- -------------- --------------
INTEREST EXPENSE
Interest on deposits 9,264,853 7,415,738 6,253,291
Interest on other borrowings 23,841 33,160 63,303
--------------- -------------- --------------
Total interest expense 9,288,694 7,448,898 6,316,594
--------------- -------------- --------------
Net interest income 14,103,879 13,125,935 12,686,240
PROVISION FOR LOAN LOSSES 6,153,000 385,000 875,000
--------------- -------------- --------------
Net interest income after provision for loan losses 7,950,879 12,740,935 11,811,240
--------------- -------------- --------------
NONINTEREST INCOME
Service charges on deposit accounts 1,008,691 917,466 859,329
Lease commissions 1,670,636 271,070 -
Brokered loan fees 1,028,550 557,007 347,466
Other 1,349,407 1,390,880 1,020,172
--------------- -------------- --------------
Total noninterest income 5,057,284 3,136,423 2,226,967
--------------- -------------- --------------
NONINTEREST EXPENSE
Salaries and employee benefits 7,768,328 5,512,769 4,672,500
Occupancy expense 734,772 572,532 598,127
Furniture and equipment expense 1,293,088 998,145 791,141
Other 3,786,305 3,186,083 2,874,717
--------------- -------------- --------------
Total noninterest expense 13,582,493 10,269,529 8,936,485
--------------- -------------- --------------
Income (loss) before provision for income taxes (574,330) 5,607,829 5,101,722
PROVISION (BENEFIT) FOR INCOME TAXES (412,900) 2,206,778 2,036,000
--------------- -------------- --------------
NET INCOME (LOSS) $ (161,430) $ 3,401,051 $ 3,065,722
--------------- -------------- --------------
--------------- -------------- --------------
PER SHARE AMOUNTS
Basic earnings per share $ (0.10) $ 2.20 $ 1.93
--------------- -------------- --------------
--------------- -------------- --------------
Diluted earnings per share $ (0.10) $ 2.07 $ 1.80
--------------- -------------- --------------
--------------- -------------- --------------
Cash dividends per common share and common share equivalent $ .42 $ .40 $ .39
--------------- -------------- --------------
--------------- -------------- --------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,577,249 1,638,996 1,710,948
--------------- -------------- --------------
--------------- -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
- 39 -
CONSOLIDATED FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------------------------------
DEBT NET
GUARANTEE UNREALIZED
OF GAIN/(LOSS)
EMPLOYEE ON
COMMON STOCK STOCK SECURITIES
------------------------ RETAINED OWNERSHIP AVAILABLE-
SHARES AMOUNT EARNINGS PLAN FOR-SALE TOTAL
--------- ----------- ------------ ----------- ----------- -----------
BALANCE DECEMBER 31, 1994 1,361,116 $ 7,879,247 $ 8,533,365 $ - $(159,419) $16,253,193
5% stock dividend with cash paid
in lieu of fractional shares 67,610 1,267,687 (1,276,762) - - (9,075)
ESOP loan - - - (200,000) - (200,000)
Reduction of ESOP debt - - - 40,000 - 40,000
Options exercised 19,487 40,424 - - - 40,424
Shares surrendered from exercise of options (1,325) (25,837) - - - (25,837)
Tax benefit arising from exercise of
nonqualified stock options and
disqualifying dispositions - 142,320 - - - 142,320
Cash dividends - - (615,787) - - (615,787)
Change in net unrealized gain on
securities held as available-for-sale - - - - 184,409 184,409
Net income - - 3,065,722 - - 3,065,722
--------- ----------- ------------ ----------- ----------- -----------
BALANCE DECEMBER 31, 1995 1,446,888 $ 9,303,841 $ 9,706,538 $(160,000) $ 24,990 $18,875,369
5% stock dividend with cash paid
in lieu of fractional shares 72,050 1,513,050 (1,523,842) - - (10,792)
Reduction of ESOP debt - - - 40,000 - 40,000
Options exercised 28,253 60,218 - - - 60,218
Shares surrendered from exercise of options (1,159) (25,208) - - - (25,208)
Tax benefit arising from exercise of
nonqualified stock options and
disqualifying dispositions - 236,289 - - - 236,289
Cash dividends - - (647,941) - - (647,941)
Change in net unrealized loss on
marketable equity securities - - - - (42,806) (42,806)
Net income - - 3,401,051 - - 3,401,051
--------- ----------- ------------ ----------- ----------- -----------
BALANCE DECEMBER 31, 1996 1,546,032 $11,088,190 $10,935,806 $(120,000) $ (17,816) $21,886,180
5% stock dividend with cash paid
in lieu of fractional shares 77,304 2,203,164 (2,218,649) - - (15,485)
Reduction of ESOP debt - - - 40,000 - 40,000
Options exercised 29,857 41,175 - - - 41,175
Shares surrendered from exercise of options (2,062) (57,957) - - - (57,957)
Tax benefit arising from exercise of
nonqualified stock options and
disqualifying dispositions - 312,847 - - - 312,847
Cash dividends - - (691,630) - - (691,630)
Change in net unrealized gain on
marketable equity securities - - - - 16,614 16,614
Net income - - (161,430) - - (161,430)
--------- ----------- ------------ ----------- ----------- -----------
BALANCE DECEMBER 31, 1997 1,651,131 $13,587,419 $ 7,864,097 $ (80,000) $ (1,202) $21,370,314
--------- ----------- ------------ ----------- ----------- -----------
--------- ----------- ------------ ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
- 40 -
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (161,430) $ 3,401,051 $ 3,065,722
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 975,178 776,561 687,353
Provision for losses on other real estate owned 80,389 97,823 178,506
Provision for loan losses 6,153,000 385,000 875,000
Provision for deferred taxes (1,067,925) (103,192) (204,521)
Investment security (gains) losses, net 46,250 (3,470) 12,316
Gain on sale of loans 0 (80,952) (142,270)
(Gain) loss on sale of real estate properties, net (11,363) (240,358) 4,218
Origination of loans held-for-sale (13,160,500) (10,854,337) (19,818,618)
Proceeds from loan sales 12,879,500 28,297,103 20,858,358
(Increase) decrease in assets-
Interest receivable (457,850) (942,215) 751,854
Other assets 799,828 376,548 (4,329,745)
Increase (decrease) in liabilities-
Interest payable 408,166 75,954 789,561
Other liabilities 36,375 383,667 101,212
------------- ------------ -------------
Net cash provided by operating activities 6,469,618 21,569,183 2,828,946
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in loans 7,202,650 (6,956,353) (1,130,175)
Purchase of loans held-for-sale (28,445,574) (33,967,000) -
Purchase of securities held-to-maturity (15,440,977) (11,841,055) (14,561,000)
Purchase of securities available-for-sale (30,986,075) (7,760,490) (3,315,591)
Proceeds from maturity of securities held-to-maturity 19,538,000 10,326,530 6,658,000
Proceeds from sales and maturities of securities available-for-sale 4,325,006 2,000,000 16,771,301
Proceeds from sales of other real estate owned 239,569 489,246 1,370,253
Purchases of premises and equipment (1,732,591) (1,803,261) (954,625)
------------- ------------ -------------
Net cash provided by (used for) investing activities (45,299,992) (49,512,383) 4,838,163
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits $ 7,107,120 $ 11,290,397 $ 1,334,920
Net increase in interest-bearing deposits 21,931,470 33,305,414 16,849,335
Cash dividends (691,630) (647,941) (615,787)
Stock options exercised 296,065 271,299 156,907
Cash paid in lieu of fractional shares (15,485) (10,792) (9,075)
------------- ------------ -------------
Net cash provided by financing activities 28,627,540 44,208,377 17,716,300
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (10,202,834) 16,265,177 25,383,409
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 64,227,881 47,962,704 22,579,295
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 54,025,047 $ 64,227,881 $ 47,962,704
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for-
Interest expense $ 8,969,709 $ 7,352,690 $ 5,463,729
Income taxes 988,234 1,889,000 2,010,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Debt guarantee of ESOP $ (40,000) $ (40,000) $ 160,000
Net unrealized gain (loss) on securities held as
available-for-sale (net of taxes) 16,614 (42,806) 184,409
Tax benefit arising from exercise of nonqualified
stock options and disqualifying dispositions 312,847 236,289 142,320
Stock dividends 2,203,164 1,513,050 1,267,687
Increase in other real estate owned as a result of foreclosure 144,510 463,196 939,482
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
- 41 -
CONSOLIDATED FINANCIAL STATEMENTS
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of California Independent Bancorp and
Subsidiaries (the Company) conform with generally accepted accounting
principles and general practice within the banking industry. The more
significant of these policies applied in the preparation of the accompanying
financial statements are discussed below.
PRINCIPLES OF CONSOLIDATION-
The accompanying financial statements include the accounts of California
Independent Bancorp (CIB) and its wholly-owned subsidiary, Feather River
State Bank (the Bank) and its wholly-owned subsidiary, EPI Leasing Company,
Inc. Significant intercompany transactions and balances have been eliminated
in consolidation.
NATURE OF OPERATIONS-
CIB is a California corporation and the bank holding company for Feather
River State Bank (FRSB), located in Yuba City, California. The Bank was
incorporated as a California state banking corporation on December 1, 1976,
and commenced operations on April 6, 1977. The Company was incorporated on
October 28, 1994, and became the holding company for FRSB on May 2, 1995. The
Bank engages in a broad range of financial services activities, and its
primary market is located in the northern Sacramento Valley, with a total of
seven branches. In addition, the Bank operates four loan production offices,
emphasizing residential mortgage and agricultural lending and one lease
production office through EPI Leasing Company, Inc. The primary source of
income for the Bank is from lending activities, including commercial,
agricultural, real estate and consumer/installment loans and leases.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS-
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods.
INVESTMENT SECURITIES-
The Bank classifies its investments as either "Held-to-Maturity" or
"Available-for-Sale."
Securities that the Bank has the positive intent and ability to hold to
maturity are classified as "Held-to-Maturity" and accounted for at amortized
cost in the Consolidated Balance Sheets.
Other securities for which the Bank does not have the positive intent or
ability to hold to maturity are classified under the balance sheet caption
"Available-for-Sale" and are reported at their fair values, with unrealized
gains and losses reported on a net-of-tax basis as a separate component of
shareholders' equity. Fair values are based on quoted market prices or broker
or dealer price quotations on a specific identification basis. Certain
economic factors could cause the Bank to sell some of these securities prior
to maturity. Such factors include significant movements in interest rates and
significant changes in liquidity demands. Gains or losses on sale of
investment securities are computed using the specific identification method.
LOANS-
Loans are stated at the principal amount outstanding less applicable unearned
interest income.
A loan is impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When a loan is impaired, the
recorded amount of the loan in the balance sheets is based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or on the observable or estimated market price of the loan, or
the fair value of the collateral if the loan is collateral dependent. Income
on impaired loans is recognized in accordance with the Bank's accounting for
loans placed on a nonaccrual status. Cash payments are first applied as a
reduction of the principal balance until collectibility of the remaining
principal and interest can be reasonably assured. Thereafter, interest income
is recognized as it is collected in cash.
LOANS HELD-FOR-SALE-
The Bank originates mortgage loans on residential and farm properties that it
sells into the secondary market to divest itself of the interest rate risk
associated with these primarily fixed-interest rate products. The Bank
accounts for these loans at the lower of cost or net realizable value.
As of January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers of Financial Assets and
Extinguishment of Liabilities." This statement requires, under certain
circumstances, entities to recognize as a separate asset an amount related to
the right to service mortgage loans. The adoption of this statement had an
immaterial impact on the Company's financial position and results of
operations.
- 42 -
SALES AND SERVICING OF SBA LOANS-
The Bank originates loans to customers under the Small Business
Administration (SBA) program that generally provides for SBA guarantees of
70% to 90% of each loan. The Bank generally maintains these loans in its
portfolio, but occasionally sells the guaranteed portion of each loan to a
third party and retains the unguaranteed portion in its own portfolio. The
Bank may be required to refund a portion of the sales premium received, if
the borrower defaults or the loan prepays within 90 days of the settlement
date. At December 31, 1997, the Bank had received no premiums subject to such
recourse. A gain is recognized on the sale of SBA loans through collection on
sale of a premium over the adjusted carrying value, through retention of an
ongoing rate differential less a normal service fee (excess servicing fee)
between the rate paid by the borrower to the Buyer and the rate paid by the
Bank to the purchaser, or both.
To calculate the gain (or loss) on the sale, the Bank's investment in an SBA
loan is allocated among the retained portion of the loan, the excess
servicing retained and the sold portion of the loan, based on the relative
fair market value of each portion. The gain (or loss) on the sold portion of
the loan is recognized at the time of sale based on the difference between
the sale proceeds and the allocated investment. As a result of the relative
fair value allocation, the carrying value of the retained portion is
discounted, with the discount accreted to interest income over the life of
the loan. The excess servicing fees are reflected as an asset that is
amortized over an estimated life using a method approximating the level yield
method; in the event future prepayments exceed Management's estimates and
future expected cash flows are inadequate to cover the unamortized excess
servicing asset, additional amortization would be recognized. In its
calculation of excess servicing fees, the Bank is required to estimate a
"normal" servicing fee. The Bank uses the contractual rate of 100 basis
points as its estimate of a normal servicing fee.
ALLOWANCE FOR LOAN LOSSES-
The allowance for loan losses is maintained at a level considered adequate by
Management to provide for losses that can be reasonably anticipated.
Accordingly, loan losses are charged to the allowance for loan losses and
recoveries are credited to it. The provision for loan losses charged to
operating expense is based upon past loan loss experience, loan impairment
and estimates of potential losses which, in Management's judgment, deserve
current recognition. Other factors considered by Management include growth,
composition and overall quality of the loan portfolio, reviews of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay. This evaluation process requires the use of current estimates
that may vary from the ultimate losses experienced in the future. The
estimates are reviewed periodically, and adjustments, as they become
necessary, are charged to operations in the period in which they become known.
OTHER REAL ESTATE OWNED-
Other real estate owned consists of properties acquired by the Bank through
foreclosure and is carried at the lower of cost or fair value, less estimated
costs to sell. At the time the property is acquired, if the estimated fair
value is less than the amount outstanding on the loan, the difference is
charged against the allowance for loan losses. Subsequent declines, if any,
in estimated fair value are charged to expense.
INTEREST AND FEES ON LOANS AND LEASES-
Origination fees and commitment fees, offset by certain direct loan
origination costs, are deferred and recognized over the contractual life of
the loan as yield adjustment. Interest income on loans and direct lease
financing is accrued monthly as earned on all credits not classified as
nonaccrual. Unearned income on loans, where applicable, is recognized as
income using the effective interest method over the term of the loan.
Loans are generally placed on nonaccrual status when they are 90 days past
due as to either interest or principal or are otherwise determined to be
impaired. At that time, any accrued but uncollected interest is reversed, and
additional income is recorded on a cash basis as payments are received.
However, loans that are well-secured and in the process of collection may not
be placed on nonaccrual status, at the discretion of Management. A nonaccrual
loan may be restored to an accrual basis when interest and principal payments
are current and prospects for future payments are no longer in doubt.
- 43 -
DEPRECIATION AND AMORTIZATION-
Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation on premises, furniture, fixtures and equipment is
calculated using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 31.5 years. Leasehold improvements are
amortized using the straight-line method over the asset's useful life or the
term of the lease, whichever is shorter. Expenditures for major renewals and
improvements of bank premises and equipment are capitalized, and those for
maintenance and repairs are charged to expense as incurred.
CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES-
Income taxes reported in the financial statements are computed at current tax
rates, including deferred taxes resulting from temporary differences in the
recognition of items for tax and financial reporting purposes.
The Bank records income taxes for financial statement purposes using the
liability or balance sheet method, under which the net deferred tax asset or
liability is determined based on the tax effects of the differences between
the book and tax bases of the various balance sheet assets and liabilities.
Under this method, the computation of the net deferred tax asset or liability
gives current recognition to changes in tax laws and rates.
FINANCIAL ACCOUNTING PRONOUNCEMENTS-
In February 1997, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 128, "Earnings per Share," which establishes standards for computing
and presenting earnings per share (EPS). It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. The statement is effective
for financial statements issued for periods ending after December 15, 1997,
and requires restatement for all periods presented. The implementation of
this statement did not have a material effect on the Bank's reported
financial position or net income in 1997.
RECLASSIFICATIONS-
Certain reclassifications have been made to amounts previously reported to
conform with current presentation methods. Such reclassifications have no
effect on net income or shareholders' equity previously reported.
(2) INVESTMENT SECURITIES:
As of December 31, 1997, 1996, and 1995, the Bank's equity capital reflected
a net unrealized gain (loss), net of applicable taxes, of $(1,202),
$(17,816), and $24,990, respectively.
The amortized cost and approximate fair value of investments in debt
securities and other investments at December 31, 1997 and 1996 are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
DECEMBER 31, 1997
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $38,044,044 $ 26,287 ($28,474) $38,041,857
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 10,751,994 49,638 (1,050) 10,800,582
Obligations of states and political subdivisions 6,979,317 33,594 - 7,012,911
Corporate obligations and other securities 1,424,875 6,765 - 1,431,640
----------- ---------- ---------- -----------
Total $19,156,186 $ 89,997 $ (1,050) $19,245,133
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
DECEMBER 31, 1996
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government agencies $11,405,179 $ 5,915 $(36,631) $11,374,463
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government agencies 15,720,573 140,302 (1,158) 15,859,717
Obligations of states and political subdivisions 3,576,412 92,434 (22,159) 3,646,687
Corporate obligations and other securities 3,992,185 27,109 - 4,019,294
----------- ---------- ---------- -----------
Total $23,289,170 $259,845 $(23,317) $23,525,698
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
The following table shows the amortized cost and estimated fair value of
investment securities by contractual maturity at December 31, 1997 and 1996.
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
- 44 -
HELD-TO-MATURITY AVAILABLE-FOR-SALE
--------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COSTS VALUE COSTS VALUE
------------ ------------ ------------ ------------
DECEMBER 31, 1997
Within one year $ 6,989,727 $ 7,050,447 $ 4,029,126 $ 4,010,715
After one but within five years 9,779,637 9,797,932 20,100,415 20,093,534
After five but within ten years 2,386,822 2,396,754 13,914,502 13,937,608
------------ ------------ ------------ ------------
Total $ 19,156,186 $ 19,245,133 $ 38,044,043 $ 38,041,857
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DECEMBER 31, 1996
Within one year $ 6,833,079 $ 6,880,248 $ 1,833,086 $ 1,833,123
After one but within five years 16,060,091 16,214,010 6,119,299 6,111,175
After five but within ten years 396,000 431,440 3,452,794 3,430,165
------------ ------------ ------------ ------------
Total $ 23,289,170 $ 23,525,698 $ 11,405,179 $ 11,374,463
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net gains (losses) from sales of "Available-for-Sale" investment securities
during 1997, 1996, and 1995 were $46,250, $3,470, and $(12,316),
respectively. Gross gains of $46,250, $3,470, and $3,000, and gross losses of
$0, $0, and $15,316, were realized on those sales in 1997, 1996, and 1995,
respectively.
Investment securities pledged as collateral for certain deposits amounted to
$11,651,809 and $10,374,814 at December 31, 1997 and 1996, respectively.
(3) LOANS:
Loans outstanding are summarized as follows:
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
Commercial and agricultural $ 79,384,520 $ 71,527,482
Real Estate construction 23,927,538 29,916,204
Real Estate mortgage 28,032,552 28,564,640
Consumer 1,956,254 2,983,939
Lease financing 33,465,023 15,892,783
Other 1,021,665 2,214,574
------------- -------------
Totals $167,787,552 $151,099,622
------------- -------------
------------- -------------
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $7,585,000 and $845,832 at December 31, 1997 and
1996, respectively. This represents the total recorded investment in
impaired loans. The allowance for loan losses was allocated to these impaired
loans totaled $1,907,950 and $200,601 as of December 31, 1997 and 1996,
respectively. For income reporting purposes, impaired loans are placed on a
nonaccrual status. This is more fully discussed in Note 1. The average
balance of impaired loans during 1997 was $5,665,437. Interest income
recorded on those loans during 1997 was $642,203. Foregone interest on loans
placed on nonaccrual status was $982,125 and $42,783 as of December 31, 1997
and 1996, respectively.
Changes in the allowance for loan losses are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ---------- ----------
Balance, beginning of year $ 4,052,783 $3,910,970 $3,287,663
Provision 6,153,000 385,000 875,000
Loans charged-off (4,718,424) (327,357) (554,514)
Recoveries on loans previously
charged-off 26,940 84,170 302,821
----------- ---------- ----------
Balance, end of year $ 5,514,299 $4,052,783 $3,910,970
----------- ---------- ----------
----------- ---------- ----------
(4) PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
Land $ 1,432,957 $ 1,432,957
Bank premises and improvements 5,868,922 5,415,175
Furniture, fixtures and equipment 5,785,116 4,555,933
----------- -----------
13,086,995 11,404,065
Less accumulated depreciation and
amortization (4,909,195) (3,983,678)
----------- -----------
$ 8,177,800 $ 7,420,387
----------- -----------
----------- -----------
Depreciation and amortization charged to expense was $975,178, $776,561, and
$687,353, in 1997, 1996 and 1995, respectively.
- 45 -
CONSOLIDATED FINANCIAL STATEMENTS
(5) DEPOSITS:
A summary of deposit balances follows:
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
Demand $ 62,224,350 $ 55,117,230
Interest-bearing
transaction accounts 40,133,001 33,659,296
Savings deposits 68,789,994 67,755,798
Time deposits 95,783,513 81,359,944
------------ ------------
Total deposits $266,930,858 $237,892,268
------------ ------------
------------ ------------
Certificates of deposit of $100,000 or more, including public time deposits,
amounted to approximately $40,761,778 and $33,851,000 at December 31, 1997
and 1996, respectively.
Interest expense on certificates of deposit of $100,000 or more, including
public time deposits, amounted to approximately $2,186,861, $1,481,000, and
$911,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, the scheduled maturities of all Certificates of
Deposits were as follows:
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Three months or less $33,273
Over three through twelve months 49,031
Over one through three years 9,378
Over three years 4,102
-------
Total $95,784
-------
-------
(6) OTHER NONINTEREST INCOME AND EXPENSE:
The components of other operating income and expense were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
Servicing fees on loans $ 572 $ 487 $ 482
Gains on sale of OREO 11 240 31
Other 766 664 507
------ ------ ------
Total other noninterest income $1,349 $1,391 $1,020
------ ------ ------
------ ------ ------
Advertising and promotion $ 370 $ 342 $ 286
Telephone expense 395 236 184
Stationery and supplies 310 253 212
Directors' Fees 219 391 300
Other 2,492 1,964 1,893
------ ------ ------
Total other noninterest expense $3,786 $3,186 $2,875
------ ------ ------
------ ------ ------
(7) INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ---------- -----------
Current-
Federal $ 592,054 $1,697,811 $1,626,412
State 62,971 612,159 614,109
----------- ---------- -----------
655,025 2,309,970 2,240,521
----------- ---------- -----------
Deferred-
Federal (907,736) (85,574) (147,274)
State (160,189) (17,618) (57,247)
----------- ---------- -----------
(1,067,925) (103,192) (204,521)
----------- ---------- -----------
$ (412,900) $2,206,778 $2,036,000
----------- ---------- -----------
----------- ---------- -----------
The effective tax rate and statutory federal income tax rate are reconciled
as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------ ------
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State franchise taxes, net of Federal
income tax benefit (7.2) 7.4 7.2
Tax-exempt interest (21.9) (2.1) (1.9)
Corporate dividends received (15.7) - -
Tax reserve adjustment 6.5 - -
Other 0.4 0.1 0.6
------- ------ ------
(71.9)% 39.4% 39.9%
------- ------ ------
------- ------ ------
The components of the net deferred tax asset of the Bank, recorded in other
assets, as of December 31, 1997 and 1996, were as follows:
1997 1996
---------- ----------
Deferred tax assets-
Loan losses $2,509,072 $1,555,127
California franchise tax 29,640 205,355
Other real estate owned 131,669 116,441
Unrealized loss on available-for-sale
securities 875 12,901
Other 314,249 182,824
---------- ----------
Total deferred tax assets $2,985,505 $2,072,648
---------- ----------
---------- ----------
CONTINUED ON NEXT PAGE
- 46 -
DEFERRED INCOME TAX PROVISIONS (CONTINUED)
1997 1996
---------- ----------
Deferred tax liabilities-
Depreciation $ 250,578 $ 256,938
Accretion 100,838 85,236
---------- ----------
Total deferred tax liabilities 351,416 342,174
---------- ----------
Net deferred tax asset $2,634,089 $1,730,474
---------- ----------
---------- ----------
The components of the deferred income tax provisions are summarized as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ---------- ----------
Provisions for possible loan
losses $ (1,019,549) $ (62,802) $(242,184)
Interest on non-accrual loans 157,633 6,287 (47,349)
Tax depreciation methods (6,360) (7,589) 52,304
California franchise tax (175,715) (53,570) (24,447)
Other real estate owned (15,228) (54,179) (37,663)
Accretion 15,602 17,661 52,959
Other (24,308) 51,000 41,859
------------- ---------- ----------
$ (1,067,925) $(103,192) $(204,521)
------------- ---------- ----------
------------- ---------- ----------
(8) SHAREHOLDERS' EQUITY:
At December 31, 1997, CIB was authorized to issue 20,000,000 shares of no par
common stock. Of this amount, 1,651,131 and 1,623,336 shares of common stock
were issued and outstanding at December 31, 1997 and 1996, respectively.
One of the principal sources of cash for the Company will be dividends from
its subsidiary bank. Banking regulations limit the amount of dividends that
may be paid without prior approval of the Company's regulatory agencies to
the lesser of retained earnings or the net income of the Company for its last
three fiscal years, less any distributions during such period, subject to
capital adequacy requirements. At December 31, 1997, the Company had
approximately $4,314,633 available for payments of dividends, which would not
require the prior approval of the banking regulators under this limitation.
The Bank adopted SFAS No. 128, "Earnings per Share," effective December 15,
1997. As a result, the Bank's earnings per share for all prior periods have
been restated. The following table reconciles the numerator and denominator
of the basic and diluted earnings per share computations:
FOR THE YEAR ENDED 1997 FOR THE YEAR ENDED 1996 FOR THE YEAR ENDED 1995
----------------------------------- ----------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
Basic EPS income
available to common
stockholders $(161,430) 1,577,249 $(0.10) $3,401,051 1,549,095 $2.20 $3,065,722 1,584,598 $1.93
Effect of dilutive
securities:
Employee Stock
Options - 82,727 - - 91,115 0.13 - 115,326 0.13
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
Diluted EPS income
available to common
stockholder $(161,430) 1,659,976 $(0.10) $3,401,051 1,640,210 $2.07 $3,065,722 1,699,924 $1.80
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
- 47 -
CONSOLIDATED FINANCIAL STATEMENTS
In August 1997, the Board of Directors authorized a five percent stock
dividend that was distributed on September 12, 1997. The dividend was
declared on August 12, 1997, to holders of record on August 29, 1997. The
dividend resulted in the issuance of an additional 77,304 shares of common
stock. All common stock and per share amounts have been adjusted to reflect
the stock dividend.
In August 1996, the Board of Directors authorized a five percent stock
dividend that was distributed on September 20, 1996. The dividend was
declared on August 13, 1996, to holders of record on August 30, 1996. The
dividend resulted in the issuance of an additional 72,050 shares of common
stock. All common stock and per share amounts have been adjusted to reflect
the stock dividend.
In June 1995, the Board of Directors authorized a five percent stock dividend
that was distributed on July 14, 1995. The dividend was declared on June 23,
1995, to holders of record on June 30, 1995. The dividend resulted in the
issuance of an additional 67,610 shares of common stock. All common stock and
per share amounts have been adjusted to reflect the stock dividend.
(9) DISCLOSURE OF FAIR VALUE OF
FINANCIAL INSTRUMENTS:
CASH AND CASH EQUIVALENTS-
For these short-term instruments, the carrying value is a reasonable estimate
of fair value.
INVESTMENTS-
For securities held-for-investment purposes, fair values are based on quoted
market prices or dealer quotes. See Note 2 for further discussion.
LOANS-
The fair value of loans is estimated by discounting the future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings for same remaining maturities. The fair value of
nonperforming loans is estimated based on allocating specific and general
reserves to the various nonperforming loan classifications.
DEPOSIT LIABILITIES-
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
OTHER LIABILITIES-
Other liabilities represent short-term instruments. The carrying amount is a
reasonable estimate of fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS-
The fair value of amounts for fees arising from commitments to extend credit,
standby letters of credit and financial guarantees written are not material.
The estimated fair values of the Bank's financial instruments at December 31,
1997 and 1996 are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 54,025,047 $ 54,025,047 $ 64,227,881 $ 64,227,881
Investments 57,198,043 57,286,990 34,663,633 34,900,161
Loans (net) 162,273,253 164,503,476 147,046,839 149,780,903
FINANCIAL LIABILITIES:
Deposits $266,930,858 $267,297,159 $237,892,268 $238,285,181
Interest payable and other
liabilities 3,228,424 3,228,424 2,823,883 2,823,883
(10) STOCK OPTIONS:
During 1989, the Bank adopted the Feather River State Bank 1989 Amended and
Restated Stock Option Plan. The plan is nonqualified and provides that
nonemployee directors and key employees may be granted options to purchase
the Company's stock at the fair market value of the shares as determined by
the Board of Directors. As of May 1995, all previously granted options to
purchase the Bank's stock had been retired and exchanged for options to
purchase the Company's stock, on a one-for-one option basis. All granted
options must be exercised within the earlier of ten years of the date of
grant, or within 30 days of termination of employment, or status as a
director. Vesting is determined at the time of grant by the Board of
Directors. Current participants vest over five years from date of employment.
During 1996, the Company adopted the California Independent Bancorp 1996
Stock Option Plan (1996 Plan), which sets aside 149,052 shares of no par
value common stock of the Company for which options may be granted to key,
full-time salaried employees and officers of the Company, as well as
non-employee directors of the Company. The exercise price of all options to
be granted under the 1996 Plan must be at least 100% of the fair market value
of the Company's common stock on the granting date and be paid
- 48 -
in full at the time the option is exercised in cash, shares of the Company's
common stock with a fair value equal to the purchase price or a combination
thereof. Under the 1996 Plan, all options expire no more than ten years after
the date of grant.
Federal income tax benefits relating to options exercised under both plans
have been credited to shareholders' equity. Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," is effective for transactions entered into for fiscal years
beginning after December 15, 1995. This statement defines a fair-value-based
method of accounting for stock-based compensation. As permitted by SFAS 123,
the Bank accounts for stock options under APB Opinion No. 25, under which no
compensation cost is being recognized. If SFAS 123 had been used, no
compensation cost would be recognized due to low volatility of stock price.
The following is a summary of stock option transactions with 1996 figures
adjusted to reflect the five percent stock dividend:
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
Stock options authorized 448,988 427,608
---------- ----------
---------- ----------
Stock options granted 379,620 333,899
Stock options exercised (155,454) (107,138)
Stock options expired (995) (948)
---------- ----------
Stock options outstanding December 31 223,171 225,813
---------- ----------
---------- ----------
Stock options vested December 31 222,106 225,318
---------- ----------
---------- ----------
Price per share -
Options outstanding $ 5.17 to $ 5.43 to
$ 27.14 $ 24.75
---------- ----------
---------- ----------
Price of options exercised $ 5.17 to $ 5.43 to
$ 18.62 $ 13.79
---------- ----------
---------- ----------
(11) PROFIT SHARING PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN:
The Bank formed a 401(k) Qualified Savings Plan (the Plan) effective August
1, 1993. All full-time employees who have reached the age of 21 are eligible
to participate beginning on January 1st or July 1st following six months of
employment. All eligible employees are 100% vested in their own
contributions, which may be any whole percentage of pay between 2% and 12%
inclusive. Beginning January 1, 1995, the Bank made annual matching
contributions, which were equal to 20% of each employee's elective
contributions not exceeding 6% of pay. Contributions are invested with
Lincoln National Life Insurance Company under employee directed investment
options. The Bank's matching contribution amounted to approximately $35,000
in 1997, $31,912 in 1996 and $27,000 in 1995.
The Bank formed an Employee Stock Ownership Plan (the ESOP) effective January
1, 1988. Effective January 1, 1995, the ESOP was amended to recognize CIB and
all of its employees as participants. All employees who have completed six
months of service and have reached the age of 21 are eligible to participate
in the ESOP. The ESOP provides for annual contributions at the discretion of
the Board of Directors. The contributions are allocated based on the
participants' compensation for the year. Employees vest ratably in the ESOP
over six years. The ESOP borrowed $200,000 from a nonprofit corporation to
acquire 9,762 shares of CIB common stock in August 1995. The borrowing is
payable in five equal annual installments with interest at prime minus 1/2
percent, which rate was 8% at December 31, 1997. The Bank made contributions
to the ESOP of approximately $40,000 in each of the years 1997, 1996 and 1995.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank makes commitments to extend credit in the normal course of business
to meet the financing needs of its customers. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of nonperformance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank, is
based on Management's credit evaluation of the borrower. Collateral held
varies but may include certificates of deposit, accounts receivable,
inventory, property and equipment, and real property.
The Bank also issues standby letters of credit, which are unconditional
commitments to guarantee the performance of a customer to a third party.
These guarantees are primarily issued to support construction bonds, private
borrowing arrangements, and similar transactions. Most of these guarantees
are short-term commitments expiring in 1998 and are not expected to be drawn
upon. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The Bank
holds collateral as deemed necessary, as described above.
The contract amount of commitments not reflected on the balance sheet at
December 31, 1997, were as follows:
Loan commitments $71,248,000
Standby letters of credit 523,328
- 49 -
CONSOLIDATED FINANCIAL STATEMENTS
The Bank is obligated under a number of noncancellable operating leases for
premises and equipment used for banking purposes. Minimum future rental
commitments under noncancellable operating leases as of December 31, 1997
were $131,631, $104,014, and $19,058 for the years ended December 31, 1998
through 2000, respectively, and none thereafter. Rent under operating leases
was approximately $149,713, $52,487, and $110,070, in 1997, 1996 and 1995,
respectively.
(13) RELATED PARTY TRANSACTIONS:
The Bank has had loan and deposit transactions and has contracted for
services with certain officers and directors and the companies with which
they are associated. In the opinion of Management and the Board of Directors,
all such loans, commitments to lend, and contracts for services were made
under terms that are consistent with the Bank's normal policies. Loan
transactions with these officers and directors for the years ended December
31, 1997 and 1996, respectively, are as follows:
1997 1996
----------- -----------
Loan balances -
Beginning of year $ 6,897,469 $ 6,433,373
Additions 8,996,935 4,277,689
Collections (8,851,205) (3,813,593)
----------- -----------
End of year $ 7,043,199 $ 6,897,469
----------- -----------
----------- -----------
The Bank had loans outstanding to a director of the Bank and his associates
in excess of 5 percent of shareholders' equity. The total principal balance
of the loans to this director was approximately $3,914,374 and $3,781,536 at
December 31, 1997 and 1996, respectively.
Remodeling work on branches and offices of the Bank was done by directors of
the Bank. The Bank paid approximately $442,168, $320,901, and $60,000 for
this work in 1997, 1996 and 1995, respectively.
(14) CALIFORNIA INDEPENDENT BANCORP FINANCIAL STATEMENTS (PARENT ONLY):
DECEMBER 31,
------------------------
1997 1996
-------- ---------
(IN THOUSANDS)
BALANCE SHEET-
Assets:
Cash and due from banks $ 2 $ 63
Investment in subsidiaries 22,669 21,662
Other assets 108 161
-------- ---------
Total assets $22,779 $21,886
-------- ---------
-------- ---------
Liabilities and shareholders' equity:
Shareholders' equity
Total shareholders' equity $22,779 $21,886
-------- ---------
Total liabilities and
shareholders' equity $22,779 $21,886
-------- ---------
-------- ---------
DECEMBER 31,
------------------------
1997 1996
-------- ---------
(IN THOUSANDS)
STATEMENTS OF INCOME-
Administrative expense $ 116 $ 222
Other expense 82 104
------- --------
Loss before equity in
net income of subsidiaries $ 198 $ 326
Equity in net income of subsidiaries:
Distributed 958 958
Undistributed 407 2,637
Income tax benefit 80 132
------- --------
Net income $ 1,247 $ 3,401
------- --------
------- --------
- -------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 1,247 $ 3,401
Adjustments to reconcile net income to net cash
provided by operating activities-
Undistributed equity in net
income of subsidiaries (407) (2,637)
Deferred income taxes (80) (132)
Decrease (increase) in
other operating assets 53 (68)
------- --------
Net cash provided by
operating activities $ 813 $ 564
------- --------
Investing activities:
Net cash provided by investing activities - -
Financing activities:
Dividends paid (874) (530)
------- --------
Net cash used in:
financing activities (874) (530)
------- --------
(Decrease) increase in cash
cash equivalents $ (61) $ 34
Cash and cash equivalents,
beginning of year 63 29
------- --------
Cash and cash equivalents,
end of year $ 2 $ 63
------- --------
------- --------
(15) QUARTERLY STATEMENTS OF OPERATIONS:
The following information is unaudited. However, in the opinion of
Management, all adjustments, which include only normal recurring adjustments
necessary to present fairly the results of operations for such periods, are
reflected. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further explanation of
quarterly results of operations.
- 50 -
1997 QUARTER ENDED (UNAUDITED)
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $5,473 $5,904 $6,162 $5,854
Interest expense 2,210 2,360 2,407 2,312
--------- --------- ------------ -----------
Net interest income 3,263 3,544 3,755 3,542
Provision for loan losses (40) (3,296) 0 (2,817)
--------- --------- ------------ -----------
Net interest income after provision
for loan losses 3,223 248 3,755 725
Noninterest income 1,062 1,094 1,453 1,448
Noninterest expense 2,958 3,385 3,569 3,670
--------- --------- ------------ -----------
Income before income taxes 1,327 (2,043) 1,639 (1,497)
Provision for income taxes 510 (850) 651 (724)
--------- --------- ------------ -----------
Net income (loss) $ 817 $(1,193) $ 988 $ (773)
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Basic earnings per share $ 0.53 $ (0.76) $ 0.63 $ (0.50)
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Diluted earnings per share $ 0.51 $ (0.73) $ 0.60 $ (0.48)
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Weighted average shares outstanding 1,546,032 1,552,808 1,571,498 1,637,712
1996 QUARTER ENDED (UNAUDITED)
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $4,823 $4,867 $5,311 $5,574
Interest expense 1,746 1,743 1,884 2,076
--------- --------- ------------ -----------
Net interest income 3,077 3,124 3,427 3,498
Provision for loan losses 60 40 80 205
--------- --------- ------------ -----------
Net interest income after provision
for loan losses 3,017 3,084 3,347 3,293
Noninterest income 638 589 677 1,232
Noninterest expense 2,346 2,360 2,583 2,980
--------- --------- ------------ -----------
Income before income taxes 1,309 1,313 1,441 1,545
Provision for income taxes 522 526 537 622
--------- --------- ------------ -----------
Net income $ 787 $ 787 $ 904 $ 923
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Basic earnings per share $ 0.50 $ 0.51 $ 0.58 $ 0.59
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Diluted earnings per share $ 0.48 $ 0.48 $ 0.55 $ 0.56
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Weighted average shares outstanding 1,535,447 1,535,450 1,538,713 1,560,950
1995 QUARTER ENDED (UNAUDITED)
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $4,379 $4,774 $4,939 $4,911
Interest expense 1,395 1,555 1,653 1,714
--------- --------- ------------ -----------
Net interest income 2,984 3,219 3,286 3,197
Provision for loan losses 245 255 275 100
--------- --------- ------------ -----------
Net interest income (loss) after
provision for loan losses 2,739 2,964 3,011 3,097
Noninterest income 372 422 671 762
Noninterest expense 2,100 2,218 2,246 2,372
--------- --------- ------------ -----------
Income (loss) before income taxes 1,011 1,168 1,436 1,487
Provision for income taxes 396 462 569 609
--------- --------- ------------ -----------
Net income $ 615 $ 706 $ 867 $ 878
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Basic earnings per share $ 0.38 $ 0.43 $ 0.53 $ 0.54
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Diluted earnings per share $ 0.37 $ 0.41 $ 0.51 $ 0.51
--------- --------- ------------ -----------
--------- --------- ------------ -----------
Weighted average shares outstanding 1,621,384 1,659,075 1,628,262 1,637,397
- 51 -
CONSOLIDATED FINANCIAL STATEMENTS
(16) REGULATORY MATTERS:
The Company and Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital guidelines
that involve quantitative measures of the Company's and Bank's assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set
forth in the table below) of total capital (Total Risk-Based), and Tier 1
capital (Tier 1 Risk-Based) (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (Tier 1 Leverage Ratio) (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, that the Company and Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum Total Risk-Based, Tier 1 Risk-Based, Tier 1 Leverage Ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and Bank's actual capital amounts and ratios are also presented
in the table:
TO BE WELL-
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- ---------------------------------------- -----------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------------------- ------------------- ------------------- --------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT RATIO DATA)
AS OF DECEMBER 31, 1997:
Total Risk-Based Capital:
California Independent
Bancorp $24,124 10.25% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $18,826 OR EQUAL TO 8.00% OR EQUAL TO $23,533 OR EQUAL TO 10.00%
Feather River State Bank $24,006 10.23% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $18,780 OR EQUAL TO 8.00% OR EQUAL TO $23,475 OR EQUAL TO 10.00%
Tier I Risk-Based Capital:
California Independent
Bancorp $21,151 8.99% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $9,413 OR EQUAL TO 4.00% OR EQUAL TO $14,120 OR EQUAL TO 6.00%
Feather River State Bank $21,040 8.96% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $9,390 OR EQUAL TO 4.00% OR EQUAL TO $14,085 OR EQUAL TO 6.00%
Tier I Leverage Ratio:
California Independent
Bancorp $21,151 7.43% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $11,384 OR EQUAL TO 4.00% OR EQUAL TO $14,230 OR EQUAL TO 5.00%
Feather River State Bank $21,040 7.40% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $11,377 OR EQUAL TO 4.00% OR EQUAL TO $14,221 OR EQUAL TO 5.00%
AS OF DECEMBER 31, 1996:
Total Risk-Based Capital:
California Independent
Bancorp $22,918 11.89% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $15,426 OR EQUAL TO 8.00% OR EQUAL TO $19,282 OR EQUAL TO 10.00%
Feather River State Bank $24,225 12.57% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $15,415 OR EQUAL TO 8.00% OR EQUAL TO $19,269 OR EQUAL TO 10.00%
Tier I Risk-Based Capital:
California Independent
Bancorp $21,813 11.31% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $ 7,713 OR EQUAL TO 4.00% OR EQUAL TO $11,569 OR EQUAL TO 6.00%
Feather River State Bank $21,804 11.32% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $ 7,708 OR EQUAL TO 4.00% OR EQUAL TO $11,562 OR EQUAL TO 6.00%
Tier I Leverage Ratio:
California Independent
Bancorp $21,813 8.82% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $ 9,891 OR EQUAL TO 4.00% OR EQUAL TO $12,364 OR EQUAL TO 5.00%
Feather River State Bank $21,804 8.82% GREATER THAN GREATER THAN GREATER THAN GREATER THAN
OR EQUAL TO $ 9,890 OR EQUAL TO 4.00% OR EQUAL TO $12,363 OR EQUAL TO 5.00%
- 52 -
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
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
For information concerning directors and executive officers of the
Company, see "ELECTION OF DIRECTORS" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the definitive Proxy Statement for
the Company's 1998 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A (the "Proxy Statement"), which is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial
owners and management, see "Security Ownership of Certain Beneficial Owners
and Management" and "Election of Directors" in the Proxy Statement, which is
incorporated herein by reference.
- 53 -
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related
transactions, see "Indebtedness of Management and Other Transactions" in the
Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS.
The consolidated financial statements of California IndependentBancorp
and Subsidiaries, other financial information and the Independent Auditors'
Report on Consolidated Financial Statements are contained herein under Item 8.
2. FINANCIAL STATEMENT SCHEDULES.
In accordance with Regulation S-X, the financial statement schedules have
been omitted because (a) they are not applicable to or required of the
Company; or (b) the information required is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS.
See Index to Exhibits of this Form 10-K.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by registrant during the quarter ended
December 31, 1997.
For the purposes of complying with the amendments to the rules governing
Form S-8 under the Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference
into the registrant's Registration Statements on Form S-8 No. 333-09823 and
No. 333-09813.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding as asserted by such director, officer or
controlling person in connection with the securities being registered the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question
- 54 -
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly issued this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA INDEPENDENT BANCORP
Date: March 26, 1998
By: /s/ Robert J. Mulder
--------------------------------
Robert J. Mulder, President
and Chief Executive Officer
- 55 -
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Robert J. Mulder and Annette Dier Bertolini and each of them, his or her true
and lawful attorney-in-fact and agent, with full powers of substitution, for
him or her and in his or her name, place and stead, in any and all
capacities, to sign and to file any and all amendments, including pre- and/or
post-effective amendments to this Registration Statement, with the Securities
and Exchange Commission, granting to said attorney-in-fact full power and
authority to perform any other act on behalf of the undersigned required to
be done in connection therewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Annette Dier Bertolini Senior Vice March 26, 1998
- -------------------------- President and Chief
ANNETTE DIER BERTOLINI Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Harold M. Eastridge
- -------------------------- Chairman of the Board March 26, 1998
HAROLD M. EASTRIDGE of Directors
/s/ William H. Gilbert
- -------------------------- Director March 26, 1998
WILLIAM H. GILBERT
/s/ Lawrence G. Harris
- -------------------------- Director March 26, 1998
LAWRENCE G. HARRIS
/s/ Robert J. Mulder
- -------------------------- President, Chief March 26, 1998
ROBERT J. MULDER Executive Officer and
Director
/s/ David A. Offutt
- -------------------------- Director March 26, 1998
DAVID A. OFFUTT
/s/ William K. Retzer
- -------------------------- Director March 26, 1998
WILLIAM K. RETZER
/s/ Ross D. Scott
- -------------------------- Director March 26, 1998
ROSS D. SCOTT
/s/ Louis F. Tarke
- -------------------------- Director March 26, 1998
LOUIS F. TARKE
/s/ Michael C. Wheeler
- -------------------------- Director March 26, 1998
MICHAEL C. WHEELER
- 56 -
INDEX TO EXHIBITS
The following documents are included as Exhibits to this Form 10-K.
Those Exhibits below Incorporated by Reference are indicated as such by an
asterisk or explanatory footnote. If no asterisk or footnote appears after an
Exhibit, such Exhibit is filed herewith.
Exhibit No.
- -----------
2.1 Plan of Reorganization and Merger Agreement dated January 30,
1995 by and between Feather River State Bank, FRSB Merger Company and
California IndependentBancorp. 23/*
3.1 Articles of Incorporation of California Independent Bancorp. 23/*
3.2 Bylaws of California Independent Bancorp. 23/*
10.1 Salary Continuation Agreements dated April 28, 1993 with Robert
J. Mulder, Ronald W. Kelly and Annette Dier Bertolini. 23/*
10.2 Agreement for the purchase of 203 Main Street, Woodland,
California by and between Feather River State Bank and Bank of America,
NT & SA successor to Security Pacific National Bank. 23/*
10.3 Consolidated Agreement dated April 30, 1993 with Unisys
Corporation. 23/*
10.4 Agreements with Information Technologies, Inc. 23/*
10.5 Lease for 6545 Sunrise Boulevard, Suite 201, Citrus Heights,
California. 23/*
10.6 Deferred Compensation Agreement dated July 19, 1994 with
William H. Gilbert. 23/*
10.7 Feather River State Bank Employee Ownership Plan. 23/*
10.8 Bank Affiliate Agreement between Feather River State Bank and
Lexington Capital Management, Inc. 24/*
10.9 California Independent Bancorp 1989 Amended and Restated Stock
Option Plan including related Incentive and Non Statutory Stock Option
Agreements. 25/
- 57 -
10.10 California Independent Bancorp 1996 Stock Option Plan and
related Incentive Stock Option and Nonstatutory Stock Option
Agreements. 26/*
10.11 Purchase and Sale Agreement and Joint Escrow Instructions by
and between First Interstate Bank of California and Feather River State
Bank for 700 "E" Street, Marysville. 24/*
10.12 Stock Purchase Agreement dated September 16, 1996 between
Feather River State Bank and Carolyn E. Roth and related Employment
Agreement and Noncompetition Agreement. 27/*
10.13 Lease by and between Metta M. Boyd and Feather River State Bank
for 194 East Sixth Street, Chico, California. 28/*
10.14 Lease by and between Wells Fargo Bank, N.A. and Feather River
State Bank for 995 Tharp Road, Yuba City, California. 28/*
10.15 Lease by and between Professional Executive Center, Inc. and
Feather River State Bank for 2140 Professional Drive, Roseville,
California. 28/*
10.16 Executive Salary Continuation Agreement dated February 4, 1997 by
and between Feather River State Bank and Robert J. Mulder. 28/*
10.17 Lease by and between Anderson and Associates and E.P.I. Leasing Co., Inc.
for the premises at 6929 Sunrise Boulevard, Citrus Heights,
California. 28/*
10.18 Lease by and between Vault Security Systems, Inc. and Feather
River State Bank dated March 1, 1997 for modular bank branch located in
Wheatland, California. 28/*
10.19 Lease by and between Raj J. Sharma, and Feather River State
Bank for 114 D Street, Wheatland, California.
10.20 Lease by and between Anderson and Associates and Feather River State
Bank for 6929 Sunrise Blvd, Citrus Heights, California.
23 Consent of Arthur Andersen LLP for audited financial statements
for the year ended December 31, 1997.
- 58 -
24 Power of Attorney (Incorporated herein by reference)
27 Financial Data Schedule
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Footnotes
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* Document incorporated herein by reference.
23/ Filed as an Exhibit to the Company's General Form for
Registration of Securities on Form 10 (File No. 0-26552).
24/ Filed as an Exhibit to the Company's Form 10-K for December 31, 1995.
25/ Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-8/SEC Registration No. 333-09813.
26/ Filed as an Exhibit to Amendment No. 1 to the Company's Form
S-8/SEC Registration No. 333-09823.
27/ Filed as an Exhibit to the Company's Form 8-K for the month of
October, 1996.
28/ Filed as an Exhibit to the Company's Form 10-K for December 31, 1996.
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