UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-KSB

 

 

CENTRAL VALLEY COMMUNITY BANCORP

(Name of small business issuer in its charter)

 

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý       No o

 

Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.  o

 

State issuer’s revenues for its most recent fiscal year: $ 18,747,213

 

State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of March 10, 2003:  $23,401,608.

 

State the number of shares of Common Stock outstanding as of March 10, 2003: 2,574,242

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement which will be filed within 120 days after December 31, 2002, in connection with the solicitation of proxies for its 2003 Annual Meeting of Shareholders, are incorporated by reference in Items 9, 10, 11 and 12 of part III hereof.  The portions of such documents that are not incorporated by reference shall not be deemed to be filed with the Commission as part of this Form 10-KSB.

 

Transitional Small Business Disclosure Format (Check one): Yes  o  No   ý

 

 

TABLE OF CONTENTS

 

ITEM 1 -	DESCRIPTION OF BUSINESS
ITEM 2 -	DESCRIPTION OF PROPERTY
ITEM 3 -	LEGAL PROCEEDINGS
ITEM 4 -	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 -	MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 7 -	FINANCIAL STATEMENTS
ITEM 8 -	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9 -	DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
ITEM 10 -	EXECUTIVE COMPENSATION
ITEM 11 -	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12 -	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 -	EXHIBITS AND REPORTS ON FORM 8-K
ITEM 14	CONTROLS AND PROCEDURES
SIGNATURES

 

 

PART I

 

ITEM 1 -                DESCRIPTION OF BUSINESS.

 

General

 

Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 as a California corporation, for the purpose of becoming the holding company for Central Valley Community  Bank, formerly known as Clovis Community Bank (the “Bank”), a California state chartered bank, through a corporate reorganization.  In the reorganization, the Bank became the wholly-owned subsidiary of the Company, and the shareholders of the Bank became the shareholders of the Company.  The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Board of Governors”).

 

At December 31, 2002, the Company had one banking subsidiary, the Bank. The Company’s principal business is to provide, through its banking subsidiary, financial services in its primary market area in California. The Company serves Fresno County, Sacramento County and its surrounding area through the Bank. The Company does not currently conduct any operations other than through the Bank. Unless the context otherwise requires, references to the Company refer to the Company and the Bank on a consolidated basis. At December 31, 2002, the Company had consolidated total assets of approximately $283,006,000 See Items 6 and 7 - Management’s Discussion and Analysis or Plan of Operation and - Financial Statements.

 

In February 2002, the Company approved a stock repurchase plan authorizing the purchase of shares up to a total cost of $500,000, or approximately 3% of its outstanding common stock.  The plan expires January 31, 2003.  The Company adopted a similar plan in February 2001, which expired on January 31, 2002.  As of December 31, 2002, the Company had repurchased 92,612 shares at a total cost of $982,619.

 

In December 2002, the Company approved a stock repurchase plan authorizing the purchase of shares up to a total cost of $500,000, or approximately 2% of its outstanding common stock.  The plan became effective January 1, 2003 and expires December 31, 2003.

 

As of March 10, 2003, the Company had a total of 126 employees and 103 full time equivalent employees, including the employees of the Bank.

 

Forward-Looking Statements

 

Certain matters discussed in this Annual Report on Form 10-KSB including, but not limited to, those described in Item 6 - Management’s Discussion and Analysis or Plan of Operation, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  Such risks and uncertainties include, among others, (1) significant increases in competitive pressure in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in the regulatory environment; (5) fluctuations in the real estate market; (6) changes in business conditions and inflation; and (7) changes in securities markets.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

 

When the Company uses in this Annual Report on Form 10-KSB the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report on Form 10-KSB.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

1

 

The Bank

 

The Bank was organized in 1979 and commenced business as a California state chartered bank in 1980.  The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits.  The Bank is not a member of the Federal Reserve System.

 

The Bank operates seven full-service banking offices in Clovis, Fresno, Kerman, Sacramento, and Prather, California. One of the offices is in a Save Mart Supermarket and offers extended banking hours, including Saturday and Sunday hours, for the convenience of the Bank’s customers. The Bank established a Real Estate Division in 1995 in a freestanding facility in downtown Clovis. All real estate related transactions are conducted and processed through the Real Estate Division, including interim construction loans for single family residences and commercial buildings. All types of permanent single family residential loans are also offered. The Bank closed its former Shaver Lake branch in 2001.

 

During 2002, the Bank relocated its River Park and Fig Garden Village offices in Fresno, California to new expanded sites.  Due to the success of the River Park office staff, the office outgrew its initial 2,000 square foot leased facility and relocated to a new 5,000 square foot facility in the same area.  Similarly the Fig Garden Village office quickly out-grew its original 350 square feet and was relocated to a new 2,000 square foot site within the same shopping area.

 

The Bank also opened two new full service offices in step with its strategic plans to expand its market areas to the entire central valley area of California.  An office in the Sacramento area was opened in the first half of 2002.  The new Sacramento Private Banking facility is intended to serve the Sacramento area needs of the Company’s existing commercial customers whose needs fall outside the Fresno area but within the Sacramento area, as well as serving the banking needs of new customers.

 

In the second half of 2002, the Company opened a new office located in Kerman, California.  The recent acquisition of Kerman State Bank, a long established community bank, by Westamerica Bank provided an opportunity to expand into the Kerman area.  The Company had been encouraged by contacts from numerous businesses in the Kerman area to open a facility.  The Bank was successful in hiring prior Kerman State Bank employees for the office.

 

The Bank anticipates additional branch openings to meet the growing service needs of its customers.  The branch expansions provide the Company with opportunities to expand its loan and deposit base; however, based on past experience, management expects these new offices will initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.

 

The Bank conducts a commercial banking business, which includes accepting demand, savings and time deposits and making commercial, real estate and consumer loans. It also issues cashier’s checks, sells traveler’s checks and provides safe deposit boxes and other customary banking services. The Bank also has offered Internet Banking since 2000. Internet Banking consists of inquiry, account status, bill paying, account transfers, and cash management. The Bank does not offer trust services or international banking services and does not currently plan to do so in the near future.

 

Since August of 1995 the Bank has been a party to an agreement with Investment Centers of America, pursuant to which Investment Centers of America provides Bank customers with access to investment services.  In connection with entering into this agreement, the Bank adopted a policy intended to comply with FDIC Regulation Section 337.4, which outlines the guidelines under which an insured non-member bank may be affiliated with a company that directly engages in the sale, distribution, or underwriting of stock, bonds, debentures, notes, or other securities.

 

There have been no other significant changes in the kinds of services rendered, the principal markets for or the methods of distribution of such services during the Bank’s past three fiscal years.

 

The Bank’s operating policy since its inception has emphasized serving the banking needs of individuals

 

2

 

and the business and professional communities in the central valley area of California.  At December 31, 2002, the Company had total loans of $159,214,000.  Total commercial and industrial loans outstanding were $70,408,000; total real estate construction, land development and other land loans outstanding were $21,736,000; total other real estate loans outstanding were $57,498,000, and total consumer installment loans outstanding were $5,581,000. The Company accepts real estate, listed and unlisted securities, savings and time deposits, automobiles, inventory, machinery and equipment as collateral for loans.

 

No individual or single group of related accounts is considered material in relation to the Bank’s assets or deposits, or in relation to the overall business of the Company. However, at December 31, 2002 approximately 49.8% of the Company’s loan portfolio held for investment consisted of real estate-related loans, including construction loans, real estate mortgage loans and commercial loans secured by real estate and 44.2% consisted of commercial loans. At December 31, 2002, the Company had approximately 9.85% of its loan portfolio concentrated in the residential construction industry. See Item 6 - Management’s Discussion and Analysis or Plan of Operation. The Company believes that these concentrations are mitigated by the diversification of the loan portfolio among commercial, commercial and residential construction, commercial mortgage, home equity and consumer loans. No borrower had aggregate credit commitments exceeding 3.60% of the loan portfolio at December 31, 2002. In addition, the business activities of the Company currently are mainly concentrated in Fresno County, California. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in this part of the California economy and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company’s operations in this area of California exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region or as a result of energy shortages in California.

 

The Company’s deposits are attracted from individual and commercial customers.  A material portion of the Company’s deposits has not been obtained from a single person or a few persons, the loss of any one or more of which would have a material adverse effect on the business of the Company.

 

In order to attract loan and deposit business from individuals and small businesses, the Company maintains the following lobby hours at its branches:

 

Branch		Monday – Thursday		Friday		Saturday		Sunday
Clovis Main		9:00 a.m. to 4:00 p.m.		9:00 a.m. to 6:00 p.m.		None		None
Clovis Main Drive Up		8:00 a.m. to 5:30 p.m.		8:00 a.m. to 6:00 p.m.		None		None
Foothill		9:00 a.m. to 5:00 p.m.		9:00 a.m. to 6:00 p.m.		9:00 a.m. to 1:00 p.m.		None
Clovis/Herndon		10:00 a.m. to 7:00 p.m.		10:00 a.m. to 7:00 p.m.		10:00 a.m. to 5:00 p.m.		10:00 a.m. to 3:00 p.m.
Fig Garden Village		9:00 a.m. to 5:00 p.m.		9:00 a.m. to 6:00 p.m.		10:00 a.m. to 2:00 p.m.		None
Kerman		9:00 a.m. to 5:00 p.m.		9:00 a.m. to 6:00 p.m.		None		None
River Park		9:00 a.m. to 5:00 p.m.		9:00 a.m. to 6:00 p.m.		9:00 a.m. to 2:00 p.m.		None
River Park Drive Up		8:00 a.m. to 5:30 p.m.		8:00 a.m. to 6:00 p.m.		9:00 a.m. to 3:00 p.m.		None
Sacramento Private Banking		9:00 a.m. to 4:00 p.m.		9:00 a.m. to 4:00 p.m.		None		None

 

Automated teller machines operate at 6 branch locations and 2 non-branch locations 24 hours per day, seven days per week.  No automated teller machines are currently located at the Sacramento office.  The Company’s

 

3

 

Real Estate and Small Business Administration (“SBA”) Departments maintain business hours of 8:00 A.M. to 5:00 P.M., Monday through Friday, and extended hours are available at customer request.

 

The Bank relies substantially on local promotional activity, personal contacts by its officers, directors and employees, referrals by its shareholders, extended hours, personalized service and its reputation in the communities it serves to compete effectively.

 

In Fresno County, in addition to the Company’s six branch locations, serving the Bank’s primary service areas, as of December 31, 2002 there were 142 operating banking offices in the Company’s primary service area, which consists of the cities of Clovis, Fresno, Kerman and Prather, California, of which 91 were offices of regional and major chain banking systems and 9 were offices of other community banks. Prather does not contain any banking offices other than the Company’s office. The Company’s primary service area contains 12 thrift offices. Business activity in the Company’s primary service area is oriented towards light industry, small business and agriculture.

 

In Sacramento County, in addition to the Company’s one branch, as of December 31, 2002 there were 196 operating banking offices in the Company’s primary service area of which 105 were offices of regional and major chain banking systems and 23 were offices of other community banks.  The Sacramento service area contains 35 thrift offices.

 

The banking business in California generally, and in the Company’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 Company is their ability to finance wide-ranging advertising campaigns and to allocate their investment assets, including loans, to regions of higher yield and demand. Major banks offer certain services such as international banking and trust services which are not offered directly by the Bank but which usually can be offered indirectly through correspondent institutions. In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Bank. Legal lending limits to an individual customer are limited to a percentage of a bank’s total capital accounts. As of December 31, 2002, the Bank’s loan limits to individual customers were $3,513,000 for unsecured loans and $5,854,000 for unsecured and secured loans combined. For borrowers desiring loans in excess of the Bank’s lending limits, the Bank makes and may, in the future, make such loans on a participation basis with other community banks taking the amount of loans in excess of the Bank’s lending limits. In other cases, the Bank may refer such borrowers to larger banks or other lending institutions.

 

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.  Banks also compete with money market funds and other money market instruments, which are not subject to interest rate ceilings. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software.  Competition for deposit and loan products remains strong, from both banking and non-banking firms, and affects the rates of those products as well as the terms on which they are offered to customers.

 

Technological innovation continues to contribute to greater competition in domestic and international financial services markets. Technological innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously have been traditional banking products. In addition, customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self-service branches, and in-store branches.

 

Mergers between financial institutions have placed additional pressure on banks to streamline their operations, reduce expenses, and increase revenues to remain competitive. In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past. Such laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in the Company’s market. The competitive environment also is significantly impacted by federal and state legislation, which may make it easier for non-bank financial institutions to compete with the Company.

 

4

 

Clovest Corporation

 

The Bank has engaged in real estate investment and development activities since 1987 through a wholly-owned subsidiary, Clovest Corporation (“Clovest”).  On July 15, 1998 the Board of Directors approved the discontinuance of Clovest’s operations. As of December 31, 2002 and 2001, and for the years then ended, the Company’s investment in Clovest and the results of Clovest’s operations were not material.

 

Clovis Securities Corporation

 

The Bank has another wholly-owned subsidiary, Clovis Securities Corporation, which has been inactive since December 31, 1993.

 

Central Valley Community Realty, LLC

 

The Bank formed a real estate investment trust, Central Valley Community Realty, LLC (“CVCR”) in 2002.  The trust invests in the Bank’s real estate related assets.  CVCR, as a real estate investment trust, is afforded certain tax advantages which reduce state income tax expense.

 

Statistical Disclosure

 

This information should be read in conjunction with the consolidated financial statements and the notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in items 6 and 7 of this annual report..

 

Distribution Of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

 

Table A sets forth the Company’s average consolidated balance sheets for the years ended December 31, 2002, 2001 and 2000 and an analysis of interest rates and the interest rate differential for the years then ended. Table B sets forth the changes in interest income and interest expense in 2002 and 2001 resulting from changes in volume and changes in rates.

 

Investment Portfolio

 

The book value of investment securities at December 31, 2002, 2001 and 2000 and the book value, maturities and weighted average yield of investment securities at December 31, 2002 are set forth in Table C.

 

Loan Portfolio

 

The composition of the loan portfolio at December 31, 2002, 2001, 2000, 1999 and 1998 is summarized in Table D.

 

Maturities and sensitivity to changes in interest rates in the loan portfolio at December 31, 2002 are summarized in Table E.

 

Table F shows the composition of non-accrual, past due and restructured loans at December 31, 2002, 2001, 2000, 1999 and 1998. Set forth in the text accompanying Table F is a discussion of the Company’s policy for placing loans on non-accrual status.

 

Summary Of Loan Loss Experience

 

Table G sets forth an analysis of loan loss experience as of and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998.

 

Set forth in the text accompanying Table G is a description of the factors which influenced management’s judgment in determining the amount of the additions to the allowance charged to operating expense in each fiscal year, a table showing the allocation of the allowance for credit losses to the various types of loans in the portfolio, as well as a discussion of management’s policy for establishing and maintaining the allowance for credit losses.

 

5

 

Deposits

 

Table H sets forth the average amount of and the average rate paid on major deposit categories for the years ended December 31, 2002, 2001 and 2000.

 

Table I sets forth the maturity of time certificates of deposit of $100,000 or more at December 31, 2002.

 

Return On Equity And Assets

 

Table J sets forth certain financial ratios for the years ended December 31, 2002, 2001 and 2000.

 

6

 

Table A

 

DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS’
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

 

The following table sets forth consolidated average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid; and the average yields earned or rates paid thereon for the years ended December 31, 2002, 2001 and 2000. The average balances reflect daily averages except non-accrual loans, which were computed using quarterly averages.

 

		2002								2001								2000
(Dollars in Thousands)		Average Balance			Interest Income/ Expense			Average Rates Earned		Average Balance			Interest Income/ Expense			Average Rates Earned		Average Balance			Interest Income/ Expense			Average Rates Earned
ASSETS:
Interest-earning deposits in other banks		$	175		$	5		2.86	%	$	100		$	3		3.00	%	$	343		$	25		7.29	%
Investment securities:
Taxable		50,974			2,629			5.16	%	55,059			3,475			6.31	%	54,457			3,506			6.44	%
Non-taxable(1)		10,136			512			5.05	%	8,665			479			5.53	%	8,804			485			5.51	%
Total investment securities		61,110			3,141			5.14	%	63,724			3,954			6.20	%	63,261			3,991			6.31	%
Federal funds sold		12,826			195			1.52	%	6,502			240			3.69	%	9,491			602			6.34	%
Loans(2)(3)		147,956			11,195			7.57	%	112,092			10,380			9.26	%	84,149			8,942			10.63	%
Total interest-earning assets(1)		222,067			$	14,536		6.55	%	182,418			$	14,577		7.99	%	157,244			$	13,560		8.62	%
Less allowance for credit losses		(2,390		)						(2,241		)						(2,495		)
Non-accrual loans		698								442								1,819
Cash and due from banks		14,988								13,932								11,804
Premises and equipment		2,719								1,896								1,656
Other assets		10,866								10,075								9,212
Total average assets		$	248,948							$	206,522							$	179,240

 

7

 

 

		2002								2001								2000
(Dollars in Thousands)		Average Balance			Interest Income/ Expense			Average Rates Paid		Average Balance			Interest Income/ Expense			Average Rates Paid		Average Balance			Interest Income/ Expense			Average Rates Paid
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits:
Savings and negotiable orders of withdrawal		$	47,936		$	168		0.35	%	$	40,126		$	263		0.66	%	$	70,302		$	1,457		2.07	%
Money market accounts		52,414			817			1.56	%	45,397			1,366			3.01	%
Time certificates of deposit, Under $100,000		38,847			1,074			2.76	%	35,458			1,646			4.64	%	36,240			1,931			5.33	%
Time certificates of deposit, $100,000 and over		14,251			334			2.34	%	16,365			840			5.13	%	13,161			732			5.56	%
Other borrowed funds		11,277			335			2.97	%	532			22			4.14	%	2,099			126			6.00	%
Federal funds purchased		18			0			1.09	%	14			1			7.14	%	18			1			5.56	%
Total interest-bearing Liabilities		164,743			$	2,728		1.66	%	137,892			$	4,138		3.00	%	121,820			$	4,247		3.49	%
Non-interest bearing demand		59,181								45,843								39,081
Other liabilities		2,420								2,606								1,664
Shareholders’ equity		22,604								20,181								16,675
Total liabilities and Shareholders’ equity		$	248,948							$	206,522							$	179,240
Interest income and average rate earned on earning assets(1)					$	14,536		6.55	%				$	14,577		7.99	%				$	13,560		8.62	%
Interest expense and average interest cost related to interest- bearing liabilities					2,728			1.66	%				4,138			3.00	%				4,247			3.49	%
Net interest income and margin(4)					$	11,808		5.32	%				$	10,439		5.72	%				$	9,313		5.92	%

 

(1)           Not computed on a tax equivalent basis.

(2)           Loan interest income includes loan fees of $755 in 2002; $648 in 2001; and $391 in 2000 (dollars in thousands).

(3)           Average loans do not include non-accrual loans.

(4)           Net interest margin is computed by dividing net interest income by total average interest-earning assets.

 

8

 

Table B

 

VOLUME AND RATE ANALYSIS

 

The following table sets forth, for the years indicated, a summary of the changes in interest earned and interest paid resulting from changes in asset and liability volumes and changes in rates.  The change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.

 

		Year Ended December 31
		2002 Compared to 2001									2001 Compared to 2000
(In Thousands)		Volume			Rate			Net			Volume			Rate			Net
Increase (decrease) due to changes in:
Interest income:
Interest-earning deposits in other banks		$	2		$	(0	)	$	2		$	(15	)	$	(7	)	$	(22	)
Investment securities:
Taxable		(244		)	(602		)	(846		)	160			(191		)	(31		)
Non-taxable(1)		(67		)	(34		)	(33		)	6			(12		)	(6		)
Total investment securities		(177		)	(636		)	(813		)	166			(203		)	(37		)
Federal funds sold		(114		)	69			(45		)	(195		)	(167		)	(362		)
Loans		1,903			(1,088		)	815			2,525			(1,087		)	1,438
Total earning assets(1)		1,614			(1,655		)	(41		)	2,481			(1,464		)	1,017
Interest expense:
Deposits:
Savings and negotiable orders of withdrawal		359			(1,003		)	(644		)	219			(48		)	171
Certificates of deposit under $100,000		177			(749		)	(572		)	(75		)	180			108
Certificates of deposit $100,000 and over		(97		)	(409		)	(506		)	(72		)	(209		)	(284		)
Total deposits		439			(2,161		)	(1,722		)	72			(77		)	(5		)
Federal funds purchased		0			(1		)	(1		)	0			0			0
Other borrowed funds		317			(4		)	313			32			(136		)	(104		)
Total interest bearing liabilities		756			(2,166		)	(1,410		)	104			(213		)	(109		)
Net interest income(1)		$	858		$	511		$	1,369		$	2,377		$	(1,251	)	$	1,126

 

(1) Not computed on a tax equivalent basis.

 

9

 

Table C

 

INVESTMENT PORTFOLIO

 

The book value of investment securities at December 31, 2002, 2001 and 2000 is set forth in the following table. At December 31, 2002, the Bank held no investment securities from any issuer which totaled over 10% of the Company’s shareholders’ equity.

 

Available for Sale		Book Value at December 31
(in thousands)		2002			2001			2000
U.S. Treasury securities and obligations of other  U.S. government agencies and corporations		$	10,619		$	8,477		$	15,283
Mortgage-backed securities		44,421			35,675			39,941
Obligations of states and political subdivisions		16,629			12,440			13,039
Federal Home Loan Mortgage Corporation stock		-0-			1,019			1,022
Corporate bonds		974			967			961
Other securities		2,348			265			2,761
Total Available-for-Sale Securities		$	74,991		$	58,843		$	73,007

 

10

 

The book value, maturities and weighted average yield of investment securities at December 31, 2002 are summarized in the following table.

 

		Maturing
(Dollars in Thousands)		In one year or less					After one through five years					After five through ten years					After ten years					Total
Available for Sale		Amount			Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Yield(1)		Amount			Yield(1)
Obligations of other U.S. Government agencies and corporations		$	666		4.26	%	$	6,019		4.81	%	$	2,000		5.68	%	$	1,934		5.88	%	$	10,619		5.13	%
Mortgage-backed securities		—			—		1,537			6.97	%	2,448			6.51	%	40,436			6.96	%	44,421			6.93	%
Obligations of states &political subdivisions		970			6.75	%	1,280			5.47	%	5,306			5.63	%	9,073			4.74	%	16,629			5.20	%
Corporate Bonds		—			—		974			6.70	%	—			—		—			—		974			6.70	%
Other securities		2,348			2.13	%	—			—		—			—		—			—		2,348			2.13	%
Total Available for Sale		$	3,984		3.61	%	$	9,810		5.42	%	$	9,754		5.86	%	$	51,443		6.53	%	$	74,991		6.14	%

 

(1)  Not computed on a tax equivalent basis.

 

11

 

Table D

 

LOAN PORTFOLIO

 

The composition of the loan portfolio at December 31, 2002, 2001, 2000, 1999 and 1998 is summarized in the table below.

 

(in thousands)		2002			2001			2000			1999			1998
Commercial and industrial		$	66,580		$	51,718		$	36,614		$	38,374		$	35,801
Real estate
Construction, land development & other land loans		21,736			27,462			12,829			8,253			5,712
Other		57,498			41,858			33,534			25,544			25,071
Loans to finance agricultural production or other loans to farmers		3,978			1,159			941			610			1,467
Installment loans to individuals for household, family and otherpersonal  expenditures		5,581			5,517			7,371			5,918			6,031
Leases		3,828			5,656			4,612			2,260			194
Other		13			302			385			545			767
Subtotal		159,214			133,672			96,286			81,504			75,043
Unearned income		(488		)	(401		)	(266		)	(251		)	(401		)
Subtotal		158,726			133,271			96,020			81,253			74,642
Allowance for credit losses		(2,433		)	(2,474		)	(2,047		)	(2,236		)	(2,949		)
Total(1)		$	156,293		$	130,797		$	93,973		$	79,017		$	71,693

 

(1)  Includes non-accrual loans of:

 

2002			2001			2000			1999			1998
$	466		$	1,109		$	205		$	3,617		$	4,033

 

12

 

Table E

 

LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

 

The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of the Company’s loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2002.

 

Maturity Distribution of Loans(1): (in thousands)		One Year or Less			After One Through Five Years			After Five Years			Total
Real estate construction		$	17,245		$	4,491		$	–0–		$	21,736
Other real estate		33,582			14,883			9,033			57,498
Commercial and industrial		58,634			11,612			3,687			73,933
Installment		2,453			1,123			2,005			5,581
		$	111,913		$	32,109		$	14,725		$	158,748
Sensitivity to Changes in Interest Rates:
Loans with Fixed Interest Rates					$	20,505		$	13,977
Loans with Floating Interest Rates					11,604			748
Total					$	32,109		$	14,725

 

(1)           Does not include non-accrual loans of $466

 

13

 

Table F

 

COMPOSITION OF NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS

 

A summary of non-accrual, restructured and past due loans at December 31, 2002, 2001, 2000, 1999 and 1998 is set forth below:

 

(In Thousands)		December 31
		2002			2001			2000			1999			1998
Non-accrual		$	466		$	1,109		$	205		$	3,617		$	4,033
Accruing loans past due 90 days or more		-0-			-0-			-0-			-0-			-0-
Restructured loans		615			627			-0-			145			242
		$	1,081		$	1,736		$	205		$	3,762		$	4,275
Non-accrual loans to total loans		0.3		%	0.8		%	0.2		%	4.5		%	5.4		%

 

The Company’s consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans. Interest income from non-accrual loans is recorded only if collection of principal in full is not in doubt and when and if received.

 

Loans are placed on non-accrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is ninety days or more past due. Loans in the non-accrual category are treated as non-accrual loans even though the Company may ultimately recover all or a portion of the interest due. These loans return to accrual status when the loan becomes contractually current and future collectibility of amounts due is reasonably assured. At December 31, 2002, the Company had $466,000 in non-accrual loans.  One agricultural relationship represented 72.5% of the total non-accrual loans.

 

Interest income on non-accrual loans that would have been recognized in the year ended December 31, 2002 if the loans had been current in accordance with their original terms totaled $62,000. No income was recognized on these loans for the year ended December 31, 2002.

 

In 2002, 2001, 1999 and 1998 the Company had one (1) restructured loan in the principal amount of $615,000, $627,000, $145,000 and $242,000, respectively. At December 31, 2000 the Company had no restructured loans. There was one loan, which was current at December 31, 2002, where serious doubt existed as to the ability of the borrower to comply with the loan repayment terms.  The loan is considered to be impaired and interest is not accruing.   See Note 3 of the Notes to Consolidated Financial Statements of the Company included under Item 7 - Financial Statements for information concerning the Company’s recorded investment in loans for which an impairment has been recognized. Impaired loans are identified from internal credit review reports, past due reports, overdraft listings, and regulatory reports of examination. Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow or business interruptions which jeopardize collection of the loan are also reviewed for possible impairment classification.

 

When a loan is classified as impaired, the net fair value (i.e., the measure of the impaired loan) is computed based on the present value of expected future cash flows discounted at the loan’s effective interest rate.  Alternatively, if the loan is collateral dependent, impairment is measured based on the fair value or market price of the collateral.  If the net fair value of the impaired loan is less than the recorded investment in the loan, then the resulting impairment amount is recognized through the use of a valuation allowance with a corresponding charge to the provision for credit losses.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement.

 

14

 

Table G

 

SUMMARY OF LOAN LOSS EXPERIENCE

 

The following table summarizes loan loss experience as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. 

 

(Dollars in Thousands)		2002			2001			2000			1999			1998
Loans outstanding at December 31,		$	159,214		$	133,672		$	96,286		$	81,504		$	75,043
Average loans outstanding during period		$	148,654		$	112,534		$	85,968		$	77,234		$	83,483
Allowance for credit losses:
Balance at beginning of year		$	2,474		$	2,047		$	2,236		$	2,949		$	2,600
Deduct loans charged-off:
Commercial and industrial		(289		)	(342		)	(146		)	(1,561		)	(1,217		)
Real estate – construction		-0-			-0-			-0-			-0-			-0-
Real estate – other		-0-			-0-			(868		)	-0-			(152		)
Loans to finance agricultural and other loans to farmers		-0-			-0-			-0-			(845		)	-0-
Loans to individuals for household, family and  other personal expenditures		(63		)	(49		)	(128		)	(103		)	(254		)
Other		-0-			-0-			-0-			(24		)	-0-
Total loans charged-off		(352		)	(391		)	(1,142		)	(2,533		)	(1,623		)
Add recoveries of loans charged off:
Commercial and industrial		275			122			271			426			85
Real estate – construction		-0-			-0-			-0-			-0-			-0-
Real estate – other		-0-			37			-0-			53			106
Loans to finance agricultural and other loans to  farmers		-0-			9			591			21			-0-
Loans to individuals for household, family and other personal expenditures		36			28			41			50			59
Total recoveries		311			196			903			550			250
Net charge-offs		(41		)	(195		)	(239		)	(1,983		)	(1,373		)
Add provision charged to operating expense		-0-			622			50			1,270			1,722
Balance at end of year		$	2,433		$	2,474		$	2,047		$	2,236		$	2,949
Allowance for credit losses as a percentage of outstanding loan balance		1.53		%	1.85		%	2.13		%	2.74		%	3.93		%
Net charge-offs to average loans outstanding		0.03		%	0.17		%	0.28		%	2.57		%	1.64		%

 

15

 

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate Company losses.  Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.

 

The allowance for credit losses is reviewed at least quarterly by the Directors’ Audit Committee and by the Board of Directors. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. The Company has adopted the specific reserve approach to allocate reserves to each adversely graded asset, as well as to each impaired asset for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of  independent loan portfolio examinations,  regulatory agency examinations, or the Company’s own internal review process. Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.

 

The Company made no additions to the allowance for credit losses in 2002 due mainly to decreased levels of risk-rated loans and increased recoveries on previously charged-off loans.

 

The provision for credit losses was $622,000 in 2001.  The 2001 provision primarily related to the Company’s increase in non-accrual loans, which totaled $1,109,000 at December 31, 2001 compared to $205,000 at December 31, 2000, as well as a 30.9% increase in loan volume during 2001. The 2000 provision for credit losses of $50,000 reflected management’s evaluation of deterioration primarily in one commercial borrowing relationship. In 1999, the provision for credit losses of $1,270,000 reflected the deterioration of four borrowing relationships. The $1,722,000 provision in 1998 was partially the result of adverse economic conditions within the Bank’s market area, particularly related to real estate and agriculture, as well as a $113,000 specific allowance for potential Year 2000 related credit problems.

 

16

 

Using the criteria on the previous page, the allocation of the allowance for credit losses is set forth below:

 

		2002					2001					2000					1999					1998
(Dollars in Thousands)		Amount			Percent of Loans in Each Category to Total Loans		Amount			Percent of Loans in Each Category to Total Loans		Amount			Percent of Loans in Each Category to Total Loans		Amount			Percent of Loans in Each Category to Total Loans		Amount			Percent of Loans in Each Category to Total Loans
Commercial and industrial		$	985		40.7	%	$	1,345		54.4	%	$	877		42.8	%	$	1,060		47.1	%	$	1,187		42.1	%
Real estate construction		85			3.5	%	141			5.7	%	272			13.3	%	75			10.1	%	51			6.3	%
Real estate – other		1,039			42.5	%	370			15.0	%	712			34.8	%	845			31.3	%	507			37.1	%
Loans to finance agricultural and other  loans to farmers		159			6.5	%	380			15.3	%	20			1.0	%	5			.8	%	630			3.7	%
Loans to individuals for household, family and other personal  expenditures and other loans		58			2.4	%	62			2.5	%	158			7.7	%	146			7.3	%	198			10.2	%
Lease contracts		—			—		—			—		—			—		23			2.8	%	3			0.6	%
Year 2000 for all loan types		—			—		—			—		—			—		81			N/A		113			N/A
Other		40			1.6	%	—			—		8			0.4	%	1			.6	%	—			N/A
Non-specific reserve		67			2.8	%	176			7.1	%	—			—		—			N/A		260			N/A
		$	2,433				$	2,474				$	2,047				$	2,236				$	2,949

 

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all potential loan charge-offs that exist in the portfolio at that time.

 

17

 

Table H

 

DEPOSITS

 

The Company has no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2002, 2001 and 2000.

 

		(dollars in thousands)
		2002					2001					2000
		Balance			Rate		Balance			Rate		Balance			Rate
Savings and negotiable orders of withdrawal		$	100,350		.98	%	$	85,523		1.90	%	$	70,302		2.07	%
Time certificates of deposit, under $100,000		$	38,847		2.76	%	$	35,458		4.64	%	$	36,240		5.33	%
Non-interest bearing demand		$	59,181		N/A		$	45,843		N/A		$	39,081		N/A
Total deposits		$	212,629				$	183,189				$	158,784

 

Table I

 

TIME DEPOSITS

 

The following table sets forth the maturity of time certificates of deposit and other time deposits of $100,000 or more at December 31, 2002.

 

(In Thousands)
Three months or less		$	8,909
Over 3 months through 6 months		2,256
Over 6 through 12 months		4,014
Over 12 months		6,445
		$	21,624

 

Table J

 

FINANCIAL RATIOS

 

The following table sets forth certain financial ratios for the years ended December 31, 2002, 2001 and 2000.

 

		2002		2001		2000
Net Income:
To average assets		1.12	%	1.15	%	0.98	%
To average shareholders’ equity		12.32	%	11.78	%	10.48	%
Dividends declared per share to net income per share		4.90	%	N/A		7.46	%
Average shareholders’ equity toaverage assets		9.08	%	9.77	%	9.30	%

 

18

 

SUPERVISION AND REGULATION

 

GENERAL

 

The banking and financial services businesses in which the Company engages are highly regulated. Such regulation is intended, among other things, to protect depositors whose deposits are insured by the FDIC and the banking system as a whole. The monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors, also influence the commercial banking business. The Board of Governors implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Board of Governors in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. Indirectly such actions may also affect the ability of non-bank financial institutions to compete with the Bank. The nature and impact of any future changes in monetary policies cannot be predicted.

 

The laws, regulations, and policies affecting financial services businesses are continuously under review by Congress and state legislatures, and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies. Changes in the laws, regulations or policies that affect the Company cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.

 

BANK HOLDING COMPANY REGULATION

 

The Company, as a bank holding company, is subject to regulation under the BHC Act, and is subject to the supervision and examination of the Board of Governors. Pursuant to the BHC Act, the Company is required to obtain the prior approval of the Board of Governors before it may acquire all or substantially all of the assets of any bank, or ownership or control of voting shares of any bank if, after giving effect to such acquisition, the Company would own or control, directly or indirectly, more than 5 percent of such bank.

 

Under the BHC Act, the Company may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries that the Board of Governors deems to be so closely related to banking as to be a proper incident to banking. The Company is also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the Board of Governors determines that the activity is so closely related to banking to be a proper incident to banking. The Board of Governors’ approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.

 

The BHC Act and regulations of the Board of Governors also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.

 

The Company’s earnings and activities are affected by legislation, by actions of its regulators, and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which the Company and the Bank conduct business. For example, these include limitations on the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends to its shareholders. It is the policy of the Board of Governors that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. In addition to these explicit limitations, the federal regulatory agencies are authorized to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend

 

19

 

would constitute an unsafe or unsound banking practice.

 

In addition, banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act and the recently enacted Regulation W, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral security for a loan or extension of credit to any person or company, issue a guarantee, or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary’s capital stock and surplus on a per affiliate basis or 20 percent of such subsidiary’s capital stock and surplus on an aggregate affiliate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank and its subsidiaries generally may not purchase a “low-quality asset,” as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also generally prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.

 

A holding company and its banking subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or provision of services. For example, with certain exceptions a bank may not condition an extension of credit on a customer obtaining other services provided by it, a holding company or any of its other bank affiliates, or on a promise by the customer not to obtain other services from a competitor.

 

The Board of Governors has cease and desist powers over parent bank holding companies and non-banking subsidiaries where actions of a parent bank holding company or its non-financial institution subsidiaries represent an unsafe or unsound practice or violation of law. The Board of Governors has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

 

The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by the Department of Financial Institutions ("DFI").

 

Further, the Company is required by the Board of Governors to maintain certain capital levels. See “Capital Standards.”

 

REGULATION OF THE BANK

 

Banks are extensively regulated under both federal and state law. The Bank, as a California state-chartered bank, is subject to primary supervision, regulation and periodic examination by the DFI and the FDIC. The Bank is not a member of the Federal Reserve System, but is nevertheless subject to certain regulations of the Board of Governors.

 

If, as a result of an examination of a bank, the FDIC should determine that the 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 remedies are available to the FDIC. 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 for a California chartered bank would result in a revocation of the bank’s charter. The DFI has many of the same remedial powers.

 

The Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $100,000 per depositor. For this protection, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a semi-annual statutory assessment.

 

Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including standards for safety and soundness, reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements,

 

20

 

Community Reinvestment Act activities, and loans to affiliates.

 

PAYMENT OF DIVIDENDS

 

THE COMPANY

 

The shareholders of the Company are entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available, subject to the dividends preference, if any, on preferred shares that may be outstanding, and also subject to the restrictions of the California Corporations Code. At December 31, 2002, the Company had no outstanding shares of preferred stock.

 

The principal source of cash revenue to the Company is dividends received from the Bank. The Bank’s ability to make dividend payments to the Company is subject to state and federal regulatory restrictions.

 

THE BANK

 

Dividends payable by the Bank to the Company are restricted under California law to the lesser of the Bank’s retained earnings, or the Bank’s net income for the latest three fiscal years, less dividends paid during that period, or, with the approval of the DFI, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year or the net income of the Bank for its current fiscal year.

 

In addition to the regulations concerning minimum uniform capital adequacy requirements described below, the FDIC has established guidelines regarding the maintenance of an adequate allowance for credit losses. Therefore, the future payment of cash dividends by the Bank will generally depend, in addition to regulatory constraints, upon the Bank’s earnings during any fiscal period, the assessment of the Board of Directors of the capital requirements of the Bank and other factors, including the maintenance of an adequate allowance for credit  losses.

 

CAPITAL STANDARDS

 

The Board of Governors, the FDIC and other federal banking agencies have issued 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 is 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 average 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

 

21

 

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.

 

A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, the Company and the Bank are required to maintain certain levels of capital. The regulatory capital guidelines as well as the actual capitalization for the Bank and the Company on a consolidated basis as of December 31, 2002 follow:

 

22

 

		REQUIREMENT				ACTUAL
		ADEQUATELY CAPITALIZED		WELL CAPITALIZED		BANK		COMPANY
Total risk-based capital ratio		8.0	%	10.0	%	12.6	%	13.2	%
Tier 1 risk-based capital ratio		4.0	%	6.0	%	11.3	%	12.0	%
Tier 1 leverage capital ratio		4.0	%	5.0	%	7.6	%	8.0	%

 

RECENT LEGISLATION

 

SARBANES-OXLEY ACT

 

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud.  In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms.  To ensure auditor independence, any non-audit services being provided to an audit client will require pre-approval by the company’s audit committee members.  In addition, the audit partners must be rotated.  The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission ("SEC"), subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement.  In addition, under the Act, legal counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

 

Longer prison terms and increased penalties will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct.  Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted.  The Act accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations.  Directors and executive officers must also provide information for most changes in ownership in their company’s securities within two business days of the change.

 

The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading.  The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to stockholders.  In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a “registered public accounting firm” in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.

 

Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Company’s chief executive officer and chief financial officer are each required to certify that the Company’s Quarterly and Annual Reports do not contain any untrue statement of a material fact.  The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s internal controls; they have made certain disclosures to the Company’s auditors and the audit committee of the Board of Directors about the Company’s internal controls; and they have included information in the Company’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

 

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USA PATRIOT ACT

 

In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.  Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps:

 

• To conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

 

• To ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

 

• To ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

 

• To ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

 

Under the USA PATRIOT Act, financial institutions were given 180 days from enactment to establish anti-money laundering programs.  The USA PATRIOT Act sets forth minimum standards for these programs, including:

 

• The development of internal policies, procedures, and controls;

 

• The designation of a compliance officer;

 

• An ongoing employee training program; and

 

• An independent audit function to test the programs.

 

Bank management believes that the Bank is currently in compliance with the Act.

 

FINANCIAL SERVICES MODERNIZATION LEGISLATION

 

On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. This legislation eliminated many of the barriers that have separated the insurance, securities and banking industries since the Great Depression. The federal banking agencies (the Board of Governors, FDIC and the Office of the Comptroller of the Currency) among others, continue to draft regulations to implement the Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act is the result of a decade of debate in the Congress regarding a fundamental reformation of the nation’s financial system. The law is subdivided into seven titles, by functional area.

 

The major provisions of the Gramm-Leach-Bliley Act are:

 

FINANCIAL HOLDING COMPANIES AND FINANCIAL ACTIVITIES. Title I establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit a holding company system to engage in a full range of financial activities through qualification as a new entity known as a financial holding company.

 

Final regulations adopted by the FDIC in January 2001, in the form of amendments to Part 362 of the FDIC rules and regulations, provide the framework for subsidiaries of state nonmember banks to engage in financial activities that the Gramm-Leach-Bliley Act permits national banks to conduct through a financial subsidiary.

 

Activities permissible for financial subsidiaries of national banks, and, pursuant to Section 362 of the FDIC

 

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rules and regulations, also permissible for financial subsidiaries of state nonmember banks, include, but are not limited to, the following:  (a) Lending, exchanging, transferring, investing for others, or safeguarding money or securities; (b) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State; (c) Providing financial, investment, or economic advisory services, including advising an investment company; (d) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and (e) Underwriting, dealing in, or making a market in securities.

 

SECURITIES ACTIVITIES. Title II narrows the exemptions from the securities laws previously enjoyed by banks and creates a new voluntary investment bank holding company.  The Board of Governors and the SEC continue to work together to draft rules governing certain securities activities of banks.

 

INSURANCE ACTIVITIES. Title III restates the proposition that the states are the functional regulators for all insurance activities, including the insurance activities of federally-chartered banks, and bars the states from prohibiting insurance activities by depository institutions.

 

PRIVACY. Under Title V, federal banking regulators were required to adopt rules that have limited the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Federal banking regulators issued final rules on May 10, 2000 to implement the privacy provisions of Title V. Under the rules, financial institutions must provide:

 

• initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates;

 

• annual notices of their privacy policies to current customers; and

 

• a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

 

Compliance with these rules was mandatory after July 1, 2001.  The Company and the Bank were in full compliance with the rules as of or prior to their respective effective dates.

 

SAFEGUARDING CONFIDENTIAL CUSTOMER INFORMATION.  Under Title V, federal banking regulators are required to adopt rules requiring financial institutions to implement a program to protect confidential customer information. In January 2000, the federal banking agencies adopted guidelines requiring financial institutions to establish an information security program.

 

The Bank implemented a security program appropriate to its size and complexity and the nature and scope of its operations prior to the July 1, 2001 effective date of the regulatory guidelines, and since initial implementation has, as necessary, updated and improved that program.

 

COMMUNITY REINVESTMENT ACT SUNSHINE REQUIREMENTS. The federal banking agencies have adopted final regulations implementing Section 711 of Title VII, the CRA Sunshine Requirements. The regulations require nongovernmental entities or persons and insured depository institutions and affiliates that are parties to written agreements made in connection with the fulfillment of the institution’s CRA obligations to make available to the public and the federal banking agencies a copy of each agreement.  Neither the Company nor the Bank is a party to any agreement that would be the subject of reporting pursuant to the CRA Sunshine Requirements.

 

The Company continues to evaluate the strategic opportunities presented by the broad powers granted to bank holding companies that elect to be treated as financial holding companies. In the event that the Company determines that access to the broader powers of a financial holding company is in the best interests of the Company, its shareholders and the Bank, the Company will file the appropriate election with the Board of Governors.

 

The Company and the Bank intend to comply with all provisions of the Gramm-Leach-Bliley Act and all implementing regulations as they become effective.

 

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CONSUMER PROTECTION LAWS AND REGULATIONS

 

The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature, and insured institutions have been advised to monitor carefully compliance with such laws and regulations. The Bank is subject to many federal consumer protection statutes and regulations, some of which are discussed below.

 

The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. The agencies use the CRA assessment factors in order to provide a rating to the financial institution. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.”  The Bank was last examined for CRA compliance by its then-primary regulator, the FDIC, as of March 2001.

 

The Equal Credit Opportunity Act (“ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.

 

The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.

 

The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.

 

The Home Mortgage Disclosure Act (“HMDA”) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.

 

Finally, the Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other penalties.

 

Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.

 

PENDING LEGISLATION

 

FAIR CREDIT REPORTING ACT

 

In 1970, the federal Fair Credit Reporting Act (the “FCRA”) was enacted to insure the confidentiality, accuracy, relevancy and proper utilization of consumer credit report information.  Under the framework of the FCRA, the United States has developed a highly advanced and efficient credit reporting system.  The information contained in that broad system is used by financial institutions, retailers and other creditors of every size in making a wide variety of decisions regarding financial transactions.  Employers, and law enforcement agencies have also made wide use of the information collected and maintained in databases made possible by the FCRA.  The FCRA affirmatively preempts state law in a number of areas, including the ability of entities affiliated by common

 

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ownership to share and exchange information freely, and the requirements on credit bureaus to reinvestigate the contents of reports in response to consumer complaints, among others.  By its terms, the preemption provision of the FCRA will terminate as of December 31, 2003.  Termination of the preemption provisions could significantly impact the ability of the existing credit bureau system to continue operating.

 

The Bank may incur additional costs, and be required to implement additional costly procedures and systems in the event that the preemption provisions of the FCRA terminate at the end of 2003, and California, or other states, adopts legislation that would have the effect of prohibiting the continued sharing of information such as that currently collected by credit bureaus throughout the United States.  The likelihood of the FCRA preemption provisions terminating by their terms, and of the adoption of such restrictive provisions by state legislatures, cannot be estimated at this time.

 

DEPOSIT INSURANCE REFORM

 

Both houses of the 108th Congress have among the bills each is to consider during the current session a measure designed to make the administration of the deposit insurance system more efficient by merging the Bank Insurance Fund and the Savings Association Insurance Fund, and increasing the flexibility of the FDI Act with regard to the appropriate level of the resulting Deposit Insurance Fund, as established by the FDIC Board of Directors.

 

On February 4, 2003, Representative Spencer Bachus of Alabama introduced bill H.R. 522, entitled the “Federal Deposit Insurance Reform Act of 2003”.  H.R. 522 incorporates a number of provisions requiring a merger of the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund, increasing the coverage amount for deposit insurance, amending the procedure and considerations utilized by the Board of Directors of the FDIC in setting insurance assessment rates, replacing the fixed target for the size of the Bank Insurance Fund of 1.25 percent of estimated insured deposits to a range of not less than 1.15 and not more than 1.4 percent of estimate deposits, making technical changes to the manner in which the FDIC gathers information to assess the risk of future bank failures for use in analyzing the adequacy of the Bank Insurance Fund and other technical amendments regarding refunds, dividends and credits from the Deposit Insurance Fund.  Finally, H.R. 522 directs the Comptroller General, the Board of Directors of the FDIC and the National Credit Union Administration Board variously to conduct a number of studies on issues including the utility of the prompt corrective provisions of the FDI Act as implemented by the federal banking agencies, the appropriateness of the organizational structure of the FDIC, and the feasibility of creating a system of private deposit insurance for amounts over the maximum public deposit insurance provided and the feasibility of converting to a voluntary or private deposit insurance system.

 

On January 29, 2003, Senator Tim Johnson of South Dakota introduced S. 229, entitled “A bill for the merger of the bank and savings association deposit insurance funds, to modernize and improve the safety and fairness of the Federal deposit insurance system, and for other purposes.”  S. 229 also seeks to merge the Bank Insurance Fund with the Savings Association Insurance Fund to form the Deposit Insurance Fund, to increase the level of federal deposit insurance coverage generally to $130,000 per account, replacing the fixed target for the size of the Bank Insurance Fund of 1.25 percent of estimated insured deposits to a range of not less than 1.10 and not more than 1.5 percent of estimate deposits, inserting a requirement that the FDIC refund any overpaid assessment, and require studies, first by the Board of Directors of the FDIC and the National Credit Union Administration Board on the feasibility of increasing deposit insurance coverage for municipalities and other units of local government, the feasibility of creating a system of private deposit insurance for amounts over the maximum public deposit insurance provided, and of the feasibility of using actual deposits rather than estimated deposits in the calculation of the reserve ratio of the Deposit Insurance Fund.

 

No assurance can be given as to the passage, or failure, of the House or Senate bills.  The Bank may incur additional costs, in the form of deposit insurance premiums, in the event that either bill becomes law.

 

PRIVACY

 

California Senate Bill 1, introduced on December 2, 2002, would enact the “California Financial Information Privacy Act”, which would require a financial institution to provide specific information to a consumer related to the sharing of that consumer’s nonpublic personal information.  The bill would allow a consumer to direct

 

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the financial institution not to share his or her nonpublic personal information with affiliated or nonaffiliated companies with which a financial institution has contracted to provide financial products and services, and would require that permission from each such consumer be acquired by a financial institution prior to sharing such information. These provisions are more restrictive than the privacy provisions of the GLB Act, and would require the Bank to adopt new policies, procedures and disclosure documentation if enacted.  The cost of complying with this bill if enacted as law in California is not predictable at this time.

 

Recent Accounting Pronouncements

 

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

 

Other

 

Other legislation which has been or may be proposed to the United States Congress and the California Legislature and regulations which may be proposed by the Board of Governors, FDIC and the DFI may affect the business of the Company and the Bank.  It cannot be predicted whether any pending or proposed legislation or regulations will be adopted or the effect such legislation or regulations may have upon the business of the Company and the Bank.

 

Other Information Concerning the Company

 

The Company holds no material patents, trademarks, licenses, franchises or concessions.

 

No expenditures were made by the Company during its last two fiscal years on material research activities relating to the development of services or the improvement of existing services.

 

Based upon present business activities, compliance with Federal, State and local provisions regulating discharge of materials into the environment will have no material effects upon the capital expenditures, earnings and competitive position of the Company.

 

The business of the Company is not seasonal.  The Company intends to continue with the same basic commercial banking activities that have characterized the Bank’s operations since its inception.

 

Available Information

 

The Company is subject to certain of the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore the Company files reports and other information with the Securities and Exchange Commission (the “Commission”). These reports and other information may be inspected and copied at the public reference facilities of the Commission located at 450 Fifth Street, N. W., Washington, D. C. 20549.  Information regarding the Commission can be obtained by calling 1-800-SEC-0330. Such reports and other information may also be accessed electronically at the Commission’s home page on the Internet at http://www.sec.gov.

 

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ITEM 2 -                DESCRIPTION OF PROPERTY.

 

(a)  Properties

 

		OWNED		LEASED		TOTAL
FULL SERVICE BRANCHES
Headquarters and Main Deposit Branch 600 Pollasky Avenue, Clovis, CA		1				1
Foothill Branch, Prather, CA		1				1
Kerman Branch, Kerman, CA				1		1
River Park Branch, Northeast Fresno, CA				1		1
Fig Garden Branch, Northwest Fresno, CA				1		1
Supermarket Branch, Clovis, CA				1		1
Sacramento Private Banking, Gold River, CA				1		1

 

OTHER FACILITIES:
Cashier, Human Resources, Information Services Department 536 Woodworth, Clovis, CA		1				1
Credit Administration, Real Estate Department 795 Pollasky Avenue, Clovis, CA				1		1
Training Facility 630 Pollasky Avenue, Clovis, CA				1		1
SBA Department 624 Pollasky Avenue, Clovis CA				1		1
Total		3		8		11

 

Title to the properties described as owned in the above table is held by the Bank with no liens or encumbrances.  All of the property described as leased is leased directly from independent parties.   Management considers the terms and conditions of each of the existing leases to be in the aggregate favorable to the Company.

 

(b)          Investment Policies

 

For a description of the Company’s policies (all of which may be changed without a vote of the Company’s security holders) and the limitations on the percentage of assets which may be invested in any one investment, or type of investment with respect to: (1) investments in real estate or interests in real estate; (2) investments in real estate mortgages; and (3) securities of or interests in persons primarily engaged in real estate activities, reference is made hereunder to the information presented above under “Item 1. Description of Business”.

 

(c)          Description of Real Estate and Operating Data

 

Inapplicable.  None of the net book values of the properties listed above represent more than 10% of total assets of the Company.

 

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ITEM 3 -                LEGAL PROCEEDINGS.

 

Neither the Company nor the Bank is a party to, nor are any of their properties the subject of, any material pending legal proceedings other than ordinary, routine litigation incidental to the Company’s and the Bank’s businesses, nor are any of such proceedings known to be contemplated by government authority.

 

No director, officer, affiliate, more than 5% shareholder of the Company or the Bank or any associate of these persons is a party adverse to the Company or the Bank or has a material interest adverse to the Company or the Bank in any material legal proceeding.

 

ITEM 4 -                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None.

 

PART II

 

ITEM 5 -                MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

The Company’s common stock is not listed on any exchange nor is it listed with NASDAQ.  Trading of the Company’s common stock has been limited in volume with transactions coordinated between buyer and seller utilizing brokers to accommodate activity.  Bid and ask prices for the Company’s common stock are quoted weekly in the “Fresno Bee” and the “pink sheet” (National Daily Quotation Service).  They can also be found on the Internet under the symbol CVCY.OB.  As of February 28, 2003 the Company had 390 shareholders of record.  The following table summarizes bid quotations for the Company’s common stock.  The prices indicated may not necessarily represent actual transactions.  Bid information has been obtained from The Seidler Companies, which makes a market in the Company’s common stock.

                               

		Bid Quotations of the Company’s Common Stock
Quarter Ended		Low Bid			High Bid
March 31, 2001		$	8.25		$	8.75
June 30, 2001		$	9.05		$	10.00
September 30, 2001		$	10.63		$	11.25
December 31, 2001		$	9.88		$	10.38
March 31, 2002		$	10.25		$	11.50
June 30, 2002		$	11.40		$	11.75
September 30, 2002		$	11.43		$	11.88
December 31, 2002		$	14.75		$	14.95

 

The Company paid a $0.05 per share cash dividend in 2002. No dividends were paid in 2001.  On January 6, 2003, the Company effected a two-for-one stock split.  Certificates for the new shares were issued on January 20, 2003.

 

Inquiries on Central Valley Community Bancorp stock can be made by calling Troy Norlander with The Seidler Companies at (800) 288-2811, Jeffrey Mayer with The Seidler Companies at (559) 449-2777, Joey Warmenhoven with Wedbush Morgan Securities at (800) 234-0480, or Dave Bonaccorso at Hoefer & Arnett at

 

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(800) 346-5544 ext. 223.

 

Inquiries regarding Central Valley Community Bancorp’s accounting, internal accounting controls or auditing concerns should be directed to Steven D. McDonald, chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com.

 

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ITEM 6 -                MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

 

Management’s discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements, including the Notes thereto, at pages 39 through 75 herein.

 

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company’s results of operations, the Company’s ability to continue its internal growth at historical rates, the Company’s ability to maintain its net interest margin, and the quality of the Company’s earning assets; (3) changes in the regulatory environment; (4) fluctuations in the real estate market; (5) changes in business conditions and inflation; (6) changes in securities markets.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

 

Overview:

 

Central Valley Community Bancorp (OTC:CVCY) (the “Company”) was incorporated on February 7, 2000.  The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves.  The Company currently has one bank subsidiary.  The Company’s market area includes the entire central valley area from Sacramento, California to Bakersfield, California.  To garner public acceptance beyond the Clovis-Fresno area, the Company made a decision in the first half of 2002, to change the name of its one subsidiary, Clovis Community Bank, to Central Valley Community Bank (the “Bank”).  This change was completed in the second quarter of 2002 and has been well received.

 

During 2002, the Bank relocated its River Park and Fig Garden Offices in Fresno, California to new expanded sites.  Due to the success of the River Park Office staff, the office outgrew its initial 2,000 square foot leased facility and relocated to a new 5,000 square foot facility in the same area.  Similarly the Fig Garden Office quickly outgrew its original 350 square feet and was relocated to a new 2,000 square foot site within the same shopping area.

 

The Bank also opened two new full service offices in step with its strategic plans to expand its market areas to the entire central valley.  An office in the Sacramento area was opened in the first half of 2002.  The new Sacramento Private Banking facility is intended to serve the Sacramento area needs of the Company’s existing commercial customers whose needs fall outside the Fresno area but within the Sacramento area, as well as serving the banking needs of new customers.

 

In the second half of 2002, the Company opened a new office located in Kerman, California.  The recent acquisition of Kerman State Bank, a long established community bank, by Westamerica Bank provided an opportunity to expand into the Kerman area.  The Company had been encouraged by contacts from numerous businesses in the Kerman area to open a facility.  The Bank was successful in hiring prior Kerman State Bank employees.

 

The Bank anticipates additional branch openings to meet the growing service needs of its customers.  The branch expansions provide the Company with opportunities to expand its loan and deposit base; however, based on past experience, management expects these new offices will initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.

 

Leasehold improvements associated with these new and relocated facilities are reflected in net premises and equipment, which increased $1,272,000 in 2002 compared to 2001.  Approximately $935,000 of the increase is

 

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related to the leasehold improvements for the River Park Office which will be amortized over the 10 year term of the lease.

 

In 2002, the Bank formed a real estate investment trust, Central Valley Community Realty, LLC  (CVCR).  The trust invests in the Bank’s real estate related assets and provides an alternative means to potentially generate additional capital.  Additionally, CVCR, as a real estate investment trust, is afforded certain tax advantages which reduce state income tax expense.  However, no assurance can be given that the Company will be successful in accomplishing these objectives. State income taxes decreased $64,000 in the period under review partly due to the trust.

 

In 2002, the Company reported its highest earnings since 1994.  The Company had net income of $2,784,000 in 2002 compared  to $2,378,000 in 2001.  The primary contributors to the increase in net income during 2002 were a $1,369,000 increase in net interest income, and a $623,000 decrease in provision for credit losses, which were partially offset by a $480,000 decrease in non-interest income and a $1,132,000 increase in non-interest expenses.

 

Average earning assets for 2002 were $222,067,000 compared to $182,418,000 for 2001.  The major contributor to the increase in average earning assets was the $29,440,000 increase in average deposits which provided liquidity for the $36,120,000 increase in average loans.  Loan and deposit growth are discussed in more detail below.

 

Accrued interest and other assets increased $2,153,000 in the periods under review mainly due to an increase in the cash surrender value of bank owned life insurance and an increase in Federal Home Loan Bank stock holdings.  For additional information, please see  Note 7 of the Notes to Consolidated Financial Statements on page 58.

 

Similar to most of the banking industry, the Company’s net interest margin continues to be challenged by the impact of twelve decreases in the Federal funds interest rate by the Federal Open Market Committee (FOMC) in 2002 and 2001.  Managing the decrease in loan yields and the effective rates paid on deposits has become increasingly difficult as deposit rates may be near the bottom of consumer tolerance.  For additional information, please see  Market Risk for further discussion of the Bank’s interest rate position.

 

The following table sets forth average assets, liabilities, and shareholders’ equity; interest income earned and interest expense paid; and the average yields earned or rates paid thereon for the years 2002 and 2001.  The average balances reflect daily averages except non-accrual loans that were computed using month-end averages.  Net interest margin is calculated by dividing net interest income by average interest earning assets.

 

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CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(dollars in thousands)

 

		FOR THE TWELVE MONTHS ENDED December 31, 2002								FOR THE TWELVE MONTHS ENDED December 31, 2001
		AVERAGE BALANCE			INTEREST			AVERAGE INTEREST RATE		AVERAGE BALANCE			INTEREST			AVERAGE INTEREST RATE
ASSETS
Interest-earning deposits in other banks		$	175		$	5		2.86	%	$	100		$	3		3.00	%
Investment securities:
Taxable securities		50,974			2,629			5.16	%	55,059			3,475			6.31	%
Non-taxable securities		10,136			512			5.05	%	8,665			479			5.53	%
Total investment securities		61,110			3,141			5.14	%	63,724			3,954			6.20	%
Federal funds sold		12,826			195			1.52	%	6,502			240			3.69	%
Loans		147,956			11,195			7.57	%	112,092			10,380			9.26	%
Total interest-earning assets		222,067			14,536			6.55	%	182,418			14,577			7.99	%
Allowance for credit losses		(2,390		)						(2,241		)
Non-accrual loans		698								442
Cash and due from banks		14,988								13,932
Premises		2,719								1,896
Other non-earning assets		10,866								10,075
Total average assets		$	248,948		$	14,536				$	206,522		$	14,577
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and negotiable orders of withdrawal		$	47,936		$	168		0.35	%	$	40,126		$	263		0.66	%
Money market accounts		52,414			817			1.56	%	45,397			1,366			3.01	%
Time certificates of deposit, under $100,000		38,847			1,074			2.76	%	35,458			1,646			4.64	%
Time certificates of deposit, $100,000 and over		14,251			334			2.34	%	16,365			840			5.13	%
Other borrowed funds		11,277			335			2.97	%	532			22			4.14	%
Federal funds purchased		18			0			1.09	%	14			1			7.14	%
Total interest-bearing liabilities		164,743			2,728			1.66	%	137,892			4,138			3.00	%
Non-interest bearing demand deposits		59,181								45,843
Other liabilities		2,420								2,606
Shareholders’ equity		22,604								20,181
Total average liabilities and shareholders’ equity		$	248,948		$	2,728				$	206,522		$	4,138
Interest income and rate earned on average earning assets					$	14,536		6.55	%				$	14,577		7.99	%
Interest expense and interest cost related to average interest-bearing liabilities					2,728			1.66	%				4,138			3.00	%
Net interest income and net interest margin					$	11,808		5.32	%				$	10,439		5.72	%

 

The Company’s net interest margin decreased 40 basis points in the periods under review.  The net interest margin in 2002 was 5.32% compared to 5.72% in 2001.  The decrease can be partially attributed to the declining interest rate environment and the fact that assets generally reprice more quickly than liabilities. West Coast prime rate declined 50 basis points in 2002, from 4.75% at December 31, 2001 to 4.25% at December 31, 2002.  West Coast prime rate decreased 475 basis points in 2001 from 9.5% at December 31, 2000 to 4.75% at December 31, 2001.  The effective yield on loans for those same periods was 7.57% for 2002 and 9.26% for 2001.  As the Bank’s reference rate, which is generally tied to the West Coast prime rate, decreased 50 basis points in 2002, the effective rate paid on deposits and other borrowings decreased 134 basis points.  Interest rates on deposits typically “lag” behind immediate changes in Federal funds rates and then generally reflect only a percentage of the rate changes on deposit accounts.  The effective rate on interest bearing liabilities in 2002 was 1.66% compared to 3.00% in 2001. Refer to “Schedule of Average Balances and Average Yields and Rates”.  However, as stated above, the Bank may not be able to reduce the rates paid on deposits further.  Customers may seek alternative avenues to increase yields on their investments and accept higher risks than those associated with traditional products offered by financial

 

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institutions.

 

The Company’s market focus for loans continues to concentrate on small to medium commercial businesses.  These loans offer diversification as to industries and types of business, thus limiting material exposure in any one industry concentration.  The Company offers both fixed and floating interest rate loans and typically obtains collateral in the form of real estate, business equipment, deposit accounts, and accounts receivable, but looks to business cash flow as its primary source of repayment.  No one borrower had aggregate credit commitments exceeding 4.0% of the loan portfolio at December 31, 2002.

 

As of December 31, 2002, in management’s judgment, a concentration of loans existed in commercial loans and real estate-related loans.  At that date, commercial and real estate-related loans represented 44.2% and 49.8% of total loans, respectively. Similar concentrations existed as of December 31, 2001 with commercial and real estate-related loans representing 42.9% and 51.9% of total loans, respectively.

 

Although management believes the loans within these concentrations have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in the Company’s primary market area, in particular, could have an adverse impact on collectibility, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition of the Company.

 

Average assets during 2002 were $248,948,000 compared to $206,522,000 for 2001, an increase of $42,426,000, or 20.5%.  Return on average assets (ROA) and return on average equity (ROE) for the past two years are reflected in the following table.

 

		For the Year Ended December 31, 2002		For the Year Ended December 31, 2001
ROA		1.12	%	1.15	%
ROE		12.32	%	11.78	%

 

Results of Operations

 

Net income for 2002 was $2,784,000 compared to $2,378,000 in 2001, a $406,000 increase.  The increase in net income in 2002 resulted from increases in net interest income after provision for credit losses, which was partially offset by decreases in non-interest income and increases in non-interest expenses.

 

Net interest income is the Company’s primary source of revenue.  Net interest income is the difference between the interest income received on interest-earning assets and the interest expense paid on interest-bearing liabilities.  Net interest income is primarily affected by two factors, the volume and mix of interest-earning assets and interest-bearing liabilities and the interest rates earned on those assets and paid on the liabilities.

 

Interest income from loans increased 7.8%, or $815,000, in the periods under review as average total loan volumes increased 32.1% to $148,654,000 for 2002 compared to $112,534,000 for 2001. The $36,120,000 increase in the average loan volume can be attributed to the continued success of the Company’s strategic plan to build its core business with the introduction of new products, seasoned commercial bankers, and strong emphasis on business development and customer retention activities.  Additionally, the successes of the River Park Office and the expansion into the Sacramento market, mentioned above, have also contributed to the increase in volume.  The Company purchased loans from other financial institutions and brokers during 2002 which also contributed to  the 2002 volumes.  No assurance can be given that this level of loan growth will continue.

 

The Company’s loan to deposit ratio at December 31, 2002 was 64.4% compared to 69.4% at December 31, 2001.  This decrease can be mainly attributed to the 28.2% increase in deposits compared to the 19.1% increase in loans in 2002.

 

The Company concentrates its lending activities mainly in small to medium business related lending, both commercial and real estate, but offers consumer, Small Business Administration (SBA) loans, and agricultural lending as well.  For the third year, Central Valley Community Bank has been honored as the number one SBA 504 lender in Fresno, Kings and Madera counties.  At December 31, 2002 and 2001, SBA loans were $16,697,000 and

 

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$12,195,000, respectively. Agricultural and agricultural related loans increased $2,819,000 in the periods under review.

 

Average non-accrual loans for 2002 were $698,000 compared to $442,000 for 2001.  At December 31, 2002, the Company had $466,000 in non-accrual loans compared to $1,109,000 at December 31, 2001.  One agricultural relationship represented 72.5% of the total non-accrual loans at December 31, 2002.  The ratio of non-accrual loans to total loans decreased to 0.3% at December 31, 2002 compared to 0.8% at December 31, 2001.

 

 The designation of a loan as non-accrual for financial reporting purposes does not relieve the borrower of its obligation to pay interest.  Accordingly, the Company may ultimately recover all or a portion of the interest due on these non-accrual loans.  A non-accrual loan returns to accrual status when the loan becomes contractually current and future collectibility of amounts due is reasonably assured.

 

The investment policy of the Company is established by the Board of Directors and implemented by the Company’s Investment/Asset Liability Committee.  It is designed primarily to provide and maintain liquidity, to enable the Company to meet its pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement the Company’s lending activities.

 

Investments typically have yields lower than loans.  Interest income from investment securities, Federal funds sold, and interest-bearing deposits in other banks decreased 20.4% in the periods under review.  The decrease in these categories of income can be attributed to lower Federal funds rates and lower yields on new investment purchases.  Average investment securities and interest-bearing deposits in other banks decreased 4.0% or $2,539,000 to $61,285,000 for 2002 compared to $63,824,000 for 2001.  Average Federal funds sold increased $6,324,000 in the periods under review.  The effective yield for investment securities not including Federal funds sold was 5.14% in 2002 compared to 6.20% in 2001.  The effective yield for Federal funds sold was 1.52% in 2002 compared to 3.69% in 2001.  As previously stated, FOMC lowered the Federal funds rate a total of 525 basis points in 2002 and 2001 which created, by the nature of collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS), increased levels of principal prepayments in the periods under review.  While a portion of the paydowns provided funding for loans, excess funds were generally reinvested at lower yields than those generated by the original investment.

 

Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with the Bank’s investment policy.  The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, and prohibited practices.

 

In an effort to increase yields without accepting unreasonable risk, a significant portion of the new investment purchases has been in high quality mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  These securities typically provide a higher yield than U.S. Treasuries, government agencies, and municipal investment securities.  The Company held $44,420,000, or 59.6% of the total investment portfolio, in MBS and CMOs with an average weighted yield of 6.93% at December 31, 2002 compared to $35,675,000, or 60.6% of the total investment portfolio, with an average weighted yield of 6.51% at December 31, 2001.  In comparison to the yield on MBS and CMOs, the Company held $10,619,000 in agency securities with an average weighted yield of 5.13% at December 31, 2002 compared to $8,477,000 in agency securities with an average weighted yield of 5.49% at December 31, 2001.

 

The Company recognizes the interest rate risks and prepayment risks associated with MBS and CMOs.  In a declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments would be expected to decline and the average life of the MBS and CMOs would be expected to extend.  The Company has purchased certain of these investments which are meant to perform well in an increasing rate environment and others that are meant to perform well in a declining rate environment, with the ultimate goal of a balanced portfolio. At December 31, 2002, the Company’s market risk was higher in an increasing rate environment versus a declining rate environment. At December 31, 2002 an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the Company’s investment portfolio by approximately $4,968,000 compared to the same scenario at December 31, 2001 which would result in an approximately $4,888,000 decrease.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the Company’s

 

36

 

investment portfolio would be approximately $4,187,000 at December 31, 2002 compared to $3,450,000 at December 31, 2001.  While an immediate shock of 200 basis points is highly unlikely, as evidenced by the changes in interest rates in 2002 and 2001 which were in 25 basis point and 50 basis point increments, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements.

 

The Company offers a variety of deposit accounts having a range of interest rates and terms.  The Company’s deposits consist of savings, demand deposits, and certificate of deposit accounts.  The flow of deposits is influenced significantly by general economic conditions, changes in the money market and prevailing interest rates and competition.  The Company’s deposits are obtained primarily from the geographic area in which its offices are located.  The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits.  The Company does not have any brokered deposits, and based on historical experience, management believes it will continue to retain a large portion of its time deposit accounts at maturity.

 

Interest expense in 2002 was $2,728,000 compared to  $4,138,000 in 2001.  This $1,410,000, or 34.1%, decrease in interest expense can be partially attributed to the decrease in Federal funds interest rates in 2001. As discussed above, interest rates on deposits typically lag behind immediate changes in Federal funds rates and then generally reflect only a percentage of the rate changes on deposit accounts.  Average interest-bearing liabilities for 2002 were $164,743,000 compared to $137,892,000 for 2001, a 19.5%, or a $26,851,000 increase.  Effective rates for interest bearing liabilities were 1.66% in 2002 compared to 3.00% in 2001, a 134 basis point decrease.  If interest rates were to decline or continue to remain unchanged in 2003, the Company could experience restraints on further decreases in the rates paid on deposit products.  Additionally, interest rate risk could increase as depositors are reluctant to accept continued low deposit rates and search for higher yields in investment products other than those offered by the Company.  Conversely, if interest rates were to increase, the Company could benefit from the immediate increase in loan rates without comparable immediate increases in deposit rates.

 

Non-interest bearing deposits provide fairly inexpensive funding for loans and offer the opportunity for the Company to enhance and strengthen its net interest margin.  Average non-interest bearing deposits increased 29.1%  to $59,181,000 for 2002 compared to $45,843,000 for 2001.    New business relationships were the major contributor to this increase.

 

Other interest expense increased in the periods under review as the Company utilized its Federal Home Loan Bank (FHLB) credit line in 2002 in anticipation of short-term liquidity needs as well as to take advantage of opportunities to lock in low funding rates for increased loan growth.  Borrowings from the FHLB were $9,000,000 at December 31, 2002 and $3,000,000 at December 31, 2001.    The average maturies and weighted average rate of the borrowings at December 31, 2002 was 1.12 years and 3.35%, respectively.  The Company will continue to analyze the advantages and disadvantages of borrowing funds versus selling investment securities as part of its ongoing funding analysis.

 

Net interest income before provision for credit losses in 2002 was $11,808,000 compared to $10,439,000 in 2001, an increase of $1,369,000, or 13.1%.

 

PROVISION FOR CREDIT LOSSES

 

The Company provides for possible credit losses by a charge to operating income based upon the composition of the loan portfolio, past delinquency levels, losses and non-performing assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses.  Loans are charged off when they are considered uncollectible or of such little value that continuance as an active earning bank asset is not warranted.

 

The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools.  The Board has established initial responsibility for the accuracy of credit risk grades with the individual credit officer.  The grading is then submitted to the Chief Credit Officer (CCO), who reviews the grades for accuracy.  The risk grading and reserve allocation is analyzed annually by a third party credit reviewer and by various regulatory agencies.

 

The CCO sets the specific reserve for all adversely risk-graded credits quarterly.  This process includes the utilization of loan delinquency reports, classified asset reports, and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves.  Reserves are also allocated to credits that are

 

37

 

not adversely graded.  Use of historical loss experience within the portfolio along with peer bank loss experience determines the level of reserves held.

 

The allowance for credit losses is reviewed at least quarterly by the Board’s Audit Committee and by the Board of Directors.  Reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  The Company has adopted the specific reserve approach to allocate reserves to each adversely graded asset, as well as to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or the Company’s own internal review process.  Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s potential loss exposure.

 

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate the Company’s potential losses.  Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.

 

The Company made no additions to the allowance for credit losses in 2002 due mainly to decreased levels of risk-rated loans and increased recoveries on previously charged off loans.  In  2001, $623,000 was added to the allowance for credit losses.  Additionally, the Company’s historical net charge-off ratio, which reflects net charge-offs to beginning loan balances for the past three (3) years, declined to 0.031% for 2002 compared to  0.209% for 2001  and 0.295% for 2000.

 

At December 31, 2002 and December 31, 2001, the Company’s recorded investment in loans that were considered to be impaired totaled $952,000,and $1,108,000, respectively.  The related allowance for credit losses on these impaired loans was $194,000 and $198,000, respectively. The Company had one restructured loan and no accruing loans past due 90 days or more at December 31, 2002.  For information regarding impaired loans, refer to Notes 1 and 3, in the “Notes to Consolidated Financial Statements” at pages 47 and 54.

 

The ratio of net credit losses to total average loans outstanding was 0.03% in 2002 compared to 0.17% in 2001.  Net charge-offs were $41,000 in 2002 and $195,000 in 2001. Non-performing loans at December 31, 2002 and 2001 were $1,081,000,000 and $2,363,000, respectively.  The ratio of non-performing loans to the allowance for credit losses at December 31, 2002 was 44.4% compared to 95.5% at December 31, 2001.  The allowance for credit losses was $2,433,000, or 1.53% of total loans at December 31, 2002 compared to $2,474,000, or 1.85% of total loans at December 31, 2001.  Based on information currently available, management believes that the allowance for credit losses will be adequate to absorb potential risks in the portfolio.  However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

 

Net interest income after the provision for credit losses increased $1,992,000, or 20.3%, in 2002 to $11,808,000 from $9,816,000 in 2001.

 

NON-INTEREST INCOME

 

Non-interest income includes service charges, rental income from equipment leased to others, loan placement fees and other income as well as gains on sales of assets and gains on securities transactions.

 

Non-interest income decreased $480,000, or 10.2%, to $4,212,000 in 2002 from $4,692,000 in 2001. The major contributors were decreases in net realized gains on sales of investment securities, rentals from equipment leased to others, and other income which was partially offset by an increase in service charge income.

 

Service charge income increased $725,000, or 60.6% in the periods under review.  The Bank introduced a successful new deposit product, Overdraft Privilege Account, in 2002  which was the main contributor to the increase.  Increased deposit accounts and lower earnings credit rates for commercial deposit accounts were also contributors to the increase.  Business related deposit accounts may earn credit for average deposit holdings which may be used to offset service expenses.  When the earnings credit is lower, the business will be required to increase deposit holdings or pay additional service charges.

 

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The Company earns loan placement fees from the brokerage of single-family residential mortgage loans.  Loan placement fees increased $163,000, or 81.1%, in the periods under review.  The 50 basis point reduction in late 2002 and the 475 basis point reductions in the Federal funds rate by the FOMC in 2001 provided consumers with numerous opportunities for refinancing of single-family homes.  As interest rates remain unchanged or begin to increase, the opportunities for continued growth in this area may decline.

 

Rental from equipment leased to others decreased $347,000 or 24.1% in the periods under review.  The decrease is mainly the result of the Company’s decision not to actively pursue new operating lease arrangements.  Equipment leased to others was $240,000 at December 31, 2002 compared to $1,217,000 at December 31, 2001.

 

Net realized gain on sales of investment securities decreased $442,000 to $26,000 in 2002 compared to $468,000 for the same period in 2001.  Liquidity needs in 2002 were met by borrowing from the FHLB.  The liquidity needs in 2001 provided an opportunity for the Company to sell securities at a gain and invest funds in higher yielding loans at a time when the loan demand increased and deposit volumes did not keep pace.  As stated previously, in the routine analysis of liquidity needs, the Company compares the advantages of borrowing funds or selling securities to meet liquidity needs.

 

Other non-interest income decreased $655,000, or 55.2%, to $531,000 in 2002 compared to $1,186,000 in 2001.  The primary contributors to the decrease were related to events in 2001 involving  an insurance settlement and a recovery on a previously charged off other real estate owned property.

 

NON-INTEREST EXPENSES

 

Total non-interest expenses for 2002 increased by $1,132,000, or 10.4% compared to 2001.  Non-interest expenses include salaries and employee benefits, occupancy and equipment expenses, depreciation and provision for losses on equipment leased to others and other expenses.  The major components of the increase were salaries, occupancy expenses, and operating losses, partially offset by a decrease in depreciation on equipment leased to others.

 

Salaries and employee benefits increased $867,000, or 16.2%, in 2002 compared to 2001.  The increase can be mainly attributed to general salary and benefits increases that enable the Company to manage recent and projected growth and retain qualified personnel.  Additional personnel for the new Sacramento and Kerman Offices were also partially responsible for the increase.  These increases correspond to the Company’s overall strategic plan and design.

 

Occupancy and equipment expense increased $304,000 or 32.7%, in the periods under review.  As stated above, new branches, remodeling costs, and the Bank’s name change were contributors to the increase.

 

 Depreciation expense and the provision for losses on equipment leased to others decreased $331,000, or 25.3%, in 2002, which was partially offset by the decrease in rental income from equipment leased to others included in non-interest income as discussed above.

 

Other expenses increased $293,000 to $3,545,000 in 2002 from $3,252,000 in 2001.  The 9.0% increase is mainly attributable to increases in advertising expenses which include costs related to the Bank’s name change, and an increase in accounting and legal expenses related to the formation of CVCR.

 

The Bank’s efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.  Excluding the non-recurring income and expenses in 2001 mentioned above, the ratio at December 31, 2002 was 73.0% compared to 75.7% at December 31, 2001.  This means that for every dollar of income generated, the cost of that income was 73 cents in 2002 and 75 cents in 2001.  The lower the ratio the more efficient the Company’s operations.  While reducing operating expenses can lower the ratio, the Company’s low loan to deposit ratio, which reduces net interest income, also significantly affects this ratio. The Company’s loan to deposit ratio of 64.4% at December 31, 2002 remains lower than the Company’s peers.

 

Income tax expense was $1,247,000 for 2002 compared to $1,275,000 for 2001.  The Company’s effective tax rate decreased to 30.9% in 2002 from 34.9% in 2001.  The change is primarily attributable to changes in the mix of taxable and non-taxable interest income in the years under review, and the Bank’s real estate investment trust, CVCR.

 

39

 

MARKET RISK

 

Market risk is the risk of loss from adverse changes in market prices and rates.  The Company’s market risk arises primarily from interest rate risk inherent in its loan and deposit functions. Management actively monitors and manages this interest rate risk exposure.

 

Fluctuations in market interest rates expose the Company to potential gains and losses.  The primary objective of asset/liability management is to manage the balance between rate sensitive assets and rate sensitive liabilities being repriced in any given period in order to maximize net interest income during periods of fluctuating interest rates.

 

Rate sensitive assets are those which contain a provision to adjust the interest rate periodically (for example, a loan in which prime rate determines the basis of the rate charged on outstanding balances).  Those assets include certain commercial, real estate mortgage and construction loans and certain investment securities, Federal funds sold and time deposits in other financial institutions.  Rate sensitive liabilities are those which provide for periodic changes in interest rate and include interest-bearing transaction accounts, money market accounts and time certificates of deposit.  Analysis has shown that because of time and volume influences, the repricing of assets and liabilities is not tied directly to the timing of changes in market interest rates.  If repricing assets exceed repricing liabilities in a time period, the Company would be considered “asset sensitive” and have a  “positive gap”.  Conversely, if repricing liabilities exceed repricing assets in a time period, the Company would be considered “liability sensitive” and have a “negative gap.”

 

Managing interest rate risk is important to the Company as its net interest margin can be affected by the repricing of assets and liabilities.  Management uses several different tools to monitor its interest rate risk, including gap analysis.   Additionally, the Company utilizes an asset/liability computer model which provides a detailed quarterly analysis of the Company’s financial reports, to include a ratio analysis of liquidity, equity, strategic free capital, volatile liability coverage, and maturity of the investment portfolio.  In addition, a trend analysis is generated which provides a projection of the Company’s asset and liability sensitivity position over a one-year period.  Exposure to interest rate changes is calculated within the program to ascertain interest rate risk in actual dollar exposure resulting from incremental changes in market interest rates.  The incremental changes are generally referred to as “shocks”.  These “shocks” measure the effect of sudden and significant rate changes on the Company’s net interest income.   Assets may not reprice in the same way as liabilities and adjustments are made to the model to reflect these differences.  For example, the time between when the Company changes its rate on deposits may lag behind the time the Company changes the rate it charges on loans.  Additionally, the interest rate change may not be in the same proportion for assets and liabilities.  Interest rates on deposits may not decrease in the same proportion as a decrease in interest rates charged on loans.  Conversely, interest rates on deposits may not be increased in the same proportion as rates charged on loans.

 

CAPITAL RESOURCES

 

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  The primary source of capital for the Company has been internally generated capital through retained earnings.

 

The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.

 

On December 18, 2002, the Company announced a 2 for 1 stock split for shareholders of record at January 6, 2003, and a stock repurchase program effective January 1, 2003 and ending December 31, 2003 with the intent to purchase up to $500,000 or approximately 2% of its common stock.The Company has had two prior stock repurchase programs for the repurchase of up to $500,000 or 3% of its common stock under each plan.  The combined results of the programs were that 92,612 shares had been repurchased at a cost of $982,619 as of December 31, 2002.

 

40

 

At the current time, there are no commitments that would engender the use of material amounts of the Company’s capital.  For further discussion of capital levels, refer to Note 12 of “Notes to Consolidated Financial Statements”, Shareholders’ Equity on page 62.

 

LIQUIDITY MANAGEMENT

 

The object of liquidity management is to maintain cash flow adequate to fund the Company’s operations and to meet obligations and other commitments on a timely and cost effective basis.  In assessing liquidity, historical information such as seasonal demand, local economic cycles and the economy in general are considered, along with current ratios, management goals, and unique characteristics of the Company.  Management accomplishes this objective through the selection of asset and liability maturity mixes that it believes will meet the Company’s needs.

 

Liquidity is provided by the Company’s core deposit base, shareholders’ equity, and reductions in assets which can be immediately converted to cash at minimal cost.  Liquid assets, which consist of cash, deposits in other financial institutions, Federal funds sold and available for sale investment securities (excluding pledged investments), averaged $65,419,000 for 2002, or 26.3% of average assets compared to $70,133,000 for 2001, or 34.0% of average assets.  The ratio of average liquid assets to average demand deposits was 110.5% for 2002 compared to 153.0% for 2001.  The decreases in liquidity ratios can be attributed to the increase in securities pledged for borrowings and public deposits.  The Company’s loan to deposit ratio at December 31, 2002 was 64.4% compared to 69.8% at December 31, 2001.

 

Unpledged investment securities may also provide liquidity.  At December 31, 2002, $51,310,000 in unpledged securities was available as collateral for borrowing.  Additionally, maturing loans provide liquidity.  At December 31, 2002, approximately $22,748,000 in loans was scheduled to mature within the first quarter.

 

The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $8,000,000 and $6,000,000 at December 31, 2002 and 2001, respectively, at interest rates which vary with market conditions.  The Bank also had a line of credit with the Federal Reserve Bank of San Francisco at December 31, 2002 and 2001 which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $3,833,000 and $5,402,000 and market values totaling $3,946,000 and $5,703,000, respectively.  In addition, the Bank had a credit line with the Federal Home Loan Bank at December 31, 2002 and 2001 which bears interest at the prevailing interest rate collateralized by investment securities with amortized costs totaling $13,809,000 and $5,045,000 and market values totaling $14,823,000 and $5,067,000, respectively.  The amount of the credit line varies according to the Bank’s investment and loan portfolio make-up.  At December 31, 2002 and 2001, the Bank had $9,000,000 and $3,000,000 outstanding on these credit lines, respectively.

 

As discussed previously, the Bank borrowed funds from the FHLB during 2002 to meet anticipated liquidity needs and in 2001, the Bank sold approximately $11,602,000 in investment securities due to short-term liquidity needs in 2001.  The Company analyzes the advantages and disadvantages of borrowing funds versus selling existing investment securities and their respective rates and yields.  As indicated above, a combination of both provided the needed liquidity in 2002 and in 2001.

 

Management believes that the Company maintains adequate amounts of liquid assets to meet its liquidity needs.  The Company’s liquidity might be insufficient if deposits or withdrawals were to exceed anticipated levels.  Deposit withdrawals can increase if a company experiences financial difficulties or receives adverse publicity for other reasons, or if its pricing of products or services are not competitive with those offered by other financial institutions.

 

Management believes that the Company’s current mix of assets and liabilities provide a reasonable level of risk related to significant fluctuations in net interest income or the result of volatility of the Company’s earning base.

 

41

 

ITEM 7 -                FINANCIAL STATEMENTS.

 

Contents

Independent Auditor’s Report

Consolidated Balance Sheet

Consolidated Statement of Operations

Consolidated Statement of Changes in Shareholders’ Equity

Consolidated Statement of Cash Flows

Notes to Consolidated Financial Statements

 

42

 

INDEPENDENT AUDITOR’S REPORT

 

The Shareholders

and Board of Directors

Central Valley Community Bancorp

and Subsidiary

 

We have audited the accompanying consolidated balance sheet of Central Valley Community Bancorp and subsidiary as of December 31, 2002 and 2001 and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Central Valley Community Bancorp and subsidiary as of December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

	/s/Perry-Smith LLP
Sacramento, California
January 15, 2003

 

43

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEET

 

December 31, 2002 and 2001

 

		2002			2001
ASSETS
Cash and due from banks		$	18,803,705		$	13,963,456
Federal funds sold		17,678,000			4,160,000
Interest bearing deposits in other banks		500,000
Available-for-sale investment securities (Notes 2 and 9)		77,723,547			60,586,194
Loans, less allowance for credit losses of $2,432,936 in 2002 and $2,474,159 in 2001 (Notes 3, 11 and 15)		156,293,157			130,797,253
Equipment leased to others, net (Note 4)		239,873			1,216,635
Bank premises and equipment, net (Notes 5 and 11)		3,135,757			1,864,239
Accrued interest receivable and other assets (Notes 7, 10 and 14)		8,632,128			6,478,576
Total assets		$	283,006,167		$	219,066,353
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	73,822,469		$	49,015,731
Interest bearing (Note 8)		172,515,271			143,116,535
Total deposits		246,337,740			192,132,266
Short-term borrowings (Note 9)		2,000,000			1,000,000
Long-term debt (Note 9)		7,000,000			2,000,000
Accrued interest payable and other liabilities (Note 14)		3,569,389			3,106,339
Total liabilities		258,907,129			198,238,605
Commitments and contingencies (Note 11)
Shareholders’ equity (Note 12):
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, no par value; 40,000,000 shares authorized, 2,573,242 and 2,570,714 shares issued and outstanding in 2002 and 2001, respectively		5,854,311			6,049,217
Retained earnings		16,386,727			13,732,531
Accumulated other comprehensive income (Notes 2 and 16)		1,858,000			1,046,000
Total shareholders’ equity		24,099,038			20,827,748
Total liabilities and shareholders’ equity		$	283,006,167		$	219,066,353

 

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

 

44

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF INCOME

 

For the Years Ended December 31, 2002, 2001 and 2000

 

		2002			2001			2000
Interest income:
Interest and fees on loans		$	11,194,309		$	10,379,527		$	8,942,082
Interest on Federal funds sold		195,313			240,371			601,695
Interest and dividends on investment securities:
Taxable		2,634,097			3,477,787			3,530,964
Exempt from Federal income taxes		511,859			478,859			485,161
Total interest income		14,535,578			14,576,544			13,559,902
Interest expense:
Interest on deposits (Note 8)		2,392,994			4,115,136			4,119,858
Other (Note 9)		334,814			22,906			127,218
Total interest expense		2,727,808			4,138,042			4,247,076
Net interest income before provision for credit losses		11,807,770			10,438,502			9,312,826
Provision for credit losses (Note 3)					622,500			50,000
Net interest income after provision for credit losses		11,807,770			9,816,002			9,262,826
Non-interest income:
Service charges		1,921,816			1,197,176			1,097,419
Rentals from equipment leased to others (Note 4)		1,094,368			1,441,096			1,544,488
Loan placement fees		364,138			201,018			149,600
Net realized gains on sales and calls of investment securities (Note 2)		26,559			468,150
Appreciation in cash surrender value of insurance contracts (Note 14)		274,162			198,627			128,154
Other income		530,592			1,186,080			608,614
Total non-interest income		4,211,635			4,692,147			3,528,275
Non-interest expenses:
Salaries and employee benefits (Notes 3 and 14)		$	6,232,024		$	5,365,426		$	4,699,781
Occupancy and equipment (Notes 5 and 11)		1,234,002			929,608			841,140
Depreciation and provision for losses on equipment leased to others (Note 4)		976,761			1,307,957			1,443,797
Other expenses (Notes 11 and 13)		3,545,074			3,252,468			3,129,541
Total non-interest expenses		11,987,861			10,855,459			10,114,259
Income from continuing operations before income taxes		4,031,544			3,652,690			2,676,842
Income tax expense (Note 10)		1,247,600			1,274,600			904,100
Net income from continuing operations		2,783,944			2,378,090			1,772,742
Discontinued operations (Note 6):
Loss from operations of Clovest less applicable income tax benefit of $(16,800)								(25,231		)
Net income		$	2,783,944		$	2,378,090		$	1,747,511
Basic earnings per share from continuing operations (Note 12)		$	1.08		$	.92		$	.68
Diluted earnings per share from continuing operations (Note 12)		$	1.02		$	.89		$	.68
Basic earnings per share (Note 12)		$	1.08		$	.92		$	.67
Diluted earnings per share (Note 12)		$	1.02		$	.89		$	.67

 

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

 

45

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

For the Years Ended December 31, 2002, 2001 and 2000

 

												Accumulated Other Comprehensive (Loss) Income
		Common Stock						Retained Earnings								Shareholders’ Equity					Comprehensive Income
		Shares		Amount
Balance, January 1, 2000		2,606,918		$	6,465,236			$		9,737,276		$	(387,000		)	$		15,815,512
Comprehensive income (Note 16):
Net income								1,747,511								1,747,511					$	1,747,511
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities												1,238,000				1,238,000					1,238,000
Total comprehensive income																					$	2,985,511
Cash dividend - $.05 per share								(130,346			)					(130,346				)
Balance, December 31, 2000		2,606,918		6,465,236				11,354,441				851,000				18,670,677
Comprehensive income (Note 16):
Net income								2,378,090								2,378,090					$	2,378,090
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities												195,000				195,000					195,000
Total comprehensive income																					$	2,573,090
Stock options exercised and related tax benefit (Note 12)		15,596		83,244												83,244
Repurchase and retirement of common stock (Note 12)		(51,800	)	(499,263		)										(499,263				)
Balance, December 31, 2001		2,570,714		6,049,217				13,732,531				1,046,000				20,827,748
Comprehensive income (Note 16):
Net income							2,783,944									2,783,944					$	2,783,944
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities (Note 2)												812,000				812,000					812,000
Total comprehensive income																					$	3,595,944
Cash dividend - $.05 per share							(129,748				)					(129,748				)
Stock options exercised and related tax benefit (Note 12)		43,340		288,450												288,450
Stock repurchased (Note 12)		(40,812	)	(483,356		)										(483,356				)
Balance, December 31, 2002		2,573,242		$	5,854,311		$		16,386,727			$		1,858,000		$	24,099,038
												2002				2001
Disclosure of reclassification amount, net of taxes (Note 16):
Unrealized holding gains arising during the year												$		830,060		$			475,890
Less reclassification adjustment for net gains included in net income												18,060				280,890
Net unrealized gains on available-for-sale investment securities												$		812,000		$			195,000

 

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

 

47

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

For the Years Ended December 31, 2002, 2001 and 2000

 

		2002			2001			2000
Cash flows from operating activities:
Net income		$	2,783,944		$	2,378,090		$	1,747,511
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
Net loss from discontinued operations								25,231
Provision for credit losses					622,500			50,000
Allowance for residual losses on equipment leased to others					100,000			64,800
Gain on sale of equipment leased to others		(20,938		)	(13,599		)
Net increase in deferred loan fees		86,740			135,174			15,017
Depreciation, accretion and amortization, net		2,193,378			1,949,710			1,972,105
Net realized gains on sales and calls of available-for-sale investment securities		(26,559		)	(468,150		)
Gain on sale of equipment		(6,360		)				(60,458		)
Gain on sale of other real estate								(36,197		)
Increase in cash surrender value of life insurance		(257,088		)	(182,630		)	(113,567		)
Reduction in carrying value of bank premises and equipment								67,111
Net (increase) decrease in accrued interest receivable and other assets		(706,797		)	264,154			61,292
Net increase in accrued interest payable and other liabilities		549,550			598,261			718,384
Deferred income tax expense		97,000			65,000			876,000
Net cash provided by operating activities of continuing operations		4,692,870			5,448,510			5,387,229
Cash flows from investing activities:
Purchases of available-for-sale investment securities		(35,558,701		)	(24,454,432		)	(28,131,754		)
Proceeds from sales, calls or maturity of available-for- sale investment securities		2,120,000			21,262,139			3,225,690
Proceeds from principal repayments of available-for- sale investment securities		16,686,152			17,508,609			6,447,423
Net increase in interest bearing deposits in other banks		(500,000		)
Net increase in loans		(25,582,644		)	(37,582,235		)	(15,001,104		)
Purchases of premises and equipment		(1,858,686		)	(398,668		)	(789,575		)
Proceeds from sale of equipment		19,000						61,385
Proceeds from sale of other real estate								65,145
Purchase of equipment leased to others					(181,392		)	(1,632,673		)
Proceeds from sale of equipment leased to others		20,938			163,307
Deposits on single premium cash surrender value life insurance policies		(1,475,000		)	(447,000		)	(1,523,500		)
Net cash used in investing activities of continuing operations		(46,128,941		)	(24,129,672		)	(37,278,963		)
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits		$	46,895,882		$	15,158,142		$	22,848,882
Net increase (decrease) in time deposits		7,309,592			(3,978,139		)	8,955,998
Payments on notes payable for equipment leased to others					(35,913		)	(214,453		)
Proceeds from borrowings from Federal Home Loan Bank		14,000,000			5,000,000
Repayments to Federal Home Loan Bank		(8,000,000		)	(2,000,000		)
Cash paid for dividends		(129,748		)				(130,346		)
Share repurchase and retirement		(483,356		)	(499,263		)
Proceeds from exercise of stock options		201,950			83,244
Net cash provided by financing activities of continuing operations		59,794,320			13,728,071			31,460,081
Cash provided by discontinued operations								499,404
Increase (decrease) in cash and cash equivalents		18,358,249			(4,953,091		)	67,751
Cash and cash equivalents at beginning of year		18,123,456			23,076,547			23,008,796
Cash and cash equivalents at end of year		$	36,481,705		$	18,123,456		$	23,076,547
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the year for:
Interest expense		$	2,724,354		$	4,258,314		$	4,135,971
Income taxes		$	1,398,431		$	530,000		$	(308,706	)
Non-cash investing activities:
Net change in unrealized gain on available-for- sale investment securities		$	989,000		$	324,000		$	2,059,000
Transfer of equipment leased to others to assets held for sale					$	115,672

 

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

 

48

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

General

 

Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the “Bank”).  The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.

 

The Bank operates seven branches in Clovis, north Fresno, west and northeast Fresno County, and Sacramento, California.  The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.  The Bank’s subsidiaries have nominal activity with the exception of Central Valley Community Realty, LLC (“CVCR”).  The Bank formed CVCR in June 2002 to invest in certain of the Bank’s real estate related assets.  CVCR can be used as a means of generating capital and affords the Company certain favorable income tax treatments.

 

The accounting and reporting policies of Central Valley Community Bancorp and subsidiary conform with generally accepted accounting principles and prevailing practices within the banking industry.

 

Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2002.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank.  In addition, the accounts of the Bank’s wholly owned subsidiaries, CVCR, Clovest Corporation (“Clovest”) and Clovis Securities Corporation (an inactive company), are included in the consolidated financial statements.  The operating results of Clovest were not material in 2002 and 2001 and were reflected as discontinued operations in 2000.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Cash Equivalents

 

For the purpose of the statement of cash flows, cash and due from banks and Federal funds sold are considered to be cash equivalents.  Generally, Federal funds are sold for one-day periods.

 

Investment Securities

 

Investments are classified into the following categories:

 

•                  Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.

 

•                  Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.

 

Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.  All transfers between categories are accounted for at fair value.

 

49

 

Gains or losses on the sale of investment securities are computed on the specific identification method.  Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums.  In addition, unrealized losses that are other than temporary are recognized in earnings for all investments.

 

Loans

 

Loans are stated at principal balances outstanding.  Interest is accrued daily based upon outstanding loan balances.  However, when, in the opinion of management, loans are considered impaired and the future collectibility of interest and principal is in serious doubt, a loan is placed on nonaccrual status and the accrual of interest income is suspended.  Any interest accrued but unpaid is charged against income.  Payments received are applied to reduce principal to the extent necessary to ensure collection.  Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

 

An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent.  A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement.

 

Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan.  The unamortized balance of deferred fees and costs is reported as a component of net loans.

 

Allowance for Credit Losses

 

The allowance for credit losses is maintained to provide for losses related to impaired loans and other losses that can be expected to occur in the normal course of business.  The determination of the allowance is based on estimates made by management, to include consideration of the character of the loan portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Bank’s service area.

 

Loans determined to be impaired or classified are individually evaluated by management for specific risk of loss.  In addition, a reserve factor is assigned to currently performing loans based on the Bank’s historical experience.  Management also computes specific and expected loss reserves for loan commitments.  These estimates are susceptible to changes in the economic environment and market conditions.

 

The Bank’s Audit Committee reviews the adequacy of the allowance for credit losses quarterly, to include consideration of the relative risks in the portfolio and current economic conditions.  The allowance is adjusted based on that review if, in the judgment of the Audit Committee and management, changes are warranted.

 

50

 

This allowance is established through a provision for credit losses which is charged to expense.  Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth.  The allowance for credit losses at December 31, 2002 and 2001, respectively, reflects management’s estimate of potential losses in the portfolio.

 

Equipment Leased to Others

 

The Bank enters into leasing arrangements through certain leasing brokers to lease computer equipment to various entities.  Computer equipment leased to others under operating leases is depreciated on a straight-line basis over the lease term to an estimated residual value.  Related rental income is recorded when earned.

 

The Bank maintains an allowance for residual losses based upon management’s assessment of various factors affecting residual values.  Management considers the allowance for residual losses adequate to cover any potential losses in the lease portfolio.

 

Other Real Estate

 

Other real estate represents real estate acquired in full or partial settlement of loan obligations.  When property is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property is charged against the allowance for credit losses.  A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value.  The allowance is established through a provision for losses on other real estate and is included in other expenses.  Subsequent gains or losses on sales or writedowns resulting from permanent impairments are recorded in other income or expense as incurred.  At December 31, 2002 and 2001, no other real estate was held.

 

Bank Premises and Equipment

 

Bank premises and equipment are carried at cost.  Depreciation is determined using the straight-line method over the estimated useful lives of the related assets.  The useful lives of Bank premises are estimated to be between twenty and forty years.  The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter.  When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period.  The cost of maintenance and repairs is charged to expense as incurred.

 

The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.

 

Income Taxes

 

The Company files its income taxes on a consolidated basis with its subsidiary.  The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.

 

51

 

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

 

Stock-Based Compensation

 

At December 31, 2002, the Company has two stock-based employee compensation plans, the Central Valley Community Bancorp 2000 and 1992 Stock Option Plans, which are described more fully in Note 12.  The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested.  In addition, the cancellation of options in 2000, which were expected to vest in 1999 and 1998, resulted in an adjustment to the 2000 pro forma income for the pro forma compensation expense previously recognized.

 

		2002			2001			2000
Net earnings from continuing operations, as reported		$	2,783,944		$	2,378,090		$	1,772,742
Deduct (add):  Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		198,000			268,000			(74,000		)
Pro forma net earnings from continuing operations		$	2,585,944		$	2,110,090		$	1,846,742
Basic earnings per share from continuing operations - as reported		$	1.08		$	.92		$	.68
Basic earnings per share from continuing operations - pro forma		$	1.00		$	.81		$	.71
Diluted earnings per share from continuing operations - as reported		$	1.02		$	.89		$	.68
Diluted earnings per share from continuing operations - pro forma		$	.96		$	.79		$	.70
Net income, as reported		$	2,783,944		$	2,378,090		$	1,747,511
Deduct (add):  Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		198,000			268,000			(74,000		)
Pro forma net income		$	2,585,944		$	2,110,090		$	1,821,511
Basic earnings per share - as reported		$	1.08		$	.92		$	.67
Basic earnings per share - pro forma		$	1.00		$	.81		$	.70
Diluted earnings per share - as reported		$	1.02		$	.89		$	.67
Diluted earnings per share - pro forma		$	.96		$	.79		$	.70
Weighted average fair value of options granted during the year		$	4.86		$	3.96		$	3.47

 

52

 

The fair value of each option is estimated on the date of grant using an option-pricing model with the following assumptions:

 

		2002		2001		2000
Dividend yield		.5	%	N/A		.7	%
Expected volatility		65.88 to 75.21	%	48.36 to 82.38	%	54.51 to 72.28	%
Risk-free interest rate		3.66 to 5.39	%	4.88 to 5.39	%	5.85 to 6.75	%
Expected option life		10 years		10 years		10 years

 

Earnings Per Share

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

 

53

 

Impact of New Financial Accounting Standards

 

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

 

2.             AVAILABLE-FOR-SALE INVESTMENT SECURITIES

 

The amortized cost and estimated market value of available-for-sale investment securities at December 31, 2002 and 2001 consisted of the following:

 

		2002
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Market Value
U.S. Government agencies		$	10,619,453		$	886,000					$	11,505,453
Obligations of states and political subdivisions		16,629,640			933,000			$	(101,000	)	17,461,640
U.S. Government agencies collateralized by mortgage obligations		44,420,348			1,117,000			(144,000		)	45,393,348
Corporate bonds		973,983			41,000						1,014,983
Other securities		2,348,123									2,348,123
		$	74,991,547		$	2,977,000		$	(245,000	)	$	77,723,547

 

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		2001
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Market Value
U.S. Government agencies		$	8,476,631		$	199,400		$	(1,300	)	$	8,674,731
Obligations of states and political subdivisions		12,440,463			610,600			(22,600		)	13,028,463
U.S. Government agencies collateralized by mortgage obligations		35,674,586			1,102,700			(183,600		)	36,593,686
Federal Home Loan Mortgage Corporation non-cumulative preferred stock		1,018,719						(18,700		)	1,000,019
Corporate bonds		967,242			56,500						1,023,742
Other securities		265,553									265,553
		$	58,843,194		$	1,969,200		$	(226,200	)	$	60,586,194

 

Net unrealized gains on available-for-sale investment securities totaling $2,732,000 and $1,743,000 are recorded net of $874,000 and $697,000 in tax expense as accumulated other comprehensive income within shareholders’ equity at December 31, 2002 and 2001, respectively.

 

Proceeds and gross realized gains from the sale, call or maturity of available-for-sale investment securities totaled $2,120,000 and $26,559, respectively, for the year ended December 31, 2002.  Proceeds and gross realized gains from the sale, call or maturity of available-for-sale investment securities totaled $21,262,139 and $468,150, respectively, for the year ended December 31, 2001.  Proceeds from the call or maturity of available-for-sale investment securities totaled $3,225,690 for the year ended December 31, 2000.  No gains or losses were realized on these calls or maturities.

 

The amortized cost and estimated market value of available-for-sale investment securities at December 31, 2002 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Amortized Cost			Estimated Market Value
Within one year		$	1,636,229		$	1,660,791
After one year through five years		10,273,366			10,997,445
After five years through ten years		5,305,888			5,791,507
After ten years		11,007,593			11,532,333
		28,223,076			29,982,076
Investment securities not due at a single maturity date:
U.S. Government agencies collateralized by mortgage obligations		44,420,348			45,393,348
Other securities		2,348,123			2,348,123
		$	74,991,547		$	77,723,547

 

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Investment securities with amortized costs totaling $23,681,467 and $14,127,454 and market values totaling $25,269,000 and $14,613,000 were pledged to secure public deposits, other contractual obligations and short-term borrowing arrangements at December 31, 2002 and 2001, respectively.

 

3.             LOANS

 

Outstanding loans are summarized as follows:

 

		December 31,
		2002			2001
Commercial		$	70,407,871		$	57,374,961
Real estate		57,498,310			41,857,806
Real estate – construction, land development and other land loans		21,735,949			27,461,865
Agricultural		3,977,995			1,158,594
Installment		5,580,688			5,517,307
Other		12,900			301,759
		159,213,713			133,672,292
Deferred loan fees, net		(487,620		)	(400,880		)
Allowance for credit losses		(2,432,936		)	(2,474,159		)
		$	156,293,157		$	130,797,253

 

At December 31, 2002 and 2001, loans originated under Small Business Administration (SBA) programs totaling $16,696,690 and $12,194,952, respectively, were included in the real estate and commercial categories.

 

Changes in the allowance for credit losses were as follows:

 

		Year Ended December 31,
		2002			2001			2000
Balance, beginning of year		$	2,474,159		$	2,046,576		$	2,236,342
Provision charged to operations					622,500			50,000
Losses charged to the allowance		(352,596		)	(391,005		)	(1,142,860		)
Recoveries		311,373			196,088			903,094
Balance, end of year		$	2,432,936		$	2,474,159		$	2,046,576

 

The recorded investment in loans that were considered to be impaired totaled $951,634 and $1,108,089 at December 31, 2002 and 2001, respectively.  The related allowance for credit losses on these impaired loans at December 31, 2002 and 2001 was $194,000 and $198,000, respectively.  The average recorded investment in impaired loans during 2002, 2001 and 2000 was $782,000, $1,175,000 and $1,687,000 , respectively.  Interest income on impaired loans is recognized on a cash basis and totaled $175, $2,481 and $18,744 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

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At December 31, 2002 and 2001, nonaccrual loans totaled $466,227 and $1,109,362, respectively.  Interest foregone on nonaccrual loans totaled $61,635, $46,416 and $14,193 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Salaries and employee benefits totaling $162,847, $90,936 and $63,669 have been deferred as loan origination costs for the years ended December 31, 2002, 2001 and 2000, respectively.

 

4.             EQUIPMENT LEASED TO OTHERS

 

Equipment leased to others consisted of the following:

 

		December 31,
		2002			2001
Computer equipment		$	3,192,301		$	3,854,016
Accumulated depreciation		(2,749,265		)	(2,434,218		)
Allowance for residual losses		(203,163		)	(203,163		)
		$	239,873		$	1,216,635

 

Changes in the allowance for residual losses were as follows:

 

		Year Ended December 31,
		2002			2001			2000
Balance, beginning of year		$	203,163		$	103,649		$	38,849
Losses charged to allowance					(486		)
Provision charged to operations					100,000			64,800
Balance, end of year		$	203,163		$	203,163		$	103,649

 

Depreciation expense totaled $976,762, $1,207,958 and $1,378,997 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Minimum future rental income on noncancelable operating leases for the year ending December 31, 2003 is $121,413.

 

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5.             BANK PREMISES AND EQUIPMENT

 

Bank premises and equipment consisted of the following:

 

		December 31,
		2002			2001
Land		$	250,000		$	250,000
Buildings and improvements		1,185,314			1,157,764
Furniture, fixtures and equipment		3,149,712			2,512,294
Leasehold improvements		1,515,150			464,284
		6,100,176			4,384,342
Less accumulated depreciation and amortization		(2,964,419		)	(2,520,103		)
		$	3,135,757		$	1,864,239

 

Depreciation and amortization included in occupancy and equipment expense totaled $574,528, $413,764 and $397,320 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

6.                                      DISCONTINUED OPERATIONS

 

The Board of Directors approved the discontinuation of Clovest’s operations on July 15, 1998 (the measurement date).  At the measurement date, management estimated the net realizable value of each asset and established a plan of disposition.  The plan of disposition calls for the expedient but judicious sale of assets.  Management anticipates no further significant losses will be incurred in connection with the disposition of the remaining assets in Clovest.

 

At December 31, 2002 and 2001 and for the years then ended, the Company’s investment in Clovest and the results of Clovest’s operations are not material.  Operating losses from the measurement date to December 31, 2000 totaled approximately $830,000.  Asset dispositions subsequent to the measurement date totaled $8,842,000 at December 31, 2000.  At December 31, 2000, Clovest had no commitments to fund further development of any projects.

 

7.             ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

 

Accrued interest receivable and other assets consisted of the following:

 

			December 31,
		2002				2001
Accrued interest receivable		$		1,206,778		$	1,007,246
Net deferred tax assets (Note 10)		419,000				693,000
Cash surrender value of life insurance (Note 14)		5,580,923				3,848,835
Prepaid expenses		221,085				180,859
Federal Home Loan Bank stock		659,100				160,600
Other		545,242				588,036
		$		8,632,128		$	6,478,576

 

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8.             DEPOSITS

 

Interest-bearing deposits consisted of the following:

 

		December 31,
		2002			2001
Savings		$	14,918,823		$	11,769,996
Money market		59,391,693			50,597,843
NOW accounts		40,886,795			30,740,328
Time, $100,000 or more		21,624,034			17,114,349
Time, under $100,000		35,693,926			32,894,019
		$	172,515,271		$	143,116,535

 

Aggregate annual maturities of time deposits are as follows:

 

 

Interest expense recognized on interest-bearing deposits consisted of the following:

 

		Year Ended December 31,
		2002			2001			2000
Savings		$	88,184		$	144,501		$	233,720
Money market		817,591			1,366,056			1,024,492
NOW accounts		79,524			118,847			198,431
Time, $100,000 or more		333,753			839,772			731,912
Time, under $100,000		1,073,942			1,645,960			1,931,303
		$	2,392,994		$	4,115,136		$	4,119,858

 

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9.                                      SHORT-TERM BORROWINGS, LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS

 

Short-Term Borrowings and Long-Term Debt

 

Advances from the Federal Home Loan Bank of San Francisco at December 31, 2002 and 2001 consisted of the following:

 

2002									2001
Amount			Rate		Maturity Date					Amount			Rate		Maturity Date
$	1,000,000		2.44	%	May 7, 2003					$	1,000,000		2.46	%	May 20, 2002
1,000,000			3.33	%	November 20, 2003					1,000,000			3.33	%	November 20, 2003
2,000,000			3.28	%	February 23, 2004					1,000,000			3.99	%	November 22, 2004
3,000,000			3.38	%	March 4, 2004
1,000,000			3.70	%	April 15, 2004
1,000,000			3.99	%	November 22, 2004
9,000,000										3,000,000
(2,000,000)			Less short-term portion							(1,000,000		)	Less short-term portion
$	7,000,000									$	2,000,000

 

The advances are secured by investment securities with amortized costs totaling $13,809,000 and $5,045,000 and market values totaling $14,823,000 and $5,067,000 at December 31, 2002 and 2001, respectively.  The credit limit varies according to the amount and composition of the Bank’s investment and loan portfolios pledged as collateral.

 

Other Borrowing Arrangements

 

The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $8,000,000 and $6,000,000 at December 31, 2002 and 2001, respectively, at interest rates which vary with market conditions.  The Bank also had a line of credit with the Federal Reserve Bank of San Francisco at December 31, 2002 and 2001 which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $3,833,000 and $5,402,000 and market values totaling $3,946,000 and $5,703,000, respectively.  At December 31, 2002 and 2001, the Bank had no outstanding borrowings under these lines of credit.

 

10.          INCOME TAXES

 

The expense (benefit) for income taxes for continuing operations for the years ended December 31, 2002, 2001 and 2000 consisted of the following:

 

		Federal			State			Total
2002
Current		$	884,600		$	266,000		$	1,150,600
Deferred		189,000			(92,000		)	97,000
Income tax expense		$	1,073,600		$	174,000		$	1,247,600
2001
Current		$	982,700		$	226,900		$	1,209,600
Deferred		53,800			11,200			65,000
Income tax expense		$	1,036,500		$	238,100		$	1,274,600
2000
Current		$	20,100		$	8,000		$	28,100
Deferred		508,000			368,000			876,000
Income tax expense		$	528,100		$	376,000		$	904,100

 

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Deferred tax assets (liabilities) consisted of the following:

 

		December 31,
		2002			2001
Deferred tax assets:
Allowance for credit losses		$	538,000		$	538,000
Other reserves		76,000			388,000
Bank premises and equipment		210,000			36,000
Deferred compensation		668,000			546,000
Total deferred tax assets		1,492,000			1,508,000
Deferred tax liabilities:
Other accruals		(140,000		)	(82,000		)
Future liability of State deferred tax asset		(59,000		)	(36,000		)
Unrealized gain on available-for-sale
investment securities		(874,000		)	(697,000		)
Total deferred tax liabilities		(1,073,000		)	(815,000		)
Net deferred tax assets		$	419,000		$	693,000

 

61

 

The expense for income taxes for continuing operations differs from amounts computed by applying the statutory Federal income tax rates to operating income from continuing operations before income taxes.  The significant items comprising these differences for the years ended December 31, 2002, 2001 and 2000 consisted of the following:

 

		2002		2001		2000
Federal income tax expense, at statutory rate		34.0	%	34.0	%	34.0	%
State franchise tax expense, net of Federal tax effect		2.8	%	6.7	%	6.8	%
Tax exempt income		(4.1	)%	(5.8	)%	(6.5%	)
Other		(1.8	)%			(.5	)%
Total income tax expense for continuing operations		30.9	%	34.9	%	33.8	%

 

11.          COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases.  Rental expense included in occupancy and equipment and other expense totaled $235,212, $195,464 and $189,217 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Future minimum lease payments on noncancelable operating leases are as follows:

 

 

The Bank has options to renew its branch facilities and administrative offices after the initial leases expire.  The lease expiration dates and renewal options are as follows:

 

 

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Federal Reserve Requirements

 

Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits.  The average amount of such reserve balances required at December 31, 2002 and 2001 was $311,000 and $3,919,000, respectively.

 

Correspondent Banking Agreements

 

The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements.  Uninsured deposits totaled $7,252,000 at December 31, 2002.

 

Financial Instruments With Off-Balance-Sheet Risk

 

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates.  These financial instruments consist of commitments to extend credit and letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and letters of credit as it does for loans included on the balance sheet.

 

The following financial instruments represent off-balance-sheet credit risk:

 

		December 31,
		2002			2001
Commitments to extend credit		$	65,210,710		$	63,274,446
Letters of credit		$	1,177,060		$	1,329,972

 

Commitments to extend credit consist primarily of unfunded single-family residential and commercial real estate construction loans and commercial revolving lines of credit.  Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction.  Commercial revolving lines of credit have a high degree of industry diversification.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are generally secured and are issued by the Bank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

At December 31, 2002, commercial loan commitments represent approximately 53% of total commitments and are generally secured by collateral other than real estate or unsecured.  Real estate loan commitments represent 27% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%.  Consumer loan commitments represent the remaining 20% of total commitments and are generally unsecured.  In addition, the majority of the Bank’s loan commitments have variable interest rates.

 

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Concentrations of Credit Risk

 

At December 31, 2002, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans.  At that date, approximately 94.0% of the Company’s loans were commercial and real-estate-related, representing 44.2% and 49.8% of total loans, respectively.

 

At December 31, 2001, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans.  At that date, approximately 94.8% of the Company’s loans were commercial and real-estate-related, representing 42.9% and 51.9% of total loans, respectively.

 

Although management believes the loans within these concentrations have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in the Company’s primary market area, in particular, could have an adverse impact on collectibility, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition of the Company.

 

Contingencies

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.

 

12.                               SHAREHOLDERS’ EQUITY

 

Regulatory Capital

 

The Company and the Bank are subject to certain regulatory requirements administered by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC).  Failure to meet these 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 consolidated statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and the 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 the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets.  Each of these components is defined in the regulations.  The consolidated average assets and risk-weighted assets of the Company and the average assets and risk-weighted assets of the Bank were not materially different at December 31, 2002 and 2001.  Management believes that the Company and the Bank meet all their capital adequacy requirements as of December 31, 2002.

 

64

 

In addition, 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 and Tier 1 leverage ratios as set forth below.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

 

		2002					2001
		Amount			Ratio		Amount			Ratio
Tier 1 Leverage Ratio
Central Valley Community Bancorp and Subsidiary		$	22,236,000		8.0	%	$	19,755,000		8.9	%
Central Valley Community Bank		$	20,974,000		7.6	%	$	19,095,000		8.7	%
Minimum requirement for “Well-Capitalized” institution		$	13,915,000		5.0	%	$	11,062,000		5.0	%
Minimum regulatory requirement		$	11,132,000		4.0	%	$	8,850,000		4.0	%
Tier 1 Risk-Based Capital Ratio
Central Valley Community Bancorp and Subsidiary		$	22,236,000		12.0	%	$	19,755,000		13.1	%
Central Valley Community Bank		$	20,974,000		11.3	%	$	19,095,000		12.7	%
Minimum requirement for “Well-Capitalized” institution		$	11,129,000		6.0	%	$	9,115,000		6.0	%
Minimum regulatory requirement		$	7,419,000		4.0	%	$	6,077,000		4.0	%
Total Risk-Based Capital Ratio
Central Valley Community Bancorp and Subsidiary		$	24,550,000		13.2	%	$	21,655,000		14.3	%
Central Valley Community Bank		$	23,288,000		12.6	%	$	20,995,000		13.9	%
Minimum requirement for “Well-Capitalized” institution		$	18,549,000		10.0	%	$	15,192,000		10.0	%
Minimum regulatory requirement		$	14,839,000		8.0	%	$	12,154,000		8.0	%

 

Stock Split

 

On January 6, 2003, the Company effected a two-for-one stock split.  All per share, shares outstanding and stock option data in the financial statements have been retroactively restated to reflect the stock split.

 

Dividends

 

On February 13, 2002, the Board of Directors declared a $.05 per share cash dividend to shareholders of record at the close of business on March 1, 2002, paid on or about March 31, 2002.  On July 19, 2000, the Board of Directors declared a $.05 cash dividend to shareholders of record at the close of business on August 1, 2000, paid on or about August 15, 2000.  No cash dividends were paid during 2001.

 

65

 

The Company’s primary source of income with which to pay cash dividends is dividends from the Bank.  The California Financial Code restricts the total amount of dividends payable by the bank at any time without obtaining the prior approval of the California Department of Financial Institutions to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period.  At December 31, 2002, retained earnings of $4,777,000 were free of such restrictions.

 

66

 

Share Repurchase Plan

 

During 2002 and 2001, the Company approved stock repurchase plans authorizing the purchase of shares up to a total cost of $500,000, or approximately 3% of its common stock, in each year.  As of December 31, 2002 and 2001, the Company repurchased 40,812 and 51,800 shares at a total cost of $483,356 and $499,263, respectively.  In December 2002, the Company announced its intent to purchase up to $500,000, or approximately 2% of its common stock, through a stock repurchase plan that will become effective on January 1, 2003.

 

Earnings Per Share

 

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:

 

		For the Year Ended December 31,
		2002			2001			2000
Basic Earnings Per Share:
Income from continuing operations		$	2,783,944		$	2,378,090		$	1,772,742
Loss from discontinued operations								(25,231		)
Net income available to common shareholders		$	2,783,944		$	2,378,090		$	1,747,511
Weighted average shares outstanding		2,585,433			2,594,332			2,606,918
Basic earnings (loss) per share:
Continuing operations		$	1.08		$	.92		$	.68
Discontinued operations								(.01		)
Net income		$	1.08		$	.92		$	.67
Diluted Earnings Per Share:
Income from continuing operations		$	2,783,944		$	2,378,090		$	1,772,742
Loss from discontinued operations								(25,231		)
Net income  available to common shareholders		$	2,783,944		$	2,378,090		$	1,747,511
Weighted average shares outstanding		2,585,433			2,594,332			2,606,918
Effect of dilutive stock options		156,310			84,298			17,428
Weighted average shares of common stock and common stock equivalents		2,741,743			2,678,630			2,624,346
Diluted earnings (loss) per share:
Continuing operations		$	1.02		$	.89		$	.68
Discontinued operations								(.01		)
Net income		$	1.02		$	.89		$	.67

 

 

67

 

Stock Options

 

During 1992, the Bank established a Stock Option Plan for which shares are reserved for issuance to employees and directors under incentive and nonstatutory agreements.  The Company assumed all obligations under this plan as of November 15, 2000, and options to purchase shares of the Company’s common stock were substituted for options to purchase shares of common stock of the Bank.  The plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised.  The options under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.  The vesting period is determined by the Board of Directors and is generally over five years.  Outstanding options under the 1992 plan are exercisable until their expiration; however, no new options will be granted under this plan.

 

On November 15, 2000, the Company adopted, and subsequently amended on December 20, 2000, the Central Valley Community Bancorp 2000 Stock Option Plan for which 732,834 shares are reserved for issuance to employees and directors under incentive and nonstatutory agreements.

 

A summary of the combined activity of the plans, adjusted to give effect to stock dividends and splits, follows:

 

		2002					2001					2000
		Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Options outstanding, beginning of year		541,430		$	7.49		250,450		$	6.53		250,600		$	8.85
Options granted		51,000		$	10.94		320,276		$	8.10		170,200		$	6.85
Options exercised		(43,340	)	$	4.66		(15,596	)	$	4.17
Options canceled		(18,002	)	$	8.33		(13,700	)	$	8.20		(170,350	)	$	10.26
Options outstanding, end of year		531,088		$	8.02		541,430		$	7.49		250,450		$	6.53
Options exercisable, end of year		234,278		$	7.98		188,018		$	7.36		87,000		$	5.84

 

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A summary of options outstanding at December 31, 2002 follows:

 

Range of Exercise Prices		Number of Options Outstanding December 31, 2002		Weighted Average Remaining Contractual Life		Number of Options Exercisable December 31, 2002
$ 6.50 to $ 7.75		252,100		7.5 years		82,830
$ 8.18 to $ 9.50		226,988		7.2 years		151,248
$ 10.01 to $ 11.63		52,000		9.5 years		200
		531,088				234,278

 

13.          OTHER EXPENSES

 

Other expenses consisted of the following:

 

		Year Ended December 31,
		2002			2001			2000
Legal fees		$	157,832		$	169,862		$	238,278
Data processing		746,231			771,838			718,529
Advertising		524,071			366,543			356,998
Audit and accounting fees		334,480			227,308			267,784
Other expenses		1,782,460			1,716,917			1,547,952
		$	3,545,074		$	3,252,468		$	3,129,541

 

14.          EMPLOYEE BENEFITS

 

401(K) and Profit Sharing Plan

 

The Bank has established a 401(k) profit sharing plan covering substantially all employees who have completed a six-month period in which they are credited with at least 1,000 hours of service.  Participants in the profit sharing plan are eligible to receive employer contributions after completion of two years of service.  Bank contributions are determined at the discretion of the Board of Directors.  Participants are automatically vested 100% in all employer contributions.  The Bank contributed $100,000, $125,000 and $120,000 to the plan in 2002, 2001 and 2000, respectively.

 

Additionally, the Bank may elect to make a matching contribution to the participants’ accounts.  The amount contributed is announced by the Bank at the beginning of the plan year.  For the year ended December 31, 2002, the Bank made a 100% matching contribution on all deferred amounts up to 3% and a 50% matching contribution on all deferred amounts above 3% to a maximum of 5% of eligible compensation.  For the year ended December 31, 2001, the Bank made a 50% matching contribution on all deferred amounts up to 5% of eligible compensation.  For the years ended December 31, 2002 and 2001, the Bank made matching contributions totaling $128,000 and $70,000, respectively.  For the year ended 2000, there were no matching contributions.

 

69

 

Deferred Compensation Plan

 

The Bank has a nonqualified Deferred Compensation Plan which provides directors and a former key executive with an unfunded, deferred compensation program.  Under the plan, eligible participants may elect to defer some or all of their current compensation.  Deferred amounts earn interest at an annual rate determined by the Board of Directors (6% at December 31, 2002).  At December 31, 2002 and 2001, the total net deferrals included in other liabilities were $1,052,616 and $984,593, respectively.

 

In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is beneficiary and owner of the policies.  The cash surrender value of the policies totaled $3,481,940 and $1,860,715 at December 31, 2002 and 2001, respectively, and is included in accrued interest receivable and other assets on the balance sheet.  The current annual tax-free interest rates on these policies is 4.9%.

 

Salary Continuation Plans

 

The Board of Directors approved salary continuation plans for certain key executives during 2001.  Under these plans, the Bank is obligated to provide the executives with annual benefits for fifteen years after retirement.  These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives.  In addition, the estimated present values of these future benefits are accrued from the effective date of the plans until the executives’ expected retirement date.  The expense recognized under these plans for the years ended December 31, 2002 and 2001 totaled $204,958 and $160,679, respectively.

 

In connection with these plans, the Bank purchased single premium life insurance policies with cash surrender values totaling $2,098,983 and $1,988,120 at December 31, 2002 and 2001, respectively, which are included on the balance sheet in accrued interest receivable and other assets.  Income recognized on these policies, net of related expense, for the years ended December 31, 2002 and 2001 totaled $110,900 and $98,200, respectively.

 

15.          LOANS TO RELATED PARTIES

 

During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors.  These loans are made with substantially the same terms, including rates and collateral, as loans to unrelated parties.  The following is a summary of the aggregate activity involving related party borrowers:

 

Balance, January 1, 2002		$	39,000
Disbursements		722,000
Amounts repaid		(194,000		)
Balance, December 31, 2002		$	567,000
Undisbursed commitments to related parties, December 31, 2002		$	1,527,000

 

70

 

16.          COMPREHENSIVE INCOME

 

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income that historically has not been recognized in the calculation of net income.  Unrealized gains and losses on the Company’s available-for-sale investment securities are included in other comprehensive income.  Total comprehensive income and the components of accumulated other comprehensive income are presented in the Consolidated Statement of Changes in Shareholders’ Equity.

 

At December 31, 2002, 2001 and 2000, the Company held securities classified as available-for-sale which had unrealized gains as follows:

 

		Before Tax			Tax Expense			After Tax
For the Year Ended December 31, 2002
Other comprehensive income:
Unrealized holding gains		$	1,015,559		$	(185,499	)	$	830,060
Less reclassification adjustment for net gains included in net income		26,559			(8,499		)	18,060
Total other comprehensive income		$	989,000		$	(177,000	)	$	812,000
For the Year Ended December 31, 2001
Other comprehensive income:
Unrealized holding gains		$	792,150		$	(316,260	)	$	475,890
Less reclassification adjustment for net gains included in net income		468,150			(187,260		)	280,890
Total other comprehensive income		$	324,000		$	(129,000	)	$	195,000
For the Year Ended December 31, 2000
Other comprehensive income:
Unrealized holding gains		$	2,059,000		$	(821,000	)	$	1,238,000

 

17.                               DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Disclosures include estimated fair values for financial instruments for which it is practicable to estimate fair value.  These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.

 

71

 

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2002 and 2001:

 

Cash and cash equivalents:  For cash and cash equivalents, the carrying amount is estimated to be fair value.

 

Investment securities and interest-bearing deposits in other banks:  For investment securities and deposits, fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and deposits and indications of value provided by brokers.

 

Loans:  For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness.  The carrying amount of accrued interest receivable approximates its fair value.

 

Cash surrender value of life insurance policies:  The fair value of life insurance policies are based on cash surrender values at each reporting date as provided by the insurers.

 

Short-term borrowings and long-term debt:  The fair values of fixed-rate borrowings are estimated by discounting their future cash flows using rates at each reporting date for similar instruments.  The fair values of variable rate borrowings are based on carrying value.

 

Deposits:  The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities.  The carrying amount of accrued interest payable approximates its fair value.

 

Commitments to extend credit and letters of credit:  Commitments to extend credit are primarily for adjustable rate loans.  For these commitments, there are no differences between the committed amounts and their fair values.  Commitments to fund fixed rate loans and letters of credit are at rates which approximate fair value at each reporting date.

 

		December 31, 2002						December 31, 2001
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from banks		$	18,803,705		$	18,803,705		$	13,963,456		$	13,963,456
Federal funds sold		17,678,000			17,678,000			4,160,000			4,160,000
Interest-bearing deposits in other banks		500,000			500,000
Investment securities		77,723,547			77,723,547			60,586,194			60,586,194
Loans		156,293,157			164,023,000			130,797,253			134,443,000
Cash surrender value life insurance policies		5,580,923			5,580,923			3,848,835			3,848,835
Accrued interest receivable		1,206,778			1,206,778			1,007,246			1,007,246
Financial liabilities:
Deposits		$	246,337,740		$	245,751,000		$	192,132,266		$	192,415,000
Short-term borrowings		2,000,000			2,000,000			1,000,000			1,000,000
Long-term debt		7,000,000			6,922,000			2,000,000			2,090,000
Accrued interest payable		261,434			261,434			257,980			257,980
Off-balance-sheet financial instruments:
Commitments to extend credit		$	65,210,710		$	65,210,710		$	63,274,446		$	63,274,446
Standby letters of credit		1,177,060			1,177,060			1,329,972			1,329,972

 

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18.          PARENT ONLY CONDENSED FINANCIAL STATEMENTS

 

BALANCE SHEET

 

December 31, 2002 and 2001

 

		2002			2001
ASSETS
Cash and due from banks		$	684,344		$	58,186
Investment in subsidiary		22,837,134			20,168,207
Other assets		673,983			620,503
Total assets		$	24,195,461		$	20,846,896
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities		$	96,423		$	19,148
Shareholders’ equity:
Common stock		5,854,311			6,049,217
Retained earnings		16,386,727			13,732,531
Accumulated other comprehensive income		1,858,000			1,046,000
Total shareholders’ equity		24,099,038			20,827,748
Total liabilities and shareholders’ equity		$	24,195,461		$	20,846,896

 

73

 

STATEMENT OF INCOME

 

For the Years Ended December 31, 2002 and 2001 and the Period from November 15, 2000

(Date Operations Commenced) to December 31, 2000

 

		2002			2001			2000
Income:
Dividends declared by subsidiary - eliminated in consolidation		$	1,129,749		$	1,100,000		$	125,000
Interest – eliminated in consolidation		425			613
Other income		50,055
Total income		1,180,229			1,100,613			125,000
Expenses:
Professional fees		144,200			101,207			71,170
Other expenses		184,412			55,803			10,973
Total expenses		328,612			157,010			82,143
Income before equity in undistributed income of subsidiary		851,617			943,603			42,857
Equity in undistributed net income of subsidiary		1,856,927			1,378,187			531
Income before income taxes		2,708,544			2,321,790			43,388
Income tax benefit		75,400			56,300			32,800
Net income		$	2,783,944		$	2,378,090		$	76,188

 

74

 

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

For the Years Ended December 31, 2002 and 2001 and the Period from November 15, 2000

(Date Operations Commenced) to December 31, 2000

 

 

		Common Stock					Retained Earnings			Accumulated Other Comprehensive Income			Shareholders’ Equity			Comprehensive Income
		Shares		Amount
Stock issued to effect merger with the Bank, November 15, 2000		2,606,918		$	6,465,236		$	11,278,253		$	131,000		$	17,874,489
Comprehensive income:
Net income							76,188						76,188			$	76,188
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities										720,000			720,000			720,000
Total comprehensive income																$		796,188
Balance, December 31, 2000		2,606,918		6,465,236			11,354,441			851,000			18,670,677
Comprehensive income:
Net income							2,378,090						2,378,090			$	2,378,090
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment securities										195,000			195,000			195,000
Total comprehensive income																$	2,573,090
Exercise of stock options and related tax benefit		15,596		83,244									83,244
Repurchase and retirement of common stock		(51,800	)	(499,263		)							(499,263		)
Balance, December 31, 2001		2,570,714		$	6,049,217		$	13,732,531		$	1,046,000		$	20,827,748

 

75

 

										Accumulated Other Comprehensive Income
		Common Stock
		Shares		Amount			Retained Earnings						Shareholders’ Equity			Comprehensive Income
Balance, December 31, 2001		2,570,714		$	6,049,217		$	13,732,531		$	1,046,000		$	20,827,748
Comprehensive income:
Net income							2,783,944						2,783,944			$	2,783,944
Other comprehensive income, net of tax:
Unrealized gains on available-for-saleinvestment securities										812,000			812,000			812,000
Total comprehensive income																$	3,595,944
Cash dividend - $.05 per share							(129,748		)				(129,748		)
Stock options exercised and related taxbenefit (Note 12)		43,340		288,450									288,450
Stock repurchased		(40,812	)	(483,356		)							(483,356		)
Balance, December 31, 2002		2,573,242		$	5,854,311		$	16,386,727		$	1,858,000		$	24,099,038

 

76

 

STATEMENT OF CASH FLOWS

 

For the Years Ended December 31, 2002 and 2001 and the Period from November 15, 2000

(Date Operations Commenced) to December 31, 2000

 

		2002			2001			2000
Cash flows from operating activities:
Net income		$	2,783,944		$	2,378,090		$	76,188
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiary		(1,856,927		)	(1,378,187		)	(531		)
Decrease (increase) in other assets		33,020			(581,745		)	(38,758		)
Increase in liabilities		77,275			19,048			100
Net cash provided by operating activities		1,037,312			437,206			36,999
Cash flows from financing activities:
Share repurchase and retirement		(483,356		)	(499,263		)
Proceeds from exercise of stock options		201,950			83,244
Cash paid for dividends		(129,748		)
Net cash used in financing activities		(411,154		)	(416,019		)
Increase in cash and cash equivalents		626,158			21,187			36,999
Cash and cash equivalents at beginning of period		58,186			36,999
Cash and cash equivalents at end of year		$	684,344		$	58,186		$	36,999
Non-cash investing activities:
Net change in unrealized gains on available- for-sale investment securities		$	989,000		$	324,000		$	1,197,000
Issuance of common stock in exchange for the common stock of the Bank								$	17,874,165

 

77

 

ITEM 8 -                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not Applicable.

 

PART III

 

ITEM 9 -                                               DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

 

For information concerning directors and executive officers of the Company, see “ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the “Proxy Statement”), which section of the Proxy Statement is incorporated herein by reference.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the FDIC.  Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.  To the best knowledge of the Company, the only greater than ten-percent holder of the Company’s common stock is Mr. Louis McMurray and his related interests.

 

Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 4 and 5 were required for those persons, the Company believes that for the 2002 fiscal year the officers and directors of the Company complied with all applicable filing requirements, except that each of Gayle Graham, Gary Quisenberry, Thomas L. Sommer, and Shirley Wilburn filed one Form 4 late.  Those Form 4’s reported a single transaction for each person: one option grant.

 

ITEM 10 -              EXECUTIVE COMPENSATION.

 

For information concerning executive compensation, see “EXECUTIVE COMPENSATION” in the Proxy Statement, which section of the Proxy Statement is incorporated herein by reference.

 

ITEM 11 -              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

For information concerning security ownership of certain beneficial owners and manage­ment, see “PRINCIPAL SHAREHOLDERS” and “ELECTION OF DIRECTORS OF THE COMPANY” in the Proxy Statement, which sections of the Proxy Statement are incorporated herein by reference.

 

78

 

The following chart provides information as of December 31, 2002 concerning the Company’s  Stock Option Plans,  the Company’s only equity compensation plans:

 

		Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Plan Category
Equity compensation plans approved by security holders		531,088		$	8.02		173,448
Equity compensation plans not approved by security holders		-0-		-0-			-0-
Total		531,088		$	8.02		173,448

 

ITEM 12 -              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

 

For information concerning certain rela­tion­ships and related transactions, see “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “INDEBTEDNESS OF MANAGEMENT” in the Proxy Statement, which sections of the Proxy Statement are incorporated herein by reference.

 

ITEM 13 -              EXHIBITS AND REPORTS ON FORM 8-K.

 

(a)  EXHIBITS

 

See Index to Exhibits at pages 83 through 85 of this Form 10-KSB.

 

(b)  REPORTS ON FORM 8-K

 

On October 7, 2002, the Company filed a Current Report on Form 8-K reporting under Item 5 the issuance of a press release announcing unaudited financial information of the Company and related matters.  The Current Report included as an exhibit a Press Release, dated October 7, 2002, containing certain unaudited financial information of the Company and a discussion of changes for the third quarter of 2002 and for the nine-month period ended September 30, 2002.

 

On October 8, 2002, the Company filed a Current Report on Form 8-K reporting under Item 5 the issuance of a press release announcing that its wholly owned subsidiary, Central Valley Community Bank, would open its first Kerman, California office on October 15, 2002.  The Current Report included as an exhibit a Press Release, dated October 8, 2002, announcing the opening of the new office.

 

On December 23, 2002, the Company filed a Current Report on Form 8-K reporting under Item 5 the issuance of a press release announcing its adoption of a program to effect repurchases of the Company’s common stock.  The Current Report included as an exhibit a Press Release, dated October 8, 2002, announcing the adoption of said program.

 

On December 26, 2002, the Company filed a Current Report on Form 8-K reporting under Item 5 the issuance of a press release announcing a 2-for-1 split of the Company’s common stock.  The Current Report included as an exhibit a Press Release, dated December 26, 2002, announcing said stock split.

 

79

 

On January 10, 2003, the Company filed a Current Report on Form 8-K reporting under Item 7 the issuance of a press release announcing unaudited financial information of the Company and related matters.  The Current Report included as an exhibit a Press Release, dated January 10, 2003, containing certain unaudited financial information of the Company and a discussion of changes for the last quarter of 2002 and the year ended December 31, 2002, compared to the comparable periods for the preceding year.

 

ITEM 14 -            CONTROLS AND PROCEDURES

 

(a)           EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

 

Based on their evaluation as of a date within 90 days of the filing date of this Annual  Report on Form 10-KSB, the Registrant’s principal executive officer and principal financial officer have concluded that the Registrant’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

(b)  CHANGES IN INTERNAL CONTROLS.

 

There were no significant changes in the Registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

80

 

SIGNATURES

 

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CENTRAL VALLEY COMMUNITY BANCORP
Date: March 24, 2003	By:	/s/ Daniel J. Doyle
	Daniel J. Doyle
	President and Chief Executive Officer
	(principal executive officer)

 

81

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ Daniel J. Doyle				Date: March 24, 2003
Daniel J. Doyle,
President and Chief Executive
Officer and Director (principal executive officer)
/s/ Gayle Graham				Date: March 24, 2003
Gayle Graham,
Senior Vice President and Chief Financial Officer
(principal accounting officer
and principal financial officer)
Daniel N. Cunningham*				Date: March 24, 2003
Daniel N. Cunningham,
Chairman of the Board and
Director
Sidney B. Cox*				Date: March 24, 2003
Sidney B. Cox, Director
Edwin S. Darden*				Date: March 24, 2003
Edwin S. Darden, Director
Steven D. McDonald*				Date: March 24, 2003
Steven D. McDonald, Director
Louis McMurray*				Date: March 24, 2003
Louis McMurray, Director
Wanda L. Rogers*				Date: March 24, 2003
Wanda L. Rogers, Director
William S. Smittcamp*				Date: March 24, 2003
William S. Smittcamp, Director
Joseph B. Weirick*				Date: March  24, 2003
Joseph B. Weirick, Director
* By	/s/ Daniel J. Doyle			Date: March 24, 2003
Daniel J. Doyle, as Attorney-in-fact

 

82

 

I, Daniel J. Doyle, certify that:

 

1.               I have reviewed this annual report on Form 10-KSB of CENTRAL VALLEY COMMUNITY BANCORP;

 

2.               Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b.              evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

c.               presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a.               all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/ Daniel J. Doyle		Date: March 24, 2003
Daniel J. Doyle,
President and Chief Executive Officer and Director (principal executive officer)

 

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I, Gayle Graham, certify that:

 

1.               I have reviewed this annual report on Form 10-KSB of CENTRAL VALLEY COMMUNITY BANCORP;

 

2.               Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.               Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.               The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

d.              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

e.               evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

f.                 presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

c.               all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

d.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

/s/ Gayle Graham		Date: March 24, 2003
Gayle Graham,
Senior Vice President and Chief Financial Officer
(principal accounting officer and principal financial officer)

 

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INDEX TO EXHIBITS

 

Exhibit Number
		Exhibit
3.1.1		Articles of Incorporation of the Company. (1)
3.1.2		Certificate of Amendment of Articles of Incorporation, dated July 6, 2000. (2)
3.2		Bylaws of the Company as amended to date. (3)
4		N/A
9		N/A
10.1		Central Valley Community Bancorp 2000 Stock Option Plan. (4) *
10.2		Central Valley Community Bancorp Incentive Stock Option Agreement. (5) *
10.3		Central Valley Community Bancorp Non-Statutory Stock Option Agreement. (6) *
10.4		Clovis Community Bank 1992 Stock Option Plan. (7) *
10.5		Clovis Community Bank Incentive Stock Option Agreement. (8) *
10.6		Clovis Community Bank Non-Statutory Stock Option Agreement. (9) *
10.7		Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (10) *
10.8		Amendment Number One to the Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (11) *
10.9		Amendment Number Two to the Clovis Community Bank Amended and Restated Salary Deferral Plan, effective January 1, 1997. (12) *
10.10		Deferred Fee Agreement by and between Clovest Corporation and Daniel N. Cunningham. (13) *
10.11		Deferred Fee Agreement by and between Clovest Corporation and Steven McDonald. (14) *
10.12		Deferred Fee Agreement by and between Clovest Corporation and Louis McMurray. (15) *
10.13		Deferred Fee Agreement by and between Clovest Corporation and Wanda Lee Rogers. (16) *
10.14		Deferred Fee Agreement by and between Clovest Corporation and William S. Smittcamp. (17) *
10.15		Clovis Community Bank 1999 Senior Management Incentive Plan. (18) *
10.16		Employment Agreement by and between Clovis Community Bank and Daniel J. Doyle dated May 11, 1998. (19) *
10.17		Retirement Agreement between Clovis Community Bank and Donald H. Bruegman dated May 28, 1998. (20) *

 

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10.18		[reserved]
10.19		Salary Continuation Agreement by and between Clovis Community Bank and Daniel J. Doyle, dated June 7, 2000. (21) *
10.20		Salary Continuation Agreement by and between Clovis Community Bank and Gayle Graham, dated June 7, 2000. (22) *
10.21		Salary Continuation Agreement by and between Clovis Community Bank and Gary Quisenberry, dated June 7, 2000. (23) *
10.22		Salary Continuation Agreement by and between Clovis Community Bank and Tom Sommer, dated June 7, 2000. (24) *
10.23		Clovis Community Bank Amended and Restated Deferred Fee Agreement for Daniel N. Cunningham. (25) *
10.24		Clovis Community Bank Amended and Restated Deferred Fee Agreement for Steven McDonald. (26) *
10.25		Clovis Community Bank Amended and Restated Deferred Fee Agreement for Louis McMurray. (27) *
10.26		Clovis Community Bank Amended and Restated Deferred Fee Agreement for Wanda Lee Rogers. (28) *
10.27		Clovis Community Bank Amended and Restated Deferred Fee Agreement for William S. Smittcamp. (29) *
10.28		Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Daniel J. Doyle, dated June 21, 2000. (30) *
10.29		Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Dorothy Graham, dated June 21, 2000. (31) *
10.30		Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Gary Quisenberry, dated June 21, 2000. (32) *
10.31		Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Tom Sommer, dated June 21, 2000. (33) *
10.32		Salary Continuation Agreement by and between Clovis Community Bank and Shirley Wilburn, dated April 1, 2001.  (34) *
10.33		Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Clovis Community Bank and Shirley Wilburn, dated April 1, 2001. (35) *
10.34		Director Deferred Fee Agreement by and between Clovis Community Bank and Edwin S. Darden. Jr., effective August 1, 2001. (36) *
10.35		Addendum A, Clovis Community Bank Split Dollar Agreement and Endorsement by and between Clovis Community Bank and Edwin S. Darden Jr., effective November 29, 2001. (37) *
10.36		Form of Second Amended and Restated Director Deferred Fee Agreement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee

 

86

 

		Rogers and William S. Smittcamp, effective February 13, 2002. (38) *
10.37		Schedule A, Participants’ Normal Retirement Age and Form of Benefit Elected to Second Amended and Restated Director Deferred Fee Agreement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002 . (39) *
10.38		Addendum A, Clovis Community Bank Split Dollar Agreement and Endorsement by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002. (40) *
10.39		Schedule B, Participants and Their Executive Interest in Clovis Community Bank Split Dollar Agreement and Endorsement, by and between Clovis Community Bank and Daniel N. Cunningham, Steven McDonald, Louis McMurray, Wanda Lee Rogers and William S. Smittcamp, effective February 13, 2002. (41) *
10.40		Central Valley Community Bank Employee and Director Preferred Interest Bonus Plan. (42) *
10.41		Amendment No. 1 to Employment Agreement by and between Central Valley Community Bank and Daniel J. Doyle effective July 17, 2002. (43) *
10.42		Amendment No. 1 to Salary Continuation Agreement by and between Central Valley Community Bank and Daniel J. Doyle effective October 16, 2002.
11.		N/A
12.		N/A
13.		N/A
16		N/A
18		N/A
21		Subsidiaries.
22		N/A
23		Consent of Perry-Smith LLP.
24		Power of Attorney
99.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
99.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

 

*                                       Management contract and compensatory plans

 

(1)                                  Filed as Exhibit 3.1.1 to the Annual Report on Form 10-KSB for the year ended December 31, 2000 (the “2000 Form 10-KSB”) and incorporated herein by reference.

 

(2)                                  Filed as Exhibit 3.1.2 to the 2000 Form 10-KSB and incorporated herein by reference.

 

87

 

(3)                                  Filed as Exhibit 3.2 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(4)                                  Attached as Exhibit 99.1 to Registration Statement No. 333-52384 on Form S-8 filed by the Registrant (the “2000 Plan S-8 Registration Statement”) and incorporated herein by reference.

 

(5)                                  Filed as Exhibit 10.2 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(6)                                  Filed as Exhibit 10.3 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(7)                                  Attached as Exhibit 99.1 to Registration Statement No. 333-50276 on Form S-8 filed by the Registrant (the “1992 Plan S-8 Registration Statement”) and incorporated herein by reference.

 

(8)                                  Filed as Exhibit 10.5 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(9)                                  Filed as Exhibit 10.6 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(10)                            Filed as Exhibit 10.7 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(11)                            Filed as Exhibit 10.8 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(12)                            Filed as Exhibit 10.9 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(13)                            Filed as Exhibit 10.10 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(14)                            Filed as Exhibit 10.11 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(15)                            Filed as Exhibit 10.12 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(16)                            Filed as Exhibit 10.13 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(17)                            Filed as Exhibit 10.14 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(18)                            Filed as Exhibit 10.15 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(19)                            Filed as Exhibit 10.16 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(20)                            Filed as Exhibit 10.17 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(21)                            Filed as Exhibit 10.19 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(22)                            Filed as Exhibit 10.20 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(23)                            Filed as Exhibit 10.21 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(24)                            Filed as Exhibit 10.22 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(25)                            Filed as Exhibit 10.23 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(26)                            Filed as Exhibit 10.24 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(27)                            Filed as Exhibit 10.25 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(28)                            Filed as Exhibit 10.26 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(29)                            Filed as Exhibit 10.27 to the 2000 Form 10-KSB and incorporated herein by reference.

 

88

 

(30)                            Filed as Exhibit 10.28 to the 2000 Form 10-KSB and incorporated herein by reference.

 

(31)                            Filed as Exhibit 10.29 to the 2000 Form 10-KSB and incorporated herein by reference.

(32)                            Filed as Exhibit 10.30 to the 2000 Form 10-KSB and incorporated herein by reference.

(33)                            Filed as Exhibit 10.31 to the 2000 Form 10-KSB and incorporated herein by reference.

(34)                            Filed as Exhibit 10.32 to the Quarterly Report on Form 10-QSB for the quarter ended June 30, 2001 (the “June 2000 Form 10-QSB”) and incorporated herein by reference.

 

(35)                            Filed as Exhibit 10.33 to the June 2000 Form 10-QSB and incorporated herein by reference.

 

(36)                            Filed as Exhibit 10.34 to the 2001 Form 10-KSB and incorporated herein by reference.

 

(37)                            Filed as Exhibit 10.35 to the 2001 Form 10-KSB and incorporated herein by reference.

 

(38)                            Filed as Exhibit 10.36 to the June 2002 Form 10-QSB and incorporated herein by reference.

 

(39)                            Filed as Exhibit 10.37 to the June 2002 Form 10-QSB and incorporated herein by reference.

 

(40)                            Filed as Exhibit 10.38 to the June 2002 Form 10-QSB and incorporated herein by reference.

 

(41)                            Filed as Exhibit 10.39 to the June 2002 Form 10-QSB and incorporated herein by reference.

 

(42)                            Filed as Exhibit 10.40 to the June 2002 Form 10-QSB and incorporated herein by reference.

 

(43)                            Filed as Exhibit 10.41 to the September 2002 Form 10-QSB and incorporated herein by reference.

 

89