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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, 1998
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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 Street, 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 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]
The aggregate market value of the voting stock held by non-affiliates of
California Independent Bancorp at February 28, 1999 was $32,653,227.
The number of outstanding shares of common stock as of February 28, 1999 was
1,748,280.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 1999 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 38 PAGES
EXHIBIT INDEX IS ON PAGE 36
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I N D E X
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DESCRIPTION PAGE NO.
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS . . . . . . . . . . . . . . . . 30
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 32
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . 32
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . . . . . . . . . . 33
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON
FORM 8-K. . . . . . . . . . . . . . . . . . . . . . 34
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K (excluding statements
of fact or historical financial information) involve forward-looking information
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "'safe harbor" created by those sections. These forward-looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions, particularly in Sutter and Yuba counties;
volatility of rate sensitive deposits; operational risks including data
processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets. Therefore, the
information set forth herein should be carefully considered when evaluating the
business prospects of the Company and Bank.
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 Company was incorporated on October 28, 1994 and
became the bank holding company for the Bank on May 2, 1995, pursuant to the
Bank Holding Company Act of 1956, as amended ("BHC Act").
The Bank was incorporated as a California state banking corporation on
December 1, 1976 and commenced operations on April 6, 1977. On October 1, 1996,
the Bank acquired an equipment leasing company, E.P.I. Leasing Co., Inc.
("EPI"), and operates it as a wholly-owned subsidiary of the Bank. On June 25,
1984, the Bank formed Yuba-Sutter Financial Services Corporation ("Yuba-Sutter")
as a wholly-owned subsidiary. This subsidiary is inactive.
At December 31, 1998, the Company had two employees, both of which also
serve as executive officers of the Bank. The Bank at December 31, 1998
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employed 180 persons, including 11 part-time employees, 5 executive officers and
54 other officers. None of the Company's or Bank's employees is currently
represented by a union or covered under a collective bargaining agreement.
Management believes that its employee relations are excellent.
The Company itself does not engage in any business activities other than
ownership of the Bank. The Company's primary asset is its ownership of the
Bank's stock, and the dividends paid by the Bank is the Company's primary source
of income. At December 31, 1998, the Company had consolidated assets of
$295,312,605, deposits of $268,808,444, loans of $181,182,515, and shareholders'
equity of $23,655,171.
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. In addition, the Bank operates three loan production
offices ("LPOs") which are located in Madera, California, in Madera County;
Citrus Heights, California, in Sacramento County; and Chico, California, in
Butte County. These LPOs emphasize residential mortgage and construction
lending and equipment leasing through EPI. The total population base in the
six counties served by the Bank is approximately 1.8 million people, the
majority of which are in Sacramento County.
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 that are at the periphery of
housing for those individuals who work in the growing Sacramento area.
The Bank anticipates relocating its Madera, California, LPO to Fresno in
April 1999.
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The Bank currently has no applications pending to open additional branch
offices or LPOs. Further, 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 dependent on obtaining the necessary governmental
approvals, governmental monetary policies, and competition. No assurance can be
given that all or any part of the Bank's expansion program can be accomplished
without the Bank's being required to raise additional capital in the future.
The Bank is engaged in the commercial banking business, including accepting
demand, savings and time deposits and making commercial, real estate,
agricultural, and consumer loans. The Bank also offers equipment leasing
through its subsidiary, EPI. 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. The Bank also offers home banking whereby its customers can
make transfers between accounts, pay bills, receive balance inquiries and
statements via their personal computer or telephone. The Bank also introduced
Visa debit cards to its demand deposit customers. The Bank does not offer trust
services or international banking services and does not plan to do so in the
near future.
DEPOSITS
Most of the Bank's deposits are obtained from individuals, small and
medium-sized businesses, and professionals. The Bank is able to attract and
retain these deposits through advertising in the local media and because of the
reputation the Bank has established in the communities it serves. No single
depositor or group of related depositors control a significant amount of the
Bank's total deposits. The loss of any one depositor or group of related
depositors should not have a materially adverse effect on the business of the
Bank. The Bank is a member of the Federal Deposit Insurance Corporation
("FDIC"). As a result, deposit accounts held with the Bank are insured in
accordance with the FDIC's rules and regulations.
LENDING ACTIVITIES
The Bank engages in a full complement of lending activities, including
agricultural, real estate, commercial and consumer loans. Additionally, the
Bank purchases leases through outside sources, including its subsidiary EPI.
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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. As of
December 31, 1998, the Bank had agricultural production loans and other loans to
farmers outstanding of $50,505,000, which represented 27.9% of the Bank's loan
portfolio.
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 Realty Insurance Company and the
Federal Agricultural Mortgage Corporation ("Farmer Mac") and other institutional
investors. In addition, the Bank participates in the Farmer Mac II loan
program, pursuant to which it makes 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
Farmer Mac program lenders in the United States.
The Bank makes real estate loans secured by residential, agricultural, and
commercial property. Residential loans are made to purchase or refinance one
(1) to four (4) 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. Loans secured by
agricultural property include mortgages, loans for farm residences, and other
improvement loans and are secured by liens on real estate. Commercial real
estate loans are made primarily to owner-occupied businesses for such purposes
as offices, warehouses, professional buildings, retail, and storage facilities.
As of December 31, 1998, these types of real estate secured loans totaled
$28,930,000, or 16% 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 one to four family and multi-family housing. These loans are
generally secured by a first deed of trust. As of December 31, 1998, the Bank
had outstanding construction and development loans of $54,829,000 for these
purposes, representing 30.3% of the Bank's loan portfolio as compared to
$38,085,000, or 22.6% as of December 31, 1997. This increase reflects the
continued economic expansion in the real estate sector of the Sacramento Valley
and the successful efforts of the Bank's business development officers.
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In addition to originating loans for its own portfolio, the Bank originates
mortgage loans on residential and farm properties located throughout the
Sacramento Valley and the greater Fresno area, which it sells into the secondary
market. These mortgage loans are pre-sold to minimize the Bank's interest rate
risk, and usually the Bank sells these mortgage loans without retaining the loan
servicing rights in order to receive higher compensation from the secondary
market. The underwriting criteria for residential and agricultural mortgage
loans sold in the secondary market are established by the purchasers of the
loans. These mortgage loans are sold without recourse, and the Bank generally
attempts to retain the servicing rights for the agricultural mortgages.
The Company accounts for the mortgage loans it sells in accordance with
Statement of Financial Accounting Standards No. 125 "Accounting for Transfers of
Financial Assets and Extinguishment of Liabilities." As of December 31, 1998,
1997, and 1996, total loans serviced by the Bank were $146,026,000,
$151,619,000, and $107,637,000, respectively. For the years ended December 31,
1998, 1997, and 1996, total loans sold by the Bank were $65,795,000,
$66,953,000, and $45,614,000, respectively.
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. As of December 31, 1998, the Bank had outstanding loans for
these purposes of $21,599,000, representing 11.9% of the Bank's loan portfolio.
Additionally, 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%. 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.
Furthermore, 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.
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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, 1998, the Bank had a total of $2,443,000 in consumer
and installment loans, or 1.3% of its loan portfolio.
In October 1996, the Bank acquired EPI, as a wholly owned subsidiary, and
thereby increased its lending activity in the commercial lease market. The Bank
originates commercial and industrial equipment leases through EPI. Leases are
made to a wide variety of businesses, including professional, agricultural,
industrial, and construction. Total lease financing receivables as of December
31, 1998 were $23,313,000, or 12.9% of the Bank's portfolio.
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 offers other financial products and services including annuities,
mutual funds, mutual fund advisory service, IRAs, brokerage and custodial
services, 401(k) plans, estate plans, asset management, asset consulting,
charitable remainder trusts, fiduciary services, pension plans, non-qualified
deferred compensation, and retirement plans. All 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").
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COMPETITION
The Bank's primary service area consists of Colusa, Sutter, Yolo, and Yuba
Counties. It is estimated that this service area contains 54 competitive
banking and savings and loan offices, of which seventeen (17) offices are owned
by other independent banks. Based upon total bank deposits as of June 30, 1998
(the last period for which data is available), the Bank is second in market
share in Sutter County, third in Colusa County, fourth in Yuba County, and
eleventh in Yolo County.
The banking business in California and, specifically, in the Bank's primary
service area is highly competitive with respect to both loans and deposits. The
business 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 are 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, and, by virtue
of their greater total capitalization, 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.
In order to compete with major financial institutions and other
competitors, 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 demands exceed
the Bank's legal lending limit (15% of its capital and allowance for loan
losses for unsecured loans and 25% of its capital and allowance for loan
losses for secured loans), 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.
SUPERVISION AND REGULATION
Bank holding companies and their subsidiary banks are extensively regulated
under applicable federal and/or state laws and regulations. Statutes,
regulations, and policies affecting the banking industry are frequently being
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reviewed, added to, or changed by Congress, the state legislature, or the
federal or state supervisory agencies responsible for the industry's oversight.
Changes in the laws, regulations, or policies that impact the Company and Bank
cannot always be predicted and may have material impact on earnings and the
manner with which they conduct business.
As a result of the Company's and Bank's disappointing 1997 financial
performance and concerns disclosed during the Bank's December 31, 1997 joint
regulatory examination, the Bank's board of directors passed a resolution to
remedy the concerns. The resolution requires the Bank to: maintaining and, if
necessary, retain qualified management; maintain the Bank's Tier 1 leverage
capital in such an amount as to equal or exceed 7% of the Bank's FDIC Part 325
total assets (as of December 31, 1998, the Bank's Tier 1 leverage capital ratio
stood at 8.14%); continue with the diligent implementation of a previously
adopted plan to reduce the level of non-performing and problem loans and
revision of lending and collection policies and procedures; continue with the
diligent implementation of a revised operating budget and cost control plan in
order to restore the Bank's prior level of profitability; ensure that the Bank
maintains an adequate reserve for loan losses; and seek prior approval of the
Federal Deposit Insurance Corporation ("FDIC") and California Department of
Financial Institutions ("DFI") before the payment of any cash dividends.
Additionally, the FDIC and Federal Reserve Board ("FRB") have notified the
Bank and the Company that they have determined that the condition of the Bank
and the Company are such that prior approval of the regulatory agencies is
necessary before adding or replacing any member of the boards of directors,
employing any person as a senior executive officer, or changing the
responsibilities of any senior executive officer so that the individual would be
assuming a different senior executive officer position. Finally, due to the
Bank's condition, the FDIC is also restricting the Company's and the Bank's
ability to enter into any contracts to pay or make any golden parachute and
indemnification payments to institution-affiliated parties.
Discussed below are brief summaries of certain laws, regulations, or
policies that apply to the operation of bank holding companies and to the banks
they own or control. The summaries are qualified in their entirety by reference
to the full text of the applicable law, regulation, or policy.
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REGULATION OF THE COMPANY
The Company is a registered bank holding company within the meaning of the
BHC Act and is subject to the supervision of the FRB. The FRB requires the
Company to file quarterly and annual reports and may conduct examinations of the
Company and its subsidiaries.
The FRB can require the Company to terminate an activity of, control of,
liquidation of, or divestiture of certain subsidiaries or affiliates when the
FRB believes that the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness, or stability
of any of its banking subsidiaries. The FRB also has the authority to regulate
provisions of certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt. Under certain
circumstances, the Company must file a written notice and obtain approval from
the FRB prior to the purchase or redemption of its own common stock.
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. The Company is required to obtain
the FRB's prior approval before it acquires, merges, or consolidates with any
bank or bank holding company. Additionally, any company seeking to acquire,
merge, or consolidate with the Company would also be required to obtain the
FRB's approval.
The BHC Act generally prohibits the Company from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. 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, 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 that are
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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 borrow only 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.
The FRB requires the Company to maintain certain levels of capital.
(See "Capital Standards.") 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.")
Pursuant to FRB regulations, a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and
may not conduct its operations in an unsafe or unsound manner. In addition,
the FRB has issued a policy that in order to serve as a source of strength to
its subsidiary banks, a bank holding company should stand ready to use
available resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's
failure to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the FRB to be an unsafe and
unsound banking practice or a violation of the FRB's regulations, or both.
The Company is also a bank holding company within the meaning of
California Financial Code section 3700. As a result, the Company and its
subsidiaries are subject to examination by, and may be required to file
reports with, the DFI.
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The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 ("the 1934 Act"). As such,
the Company is subject to the information, proxy solicitation, insider trading,
and other requirements and restrictions of the 1934 Act.
REGULATION OF THE BANK
As a California state chartered bank, the Bank is subject to primary
supervision, periodic examination, and regulation by the DFI and the FDIC.
Additionally, the Bank is subject to certain regulations promulgated by the FRB.
If the FDIC should determine, as a result of an examination of the Bank,
that the Bank's financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of the Bank's operations are
unsatisfactory or that the Bank or its management is violating, or has violated,
any law or regulation, various actions are available to the FDIC to remedy the
situation. Such remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate the Bank's deposit insurance, which would result in
a revocation of the Bank's California charter. The DFI also has many of the
same remedial powers.
Various other requirements and restrictions under the laws of California
and the United States affect the Bank's operations. State and federal statutes
and regulations which relate to many aspects of the Bank's operations include:
reserve requirements against deposits, ownership of deposit accounts, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices, and capital requirements.
Furthermore, the Bank is required to maintain certain levels of capital. (See
"Capital Standards.")
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, unused commitments, and recourse
- 14 -
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 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 average 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.
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The following tables present the capital ratios for the Company and the
Bank as of December 31, 1998.
RISK BASED CAPITAL RATIO
AS OF DECEMBER 31, 1998
COMPANY BANK
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO
Tier 1 Capital $ 23,416 9.12% $ 23,260 9.06%
Tier 1 Capital minimum
requirement 10,270 4.00% 10,264 4,00%
-------- ------ -------- ------
Excess $ 13,146 5.12% $ 12,996 5.06%
-------- ------ -------- ------
-------- ------ -------- ------
Total Capital $ 26,660 10.38% $ 26,502 10.33%
Total Capital minimum
requirement 20,540 8.00% 20,528 8.00%
-------- ------ -------- ------
Excess $ 6,120 2.38% $ 5,974 2.33%
-------- ------ -------- ------
-------- ------ -------- ------
Risk-adjusted assets $256,754 $256,604
-------- --------
-------- --------
LEVERAGE CAPITAL RATIO
Tier 1 Capital to quarterly
average total assets $ 23,416 8.20% $ 23,260 8.14%
Minimum leverage
requirement 11,427 4.00% 11,419 4.00%
-------- ------ -------- ------
Excess $ 11,989 4.20% $ 11,841 4.14%
-------- ------ -------- ------
-------- ------ -------- ------
Total Quarterly average assets $285,678 $285,463
-------- --------
-------- --------
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective or other
supervisory action to resolve an insured depository institution's problems.
Problems that may be addressed through such actions include, but are not limited
to, institutions that fall below one or more prescribed minimum capital ratios.
Each federal banking agency has promulgated regulations defining the following
five categories in which an insured depository institution will be placed, based
on its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. At December 31, 1998, the Bank and the Company exceeded all
the required ratios for classification as "well capitalized."
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An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed 2% of the bank's total assets. Federal
guidelines generally define "tangible equity" as a bank's tangible assets less
liabilities. Federal regulators may, among other alternatives, require the
appointment of a conservator or a receiver for a critically undercapitalized
bank. In California, the Commissioner may require the appointment of a
conservator or receiver for a state-chartered bank if its tangible equity does
not exceed 3% of the bank's total assets, or $1 million.
In addition to measures taken under the prompt corrective action
provisions, banks may be subject to potential enforcement actions by the federal
or state regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or any written agreement with the agency.
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 limited 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
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
- 17 -
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 rules in the form of
guidelines that set forth operational and managerial standards relating to:
(i) internal controls, information systems, and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) asset growth;
(v) earnings; and (vi) compensation, fees, and benefits.
In addition, the federal banking agencies have also adopted safety and
soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a system
to identify problem assets and prevent those assets from deteriorating. Under
these standards, an insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets; (ii) estimate the inherent
losses in problem assets and establish reserves that are sufficient to absorb
estimated losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider the size
and potential risks of material asset concentrations; and (vi) provide periodic
asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk. These guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves.
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. Should the agency require submission of a compliance plan and the
institution fails to timely submit an acceptable plan, within 30 days of a
request to do so, or to implement an accepted plan, the agency must require the
institution to correct the deficiency. 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 that limit the amount available for
such distribution depending upon the earnings, financial condition, and cash
needs of the
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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 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, as previously stated, 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 will be subject to restrictions set forth
in California banking law and the regulations of the FDIC.
Under California Financial Code section 642, 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, with the prior
approval of the California Superintendent of Banks, California Financial Code
section 643 provides that a bank may pay cash dividends in an amount not to
exceed the greater of: (1) the retained earnings of the bank; (2) the net
income of the bank for its last fiscal year; or (3) the 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.
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 has the
authority to prohibit a bank from engaging in business practices that the FDIC
- 19 -
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.
Finally, the Bank is subject to certain restrictions imposed by federal law
on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Company or other affiliates, the purchase of, or
investments in, stock or other securities thereof, the taking of such securities
as collateral for loans, and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other affiliates
from borrowing from the Bank unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Bank to or in the Company or to or in any other affiliate are limited,
individually, to 10% of the Bank's capital and surplus (as defined by federal
regulations), and such secured loans and investments are limited, in the
aggregate, to 20% of the Bank's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect to
transactions involving the Company and other controlling persons of the Bank.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions of federal law.
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, effectively
permitting 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 FRB may not be
granted for a proposed interstate acquisition if, after the acquisition, the
acquirer on a consolidated basis would control more than 10% of the total
deposits nationwide or would control 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 (the "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 new
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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 shall apply to the interstate
branches.
The opening of a new branch by an out-of-state bank is not permitted unless
the host state expressly permits such an opening. The establishment of an
initial new 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 that 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 it is prohibited from
conducting as a 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 50% 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.
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The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995 (the "Caldera Act"), effective October 2, 1995, amends
the California Financial Code to, among other matters, regulate the
operations of state banks to eliminate conflicts with and to implement the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 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 that has been in existence for at least
five years.
COMMUNITY REINVESTMENT ACT
The Bank is subject to the fair lending requirements and reporting
obligations involving home mortgage lending operations and CRA activities. The
CRA generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods. A bank may be subject to
substantial penalties and corrective measures for a violation of certain fair
lending laws. The federal banking agencies may take compliance with such laws
and CRA obligations into account when regulating and supervising other
activities.
A bank's compliance with its CRA obligations is based on a performance-
based evaluation system, which bases CRA ratings on an institution's lending
service and investment performance. When a bank holding company applies for
approval to acquire a bank or other bank holding company, the FRB will review
the assessment of each subsidiary bank of the applicant bank holding company,
and such records may be the basis for denying the application. Based on an
examination conducted in the third quarter of 1997, the Bank was rated
satisfactory in complying with its CRA obligations.
DEPOSIT INSURANCE PREMIUMS
The Bank's deposit accounts are insured by the FDIC's Bank Insurance Fund
("BIF") to the maximum permitted by law. This deposit insurance may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or
- 22 -
has violated any applicable law, regulation, rule, order, or condition imposed
by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits. As of
December 31, 1998, the assessment ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996
("EGPRA"), at January 1, 1997, the Bank began paying, in addition to its normal
deposit insurance premium as a member of the BIF, an amount equal to
approximately 1.3 basis points per $100 of insured deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry. Members of the
Savings Association Insurance Fund ("SAIF"), by contrast, pay, in addition to
their normal deposit insurance premium, approximately 6.4 basis points. Under
the EGPRA, the FDIC is not permitted to establish SAIF assessment rates that are
lower than comparable BIF assessment rates. Beginning no later than January 1,
2000, the rate paid to retire the Fico Bonds will be equal for members of the
BIF and the SAIF. Should the insurance funds be merged before January 1, 2000,
the rate paid by all members of this new fund to retire the Fico Bonds would be
equal.
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 the scope of CERCLA. "Fiduciary," as used
- 23 -
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
U.S.C. section 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.
PROPOSED LEGISLATION
Other legislation and government regulations have been proposed which could
also affect the business activities of the Company and the Bank, and it is
likely that additional legislation will be introduced in Congress or in state
legislatures in the future which may impact their business. The proposed
legislation includes wide-ranging bills that would alter the structure,
regulation, and competitive relationships of the nation's financial services
industry, such as proposals to alter the present statutory separation of
commercial and investment banking; to permit bank holding companies and banks to
engage in certain securities underwriting and distribution activities and
certain real estate investment activities; to permit bank holding companies to
own or control thrift institutions; to subject banks to increased disclosure and
reporting requirements; and to generally expand the range of financial services
that can be provided by bank holding companies as well as by other financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the present or future business
of the Company or the Bank may be affected.
IMPACT OF MONETARY POLICIES
Banking is a business that 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 a bank on loans, securities,
and other interest-earning assets comprises the major source of a bank's
earnings. Thus, the earnings and growth of banks are subject to the influence
of economic conditions
- 24 -
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 an 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 that 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 Bank 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
SFAS NO. 125 - "ACCOUNTING FOR THE TRANSFER AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES"
The Financial Accounting Standards Board ("FASB") has 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 No. 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.
SFAS NO. 130 - "REPORTING COMPREHENSIVE INCOME"
For financial statements issued after December 31, 1997, the FASB mandates
compliance with SFAS No. 130, "Reporting Comprehensive Income." SFAS provides
guidance as to the presentation and display of comprehensive income and
- 25 -
its components in the financial statements. The statement defines
"comprehensive income" to include revenues, expenses, gains, and changes in
equity from transactions during the period. The Company has adopted SFAS No.
130, and does not expect the statement to have a material impact on its
financial statements.
SFAS NO. 131 - "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION"
SFAS No. 131 establishes standards for public business enterprises'
reporting of information about operating segments in annual financial
statements. The Statement requires that the enterprises report selected
information concerning operating segments in interim financial reports issued to
shareholders. Additionally, the Statement establishes requirements for related
disclosures about products, services, geographic areas, and major customers.
SFAS No. 131 requires public business enterprises to report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. The Statement further requires reconciliation of total segment
revenues, total segment profit or loss, total segment assets, and other amounts
disclosed for segments to corresponding amounts in the enterprise's general
purpose financial statements. It requires that all public business enterprises
report information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets, and about major customers
regardless of whether that information is used in making operating decisions.
However, SFAS No. 131 does not require an enterprise to report information that
is not prepared for internal use if reporting it would be impracticable. SFAS
No. 131 is effective for financial statements for periods beginning after
December 15, 1997.
The Company has adopted SFAS No. 131. The adoption of the applicable
provisions did not have a material effect on the Company, as management believes
that it operates only in one segment - the commercial banking segment.
SFAS NO. 133 - "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES"
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires
- 26 -
recognition of all derivatives as either assets or liabilities in the statement
of financial condition and the measurement of those instruments at fair value.
Recognition of changes in fair value will be recognized into income or as a
component of other comprehensive income depending upon the type of the
derivative and its related hedge, if any. SFAS No. 133 is effective for the
Company beginning January 1, 2000. The Company is in the process of determining
the impact of SFAS No. 133 on the Company's financial statements, which is not
expected to be material.
SFAS NO. 134 - "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED
AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE
BANKING ENTERPRISE"
FASB issued SFAS No. 134 in October of 1998, to be effective the first
fiscal quarter after December 31, 1998. SFAS No. 134 amends SFAS No. 65 to
require entities engaged in mortgage banking activities to classify their
mortgage-backed securities, or other retained interests, based upon their
ability and intent to sell or hold those investments. The intent of the
statement is to conform the subsequent accounting for securities retained after
mortgage loan securitization with the subsequent accounting for securities
retained after the securitization of other types of assets by mortgage banking
entities. The Company has adopted SFAS No. 134 and does not expect the
statement to have a material impact on its financial statements.
YEAR 2000 COMPLIANCE
The Federal Financial Institutions Examination Council issued an
interagency statement in May 1997 regarding year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there may be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies have been conducting year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues. (For a further discussion of the Company's
and the Bank's efforts regarding "Year 2000" compliance, see "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS.")
- 27 -
OTHER INFORMATION
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.
ITEM 2. PROPERTIES
The Bank currently conducts its banking operations from an administrative
office, seven branch offices, and three loan production offices ("LPO") and its
subsidiary EPI. Rental expense for all premises leased totaled $177,344 for the
year ended December 31, 1999. It is estimated that rental expense for leased
premises will be approximately $139,000 for 1999.
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 and has a total square footage of 9,122.
In 1991, the Bank purchased a 3,694 square foot 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, California, in 1978. In 1991, the Bank purchased a combined 14,972
square foot retail and office building with parking located at 1227 Bridge
Street, adjacent to the Bank's Bridge Street branch. Currently, the Bank's Data
Center, the headquarters for the Company, and administrative services and
financial consulting services are located in this building.
The Bank's Marysville office is located at 700 "E" Street in Marysville,
California. The Bank purchased this 3,702 square foot building, which was a
branch of another bank, in September 1995.
The Bank's Colusa branch office is located at 655 Fremont Street in a
2,819 square foot office building that was converted to banking quarters. The
Bank owns the land and premises for the branch.
- 28 -
In 1985, the Bank purchased a 5,306 square foot 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.
In 1993, the Bank purchased a 4,427 square foot building that is now the
location of its Woodland, California, branch office located at 203 Main Street.
This was formerly the site of a branch of another bank.
The Bank leased the land and a module on the property located at 114 "D"
Street, Wheatland, California, from March 1997 until April 1998 for its
Wheatland branch office. In April 1998, the Bank entered a new lease for the
same sight together with a new freestanding building. The 2,831 square foot
building was completed on September 21, 1998, at which time the Bank relocated
from the previously leased module. The term of the lease is 10 years with the
option and right to extend the original term of this lease for two periods of
five years each. The monthly lease payment is $2,797 and is subject to annual
adjustments on the anniversary of the lease commencement date.
The Bank moved its Roseville LPO to a new office in Citrus Heights in
October 1997. The rent is $1,158 per month for this office. The lease is for
two years.
On December 1, 1997, the Bank's Chico LPO relocated to 500 Main Street in
Chico, California. The lease is for three years at a rent of $1,783 per month.
On December 2, 1996, the Bank purchased a former bank branch located at
995 Tharp Road in Yuba City, California. 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 $5,276.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental to its
business. In addition, the Bank is a party to a lawsuit entitled FEATHER RIVER
STATE BANK V. THIARA ENTERPRISES, ET AL. and the corresponding cross-complaint
entitled THIARA ENTERPRISES, ET AL. V. FEATHER RIVER STATE BANK, which could be
considered material
- 29 -
pending litigation. This suit stems from a defaulted loan obligation. The Bank
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. Subsequently, the debtor
filed for bankruptcy protection. On December 4, 1998, the parties entered into
a Settlement, Modification Agreement and General Release. The agreement is
subject to the bankruptcy court's approval.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 1998 BID ASK
--- ---
March 31 $24.50 $26.25
June 30 25.00 27.50
September 30 22.50 24.50
December 31 20.00 20.12
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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
Cash dividends paid on the Company's common stock were $.42 per share for
the year ending December 31, 1998, and $.40 per share for the year ending
December 31, 1997. These figures have been adjusted for the 5% stock dividend
paid in 1997 and in 1998.
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 its
subsidiary, Feather River State Bank, as well as legal and regulatory
requirements.
Federal and State banking and corporate laws could limit the Bank' ability
to pay dividends to the Company. The Bank has issued a policy statement that a
bank holding company should not declare or pay a cash dividend to its
shareholders if the dividend would place undue pressure on the capital of its
subsidiary banks or if the dividend could be funded only through additional
borrowings or other arrangements that may adversely affect the financial
position of the Company. In addition, a bank holding company may not continue
its existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend, and its prospective rate of earnings
retention is sufficient to fully fund each dividend and appears consistent with
its capital needs, asset quality, and overall financial condition.
As a result of the Bank's disappointing 1997 financial performance and
concerns disclosed during the Bank's December 31, 1997, joint regulatory
examination, the Bank's Board of Directors has passed a resolution that requires
the Bank to seek the written approval of the FDIC and California Department of
Financial Institutions prior to the payment of any cash dividends.
As of February 28, 1999, there were 1,110 holders of record of the
Company's common stock.
- 31 -
ITEM 6. SELECTED FINANCIAL DATA
For the "Selected Financial Data," see page 1 of the Company's 1998 Annual
Report to the Shareholders, which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the "Management's Discussion and Analysis of Financial Condition and
Results of Operations," see pages 9-21 of the Company's 1998 Annual Report to
the Shareholders, which is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the discussion of "Quantitative and Qualitative Disclosures About
Market Risk," see section titled "Interest Rate Sensitivity" at pages 17-18 of
the Company's 1998 Annual Report to the Shareholders, which is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For "Financial Statements and Supplemental Data," see pages 22-39 of the
Company's 1998 Annual Report to the Shareholders, which is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- 32 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 1999
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.
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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of the Company 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
The Company filed no reports on Form 8-K during the quarter ending December
31, 1998.
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 16, 1999
By: /s/ Robert J. Mulder
- ------------------------------------
Robert J. Mulder, President
and Chief Executive Officer
- 34 -
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 President March 16, 1999
- -------------------------- and Chief Financial Officer
ANNETTE DIER BERTOLINI (Principal Financial and
Accounting Officer)
/s/Harold M. Eastridge Director March 16, 1999
- --------------------------
HAROLD M. EASTRIDGE
/s/William H. Gilbert
- -------------------------- Director March 16, 1999
WILLIAM H. GILBERT
/s/ Donald H. Livingstone
- -------------------------- Director March 16, 1999
DONALD H. LIVINGSTONE
/s/ Robert J. Mulder
- -------------------------- President, Chief March 16, 1999
ROBERT J. MULDER Executive Officer and
Director
/s/ David A. Offutt
- -------------------------- Chairman of the Board March 16, 1999
DAVID A. OFFUTT of Directors, and Director
/s/William K. Retzer
- -------------------------- Director March 16, 1999
WILLIAM K. RETZER
/s/Ross D. Scott
- -------------------------- Director March 16, 1999
ROSS D. SCOTT
- 35 -
/s/ Louis F. Tarke
- -------------------------- Director March 16, 1999
LOUIS F. TARKE
/s/ Michael C. Wheeler
- -------------------------- Director March 16, 1999
MICHAEL C. WHEELER
INDEX TO EXHIBITS
Exhibit No.
- -----------
2.1 Plan of Reorganization and Merger Agreement dated January 30, 1995 by
and between Feather River State Bank, FRSB Merger Company and California
Independent Bancorp. Filed as Exhibit 2.1 to the Company's General Form
for Registration of Securities on Form 10 (File No. 0-26552).*
3.1 Articles of Incorporation of California Independent Bancorp. Filed as
Exhibit 3.1 to the Company's General Form for Registration of Securities
on Form 10 (File No. 0-26552).*
3.2 Bylaws of California Independent Bancorp. Filed as Exhibit 3.2 to the
Company's General Form for Registration of Securities on Form 10 (File
No. 0-26552).*
10.1 Salary Continuation Agreements dated April 28, 1993 with Robert J.
Mulder, Ronald W. Kelly and Annette Dier Bertolini. Filed as Exhibit
10.1 to the Company's General Form for Registration of Securities on
Form 10 (File No. 0-26552).*
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. Filed as Exhibit 10.2 to
the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.3 Consolidated Agreement dated April 30, 1993 with Unisys Corporation.
Filed as Exhibit 10.3 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
- 36 -
10.4 Agreements with Information Technologies, Inc. Filed as Exhibit 10.4 to
the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.5 Lease for 6545 Sunrise Boulevard, Suite 201, Citrus Heights, California.
Filed as Exhibit 10.5 to the Company's General Form for Registration of
Securities on Form 10 (File No. 0-26552).*
10.6 Deferred Compensation Agreement dated July 19, 1994 with William H.
Gilbert. Filed as Exhibit 10.6 to the Company's General Form for
Registration of Securities on Form 10 (File No. 0-26552).*
10.7 Feather River State Bank Employee Ownership Plan. Filed as Exhibit 10.7
to the Company's General Form for Registration of Securities on Form 10
(File No. 0-26552).*
10.8 Bank Affiliate Agreement between Feather River State Bank and Lexington
Capital Management, Inc. Filed as Exhibit 10.8 to the Company's General
Form for Registration of Securities on Form 10 (File No. 0-26552).*
10.9 California Independent Bancorp 1989 Amended and Restated Stock Option
Plan including related Incentive and Non Statutory Stock Option
Agreements. Filed as Exhibit 4 to Amendment No. 1 to the Company's
Registration Statement on Form S-8/SEC Registration No. 333-09813 dated
November 26, 1996.*
10.10 California Independent Bancorp 1996 Stock Option Plan and related
Incentive Stock Option and Nonstatutory Stock Option Agreements. Filed
as Exhibit to Amendment No. 1 to the Company's Form S-8/SEC Registration
No. 333-09823 dated November 26, 1996.*
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. Filed as Exhibit 10.10 to the Company's
Form 10-K for December 31, 1995.*
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. Filed as Exhibit 2 to the Company's Form 8-K
dated October 1, 1996.*
- 37 -
10.13 Purchase and sale by and between Wells Fargo Bank, N.A. and Feather
River State Bank for 995 Tharp Road, Yuba City, California. Filed as
Exhibit 10.14 to the Company's Form 10-K for December 31, 1997.*
10.14 Executive Salary Continuation Agreement dated February 4, 1997 by and
between Feather River State Bank and Robert J. Mulder. Filed as Exhibit
10.16 to the Company's Form 10-K for December 31, 1996.*
10.15 Lease by and between Anderson and Associates and E.P.I. Leasing Co.,
Inc., for the premises at 6929 Sunrise Boulevard, Citrus Heights,
California. Filed as Exhibit 10.17 to the Company's Form 10-K for
December 31, 1996.*
10.16 Lease by and between Raj J. Sharma and Feather River State Bank for 114
D Street, Wheatland, California.
10.17 Lease by and between Diana Holmes, Trustee, and Feather River State Bank
for the Chico, California Loan Production Office located at 500 Main
Street, Chico, California.
13 California Independent Bancorp's 1998 Annual Report to Shareholders.
(Deemed filed only with respect to those sections which have been
incorporated into this Form 10-K by reference.)
21 Feather River State Bank, a California banking corporation, is the only
subsidiary of Registrant.
23 Consent of Arthur Andersen LLP for audited financial statements for the
year ended December 31, 1998.
27 Financial Data Schedule
- ---------------
* Document incorporated herein by reference.
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