-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRYu/hbUBiSIF+pqpJpuOuW3jbXjrSzvNjjMlKkFMT+rfhsd9Jg1uWO+92pFaubx FH/K3vQ9et9y3q9JinMFjQ== 0000912057-02-019705.txt : 20020513 0000912057-02-019705.hdr.sgml : 20020513 ACCESSION NUMBER: 0000912057-02-019705 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA INDEPENDENT BANCORP CENTRAL INDEX KEY: 0000948976 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 680349947 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26552 FILM NUMBER: 02642574 BUSINESS ADDRESS: STREET 1: 1227 BRIDGE STREET STREET 2: SUITE C CITY: YUBA CITY STATE: CA ZIP: 95992 BUSINESS PHONE: 9166744444 MAIL ADDRESS: STREET 1: P O BOX 1575 STREET 2: 1005 STAFFORD WAY CITY: YUBA CITY STATE: CA ZIP: 95992 10-Q 1 a2079573z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-265520

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

California (State or other jurisdiction of incorporation or organization)		68-0349947 (IRS Employer Identification No.)
1227 Bridge St., Suite C, Yuba City, California 95991 (Address of principal executive offices) (Zip Code)
(530) 674-6025 (Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Class		Outstanding at March 31, 2002
Common stock, no par value		2,115,419 shares

This report contains 24 pages. The Exhibit Index is on pages 23.

PART I—FINANCIAL INFORMATION


ITEM 1
	CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS:
		CONSOLIDATED BALANCE SHEETS	3
		CONSOLIDATED STATEMENTS OF INCOME	4
		CONSOLIDATED STATEMENTS OF CASH FLOWS	5
		NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	6-7
ITEM 2
	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		7-22
ITEM 3
	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22
PART II—OTHER INFORMATION
ITEM 1
	LEGAL PROCEEDINGS		22
ITEM 2
	CHANGES IN SECURITIES AND USE OF PROCEEDS		22
ITEM 3
	DEFAULTS UPON SENIOR SECURITIES		23
ITEM 4
	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		23
ITEM 5
	OTHER INFORMATION		23
ITEM 6
	EXHIBITS AND REPORTS ON FORM 8K		23
SIGNATURES			24

PART I—Financial Information

ITEM 1. FINANCIAL STATEMENTS

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2002, December 31, 2001, and March 31, 2001
(dollars in thousands)
(UNAUDITED)

			March 31, 2002			December 31, 2001			March 31, 2001
Assets
Cash and Due From Banks			$	13,142		$	17,747		$	11,642
Federal Funds Sold				3,430			5,300			17,400

	Cash and Cash Equivalents			16,572			23,047			29,042
Investment securities:
	Held-to-Maturity Securities, at amortized cost (fair value of $2,938, $3,698, and $4,377, respectively)			2,854			3,604			4,317
	Available-for-Sale Securities, at fair value			85,982			74,753			67,237

		Total Investment Securities		88,836			78,357			71,554
Loans and Leases				192,940			192,281			176,312
	Less: Allowance for Loan and Lease Losses			(5,790	)		(5,498	)		(5,372	)

		Net Loans and Leases		187,150			186,783			170,940
Premises and Equipment, Net				6,794			6,937			6,612
Interest Receivable				1,896			2,091			2,117
Other Real Estate Owned				542			542			302
Cash Surrender Value of Insurance Policies				5,167			5,108			4,928
Other Assets				3,485			3,140			3,337
Net Assets From Discontinued Operations				—			163			191

	Total Assets		$	310,442		$	306,168		$	289,023

Liabilities and Shareholders' Equity
Deposits:
	Noninterest-Bearing		$	58,862		$	69,968		$	54,928
	Interest-Bearing			209,600			205,608			203,999

	Total Deposits			268,462			275,576			258,927
Interest Payable				1,072			1,247			1,717
Deferred Compensation Payable				1,008			935			699
Federal Agency and Other Borrowings				10,120			120			160
Other Liabilities				2,340			1,077			813
Net Liabilities From Discontinued Operations				44			—			—

	Total Liabilities			283,046			278,955			262,316
Shareholders' Equity
	Common Stock, No Par Value-Authorized-20,000,000 Issued and outstanding—2,115,419 shares March 31, 2002 and December 31, 2001, and 2,008,966 shares March 31, 2001.			22,322			22,322			19,909
	Retained Earnings			4,994			4,481			6,694
	Debt Guarantee of ESOP			(120	)		(120	)		(160	)
	Accumulated Other Comprehensive Income			200			530			264

		Total Shareholders' Equity		27,396			27,213			26,707

		Total Liabilities and Shareholders' Equity	$	310,442		$	306,168		$	289,023

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

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except share data)
(UNAUDITED)

				Three months ended March 31, 2002			Three months ended March 31, 2001
Interest Income:
	Interest and Fees on Loans and Leases			$	3,673		$	4,287
	Interest on Investments—
		Taxable Interest Income			1,194			1,227
		Nontaxable Interest Income			20			26
	Interest on Federal Funds Sold and Other Interest Income				35			166

		Total Interest Income			4,922			5,706

Interest Expense:
	Interest on Deposits				1,080			2,070
	Interest on Other Borrowings				85			46

		Total Interest Expense			1,165			2,116

		Net Interest Income			3,757			3,590
Provision for Loan and Lease Losses					150			—

	Net Interest Income After Provision for Loan and Lease Losses				3,607			3,590

Noninterest Income:
	Service Charges on Deposit Accounts				300			252
	Loan Servicing Fees				135			158
	Brokered Loan Fees				27			12
	Alternative Investment Fee Income				42			45
	Cash Surrender Value of Life Insurance Policies				70			68
	Loss on Sale of Available-for-Sale Security				(55	)		—
	Other				47			66

		Total Noninterest Income			566			601

Noninterest Expense:
	Salaries and Employee Benefits				1,776			1,871
	Occupancy Expense				197			168
	Furniture and Equipment Expense				318			282
	Other Operating and Administrative Expense				741			867

		Total Noninterest Expense			3,032			3,188

			Income Before Provision for Income Taxes		1,141			1,003
Provision for Income Taxes					414			364

	Net Income From Continuing Operations				727			639
	Income From Discontinued Operations, net of tax effect				19			12

		Net Income		$	746		$	651

Share Data:
	Earnings Per Share:
		Basic—From Continuing Operations		$	0.34		$	0.30
		Basic—After Discontinuance of Subsidiary			0.35			0.31
		Diluted—From Continuing Operations			0.34			0.30
		Diluted—After Discontinuance of Subsidiary			0.35			0.31
Weighted Average Basic Shares					2,115,419			2,109,414
Weighted Average Diluted Shares					2,134,040			2,126,367

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

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three-month Periods ended March 31, 2002 and March 31, 2001
(dollars in thousands)
(UNAUDITED)

			March 31, 2002			March 31, 2001
Cash Flows From Operating Activities
Net Income			$	746		$	651
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
	Depreciation and Amortization			249			219
	Provision for Loan and Lease Losses			150			—
	Loss on Disposal of Investment Security			55
	Purchases of Loans and Leases Held-for-Sale			—			(327	)
	Gain on Sale of Other Real Estate Owned			—			(14	)
	Gain on Sale of Premises and Equipment			—			(8	)
(Increase) Decrease in Assets:
	Interest Receivable			195			723
	Cash Surrender Value of Insurance Policies			(59	)		(58	)
	Net Assets From Discontinued Operations			163			35
	Other Assets			(76	)		2
Increase (Decrease) in Liabilities:				—			—
	Interest Payable			(175	)		(163	)
	Deferred Compensation Payable			73			68
Net Liabilities From Discontinued Operations				44			—
	Other Liabilities			1,263			(4,561	)

		Net Cash Provided By (Used For) Operating Activities		2,628			(3,433	)
Cash Flows From Investing Activities
Net (Increase) Decrease in Loans and Leases				(517	)		2,677
Purchase of Securities Available-for-Sale				(15,181	)		(8,270	)
Proceeds From Maturity of Securities Held-to-Maturity				750			1,000
Proceeds From Sales, Maturities and Calls of Securities Available-for-Sale				3,297			18,662
Proceeds From Sales of Other Real Estate Owned				—			117
Purchases of Premises and Equipment				(105	)		156

	Net Cash (Used For) Provided By Investing Activities			(11,756	)		14,342
Cash Flows From Financing Activities				—
Net Decrease in Noninterest Bearing Deposits				(11,107	)		(9,068	)
Net Increase in Interest Bearing Deposits				3,993			363
Net Increase in Other Borrowings				10,000			—
Cash Dividends				(233	)		(221	)

	Net Cash (Used For) Financing Activities			2,653			(8,926	)
Net Increase (Decrease) in Cash and Cash Equivalents				(6,475	)		1,983

Cash and Cash Equivalents, Beginning of Year				23,047			27,059

Cash and Cash Equivalents, End of Period				16,572			29,042

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

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of Management, the unaudited consolidated financial statements contain all adjustments (consisting solely of recurring adjustments) that are necessary to present fairly the financial position of California Independent Bancorp ("CIB") and its subsidiaries (collectively, the "Company") at March 31, 2002, December 31, 2001, and March 31, 2001 and the results of its operations for the three months ended March 31, 2002 and March 31, 2001.

Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with SEC rules or regulations. The results of operations for the period ended March 31, 2002, are not necessarily indicative of the operating results for the full year ending December 31, 2002. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in the Company's Annual Report and Form 10-K for the year ended December 31, 2001.

Note 2—Principles of Consolidation

The accompanying financial statements include the accounts of CIB and its wholly owned subsidiary, Feather River State Bank ("Bank") and its wholly owned subsidiary, E.P.I. Leasing Co., Inc. ("EPI"), whose operations have been discontinued and are in the process of being wound-down. Significant intercompany balances and transactions have been eliminated in consolidation.

Note 3—Commitments and Contingent Liabilities

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

The contract amount of commitments not reflected on the balance sheet at March 31, 2002 were as follows:

Loan Commitments		$	60,190,000
Standby Letters of Credit		$	520,000

Note 4—Cash and Stock Dividends

In February, May, August, and November of 2001, and February of 2002, CIB paid an eleven-cent per share cash dividend.

On August 25, 2001, CIB's Board of Directors authorized and declared a five percent (5%) stock dividend for shareholders of record as of September 10, 2001. The dividend was distributed on September 25, 2001, and resulted in the issuance of 99,957 additional shares of common stock.

Note 5—Earnings Per Share

Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to the common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of

common stock that then shared in the earnings of the Company. Basic and diluted EPS are restated for the effect of stock dividends.

Note 6—Comprehensive Income

The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The statement requires an entity to report and display comprehensive income and its components. For the Company, comprehensive income includes net income and changes in the fair value, net of applicable taxes, of its available-for-sale investment securities. Total comprehensive income for the three months ended March 31, 2002 and 2001 was $416,000 and $1,158,000, respectively.

Note 7—Financial Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). These Statements change the method of accounting for business combinations and goodwill in two significant ways. First, SFAS No. 141 prohibits the use of the pooling of interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. Second, SFAS No. 142 changes the accounting method for goodwill from an amortization method to an impairment-only approach. As a result, goodwill will be accounted for as an asset unless it declines in value. Companies will be required to test their goodwill valuation periodically for "impairment" or loss and to recognize any change on their books. The amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142, which for companies with calendar year ends, will be January 1, 2002. The Company adopted SFAS No. 141 and SFAS No. 142 and management does not believe that these Statements had a material impact on the Company.

Note 8—Reclassifications

Certain reclassifications have been made to amounts previously reported to conform with current presentation methods.

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

California Independent Bancorp ("CIB"), through its wholly owned subsidiary Feather River State Bank ("Bank"), engages in a broad range of financial service activities. The Bank commenced operations in 1977 as a California state chartered commercial bank. CIB was formed in 1994 and became the holding company for the Bank in May 1995 after receiving regulatory and shareholder approval. In October 1996, the Bank acquired E.P.I. Leasing Co. Inc., ("EPI") and has operated it as a subsidiary. Consistent with the Bank's decision in the first quarter of 2000 to discontinue originating and purchasing leases through EPI, it is anticipated that the business affairs of EPI will be dissolved following the orderly wind-down of the remaining lease portfolio.

Certain statements in this Form 10Q quarterly report, and in Management's Discussion and Analysis of Financial Condition and Results of Operations (excluding statements of fact or historical financial information) involve forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry increases significantly; changes in the interest rate environment reduce margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit

quality and an increase in the provision for possible loan and lease losses; the loss of key personnel; change in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset and liability matching risks and liquidity risks; changes in the securities markets; the impact of the California energy shortage; and the effects of terrorism, including the events of September 11, 2001 and thereafter, and the conduct of the war on terrorism by the United States and its allies.

The following discussion and analysis is designed to provide a better understanding of the significant changes and trends related to California Independent Bancorp's and Feather River State Bank's (collectively, the "Company's") financial condition, operating results, asset and liability management, liquidity and capital resources; and should be read in conjunction with the Consolidated Financial Statements of the Company and its accompanying notes.

OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS

Total assets at March 31, 2002 were $310,442,000. This figure represents an increase of 1.4% over $306,168,000 at December 31, 2001, and an increase of 7.4% over $289,023,000 at March 31, 2001.

Gross loans and leases were $192,940,000 at March 31, 2002, an increase of 0.3% from $192,281,000 at December 31, 2001, and a 9.4% increase from $176,312,000 at March 31, 2001. The increase in loans over the past twelve-month period is attributable to successful business development efforts and the Bank's strategic decision to further diversify its overall loan portfolio via growth primarily in the commercial and real estate sectors.

The Company's investment portfolio at March 31, 2002 was $88,836,000, compared to $78,357,000 at December 31, 2001, and $71,554,000 at March 31, 2001. Increases in the Company's investment portfolio during the first three months of 2002 were in large part due to a change in investment strategy whereby the Company has invested its excess funds in qualified Available-for-Sale Securities rather than federal funds sold and the adoption of a leveraged investment strategy whereby qualified securities were purchased utilizing borrowed funds. Cash and cash equivalents, which consisted of cash and due from banks and federal funds sold, were $16,572,000 at March 31, 2002, $23,047,000 at December 31, 2001, and $29,042,000 at March 31, 2001.

Total deposits of the Company remain strong at $268,462,000, $275,576,000, and $258,927,000 at March 31, 2002, December 31, 2001, and March 31, 2001, respectively. The decrease at March 31, 2002 from December 31, 2001, is indicative of normal seasonal fluctuations in deposits.

The ratio of gross loans to deposits was 71.9%, 69.8%, and 68.1% at March 31, 2002, December 31, 2001, and March 31, 2001, respectively.

Loans and Leases

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

Due to the loan and lease portfolio's composition, the Company sustains moderate variations in outstanding loan totals. More specifically, certain seasonal variations are expected to occur in the agricultural and construction loan portfolios. The table below sets forth the composition of the Company's loan and lease portfolio as of March 31, 2002, December 31, 2001, and March 31, 2001.

Composition of Loan and Lease Portfolio

Loan Category		March 31, 2002		December 31, 2001		March 31, 2001
		(dollars in thousands)
Commercial		$	25,331	$	26,764	$	22,851
Agricultural			11,567		13,329		19,703
Real Estate—Construction			32,675		32,268		33,889
Real Estate—Mortgage			106,131		100,685		75,873
Leases			9,993		11,654		17,451
Consumer			4,676		4,827		4,919
Other			2,567		2,754		1,626

	Total	$	192,940	$	192,281	$	176,312

The principal changes in the loan and lease portfolio between March 31, 2002, December 31, 2001, and March 31, 2001 are discussed below:

•: The Bank makes commercial and small business loans (including lines of credit) that are secured by the assets of the business. Commercial loans decreased $1,433,000, or 5.4%, from December 31, 2001, and increased $2,480,000, or 10.9%, over March 31, 2001. The decrease in the first three months of 2002 is due to fluctuations in the commercial loan market demand. The year-over-year increase is the result of a strategically focused marketing effort in the business loan sector throughout the Bank's geographically served areas.
•: The Bank provides agricultural production lines of credit and other agricultural loans that are secured by crops, crop proceeds, and other collateral. Agricultural loans decreased $1,762,000, or 13.2%, from December 31, 2001 and decreased $8,136,000, or 41.3% from March 31, 2001. There were five principal factors that contributed to the decline in agricultural loans. First, the Bank's enhanced credit standards have resulted in lower agricultural loan production. Second, the economic adversities affecting certain agricultural commodities produced in the Bank's trade area have softened new loan demand. Third, the Bank successfully collected several troubled agricultural loans over the past twelve months. Fourth, the Bank charged-off a large, long running agribusiness problem credit relationship. And fifth, agricultural lending competition in the Bank's core market area remains intense.
•: The Bank makes real estate construction loans, primarily to finance a variety of commercial, office, and retail projects, as well as for the construction of single family homes. At March 31, 2002, real estate construction loans increased $407,000, or 1.3%, over December 31, 2001, and decreased $1,214,000, or 3.6%, from March 31, 2001. The decline from March 31, 2001 to March 31, 2002 is principally due to a softening in the residential construction market.
•: The Bank continues to realize consistent and substantial growth in its real estate mortgage loan portfolio at March 31, 2002. Mortgage loans secured by commercial, residential, and agricultural real estate increased $5,446,000, or 5.4%, over December 31, 2001, and increased $30,258,000, or 39.9%, over March 31, 2001. The increase is primarily the result of successful business development efforts, an intensified focus on Placer County as a primary market area, and the Bank's commitment to further diversify its overall loan portfolio via growth in the real estate secured lending sector. The real estate mortgage portfolio is considered to be a concentration at 55.0% of the total loan portfolio. Increased portfolio limits have been approved as a result of an enhanced monitoring analysis and limitations set on the sub classifications within this portfolio segment.
•: Lease financing receivables declined $7,458,000, or 42.7%, between March 31, 2001 and March 31, 2002. This decline is the direct result of the Bank's decision in the first quarter of

2000 to discontinue originating and purchasing leases through EPI. Consequently, the reduction of the Bank's lease portfolio was primarily due to scheduled lease portfolio principal reductions.

In conjunction with the Bank's decision to discontinue and wind-down the operations of EPI, servicing of the lease portfolio was outsourced to Bancorp Financial Services, Inc ("BFS"), a third party specializing in the origination, acquisition, and servicing of small ticket leases. On May 21, 2001, Humboldt Bancorp ("Humboldt"), BFS' parent company, announced a plan to wind-down the operations of BFS in an orderly fashion over time. Subsequently, on January 28, 2002, BFS notified the Bank that it had targeted March 31, 2002 as the date to complete its wind-down process, and advised the Bank of its intent to resign as the servicer for the EPI lease portfolio. As a result of these developments, Management entered into a contract on March 20, 2002, effective May 1, 2002, with Portfolio Financial Servicing Company, Inc. ("PFSC") as the successor servicer of the EPI lease portfolio. PFSC is a third party specializing in the servicing of lease portfolios.

•: The Company makes consumer loans, including secured and unsecured loans and lines of credit, to finance a variety of consumer needs. Consumer loans decreased $243,000, or 4.9%, between March 31, 2001 and March 31, 2002. The decrease in this loan category was due to increased competition in the Bank's core market area and special pricing programs for new car financing by others.

During the first quarter of 2002, there were no significant changes in the Bank's loan management, lending philosophy, or credit delivery procedures. The Company continues to emphasize high credit quality and superior customer service as two key components of its strategic direction.

Loan and Lease Quality

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

Nonperforming loans and leases consist of accruing loans and leases past due 90 days or more and nonaccrual loans and leases. The table below summarizes the composition of nonperforming loans and leases as of March 31, 2002, December 31, 2001, and March 31, 2001, as well as the changes between the periods. There were no loans and leases that were accruing interest that were past due as to principal or interest for 90 days or more at March 31, 2002, December 31, 2001, or March 31, 2001.

Composition of Nonperforming Loans and Leases

		March 31, 2002		% Change From March 31, 2001 To March 31, 2002		December 31, 2001		% Change From March 31, 2001 To December 31, 2001		March 31, 2001
		(dollars in thousands)
Nonaccrual Loans and Leases
	Commercial	$	—	(100.0	)%	$	—	(100.0	)%	$	1,936
	Agricultural		109	(95.4	)%		389	(83.6	)%		2,374
	Real Estate		5,066	374.3	%		2,665	149.5	%		1,068
	Leases		—	0.0	%		—	0.0	%		—
	Consumer		2	(60.0	)%		6	20.0	%		5

Total Nonperforming Loans and Leases		$	5,177	(3.8	)%	$	3,060	(43.2	)%	$	5,383

Total nonperforming loans and leases have decreased $206,000, or 3.8%, since March 31, 2001. However, as discussed below, nonperforming loans and leases have increased from $3,060,000, or 1.6% of gross loans and leases, at December 31, 2001 to $5,177,000, or 2.7% of gross loans and leases, at March 31, 2002. This increase is principally due to one large commercial real estate secured loan that is in the process of collection.

The composition of the Company's nonaccrual loans and leases remain limited primarily to a few large agricultural real estate, commercial real estate, and commercial construction real estate relationships. At March 31, 2002, 97.2% of the Company's total nonaccrual loans and leases were concentrated in five relationships. Two of the relationships equaling $1,480,000, or 28.6%, are agricultural real estate; two totaling $1,110,000, or 21.4%, are a commercial real estate relationship; and one totaling $2,443,000, or 47.2%, is a commercial real estate construction relationship that was classified as nonaccrual during the first quarter of 2002. Each of these nonaccrual loan relationships is in the process of collection and is believed to be adequately supported by collateral.

As of December 31, 2001, 95.6% of the Company's total nonaccrual loans and leases were concentrated in five relationships. Four of the relationships, totaling $2,664,000, or 87.1%, are real estate loan relationships, while the remainder, totaling $260,000 or 8.5%, is an agribusiness credit relationship.

The Company's allowance for loan and lease losses ("ALLL") totaled $5,790,000, or 3.0% of gross loans and leases, as of March 31, 2002. This amount compares to $5,498,000, or 2.9% of gross loans and leases, as of December 31, 2001, and $5,372,000, or 3.1% of gross loans and leases, as of March 31, 2001. The ALLL is maintained at a level considered adequate by Management to provide for losses that can be reasonably anticipated. Loan and lease losses are charged against the ALLL, and recoveries are credited to it. Management believes that the total ALLL is adequate to cover potential losses in the loan and lease portfolios. While Management uses all available information to provide for loan and lease losses, future additions to the ALLL may be necessary based on changes in economic conditions and other factors.

Additions to the ALLL are made by provisions for possible loan and lease losses. The provision for possible loan and lease losses is charged to operating expense and is based upon past loss experience and estimates of potential losses which, in Management's judgment and in accordance with generally accepted accounting principles, deserve current recognition. Other factors considered by Management include growth, composition, and overall quality of the loan and lease portfolio, review of specific problem loans and leases, and current economic conditions that may affect the customer's ability to repay the obligation. Actual losses may vary from current estimates. The estimates are

reviewed regularly and adjustments, as necessary, are charged to operations in the period in which they become known.

Provisions to the ALLL totaled $150,000 and $0 for the three-month periods ending March 31, 2002 and March 31, 2001, respectively. Total provisions to the ALLL for the year ended December 31, 2001 equaled $2,450,000. Loan and lease charge-offs for the three months ended March 31, 2002 totaled $37,000, as compared to $456,000 for the three months ended March 31, 2001. Loan and lease recoveries were $179,000 for the three months ended March 31, 2002, compared to $104,000 for the three months ended March 31, 2001. The following table illustrates the activity in the Bank's ALLL for the three months ended March 31, 2002 and March 31, 2001.

Activity in Allowance for Loan and Lease Losses

		For the Three months ended March 31
		2002			2001
		(dollars in thousands)
Balance, January 1		$	5,498		$	5,724
Charge-offs by Loan Category:
	Commercial		—			38
	Agricultural		—			300
	Real Estate		—			—
	Leases		3			111
	Consumer		34			7

	Total		37			456

Recoveries by Loan Category:
	Commercial		6			5
	Agricultural		153			—
	Real Estate		—			35
	Leases		19			62
	Consumer		1			2

	Total		179			104

Net (Recoveries) Charge-offs			(142	)		352
Provision Charged to Expense			150			—

Balance, March 31		$	5,790		$	5,372

Investments

The Company's investment portfolio was $88,836,000 at March 31, 2002, compared to $78,357,000 at December 31, 2001, and $71,554,000 at March 31, 2001. The increase of $17,282,000, or 24.2%, from March 31, 2002 to March 31, 2001, is primarily due to a change in investment strategy whereby the Company has invested its excess funds in qualified Available-for-Sale Securities rather than federal funds sold and the adoption of a leveraged investment strategy whereby qualified securities were purchased utilizing borrowed funds. The Company has implemented this strategy in order to take advantage of the interest spread between funds borrowed and the interest earned on the investments. Specifically, in order to achieve the desired return, the Company purchases securities with an average life of three to five years and matches those securities with similar term funding.

As of March 31, 2002, the Company's "available-for-sale" category adjustment reflected a net unrealized gain of $200,000, net of taxes. The approximate market value of the Company's investment portfolio at March 31, 2002 was $88,920,000. As of March 31, 2001, the Company's "available-for-sale" category adjustment reflected a net unrealized gain of $264,000, net of taxes, and the approximate

market value of the Company's investment portfolio was $71,614,000. The $64,000 change in the unrealized gain/loss between the two periods is primarily the result of decreasing interest rates and changes in portfolio composition.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2002
Compared with
Three Months Ended March 31, 2001

The Company recognized net income of $746,000 for the three-month period ending March 31, 2002 resulting in diluted earnings per share after discontinuance of subsidiary of $0.35. Net income for the first three months of 2001 was $651,000, resulting in diluted earnings per share after discontinuance of subsidiary of $0.31 (all earnings per share calculations have been adjusted for the three months ended March 31, 2001, to reflect the Company's 5% stock dividend distributed on September 25, 2001).

Net interest income rose for the three months ending March 31, 2002 to $3,757,000 from $3,590,000 for the same three-month period in 2001, an increase of $167,000, or 4.7%. This increase reflects the combined effect of a variety of factors affecting interest income and interest expense as described below.

The Company's primary source of income is interest and fees on loans and leases. The table below depicts average loans and leases and yields for the three-month periods ending March 31, 2002 and 2001.

Loans and Leases	Three-months ended March 31, 2002		Three-months ended March 31, 2001
	(dollars in thousands)
Average loans and leases outstanding	$	187,203	$	176,076
Average yields		7.85%		9.74%
Interest and fees earned	$	3,673	$	4,287
Average prime rate		4.75%		8.63%

The three-month average outstanding loans and leases at March 31, 2002 were up $11,127,000, or 6.3%, over the comparable three-month period in 2001. The increase in average outstanding loans and leases is reflective of the Bank's marketing efforts and the Bank's expansion into Placer County. Both the volume and rate have been impacted as a result of the declining interest rate environment experienced during 2001 and competitive pressure to acquire and retain quality customers for the Company. The decline in average yields is also in part the result of obtaining business under a more stringent credit underwriting process.

Rates and amounts paid on average deposits, including noninterest-bearing deposits, for the three and nine-month periods ended March 31, 2002, compared to the same periods in 2001, are set forth in the following table:

Deposits	Three-months ended March 31, 2002		Three-months ended March 31, 2001
	(dollars in thousands)
Average deposits outstanding	$	271,350	$	260,098
Average rates paid		1.59%		3.18%
Interest expense	$	1,080	$	2,070

The Company experienced a decrease in total interest expense of 44.9%, or $951,000, for the three-month period ending March 31, 2002, in comparison to the same three-month period for 2001. Average rates paid on deposits decreased from 3.18% for the three-month period ending March 31,

2001 to 1.59% for the three-month period ending March 31, 2002. Interest-bearing deposits comprised 78.1% of total deposits at March 31, 2002, as compared to 78.8% at March 31, 2001.

Noninterest Income

The Company experienced a decrease in total noninterest income of $36,000, or 6.0%, for the three-month period ending March 31, 2002 versus the same period in 2001. Total noninterest income consists principally of service charges on deposit accounts, loan servicing fees, brokered loan fees, and other noninterest income.

Service charge income on deposit accounts, one of the primary components of noninterest income, showed an increase of $48,000, or 19.0%, for the three-month period ending March 31, 2002 over the three-month period ending March 31, 2001. Income derived from service charges on deposit accounts was $300,000 and $252,000 for the three-month periods ending March 31, 2002 and March 31, 2001, respectively.

Loan service fee income for the three-month period ending March 31, 2002 decreased $23,000, or 14.6%, in comparison to the three-month period ending March 31, 2001. The decrease is attributable to normal principal amortization on serviced loans, loan payoffs, and fewer originations of "servicing retained" brokered and sold loans.

Income from brokered loan fees for the three months ended March 31, 2002 increased $15,000, or 125.0%, in comparison to the three-month period ended March 31, 2001. This increase is predominantly due to favorable pricing variances on the brokering of non-conforming residential real estate loans.

All other noninterest income, which consists of alternative investment fee income, increases in the cash surrender value of life insurance policies, and other noninterest income, decreased by $76,000 for the three-month period ended March 31, 2002, in comparison to the three-month period ended March 31, 2001. These decreases include recurring operating and impairment losses on an investment made in a Community Reinvestment Act qualified California Affordable Housing Project, the economic value of which is ultimately realized through the tax benefit it generates, and a one-time loss on the disposition of an investment security.

Noninterest Expense

During the three-month period ended March 31, 2002, the Company experienced a decrease of $156,000, or 4.9%, in total noninterest expense over the three-month period ended March 31, 2001. Total noninterest expense stood at $3,032,000 for the period ending March 31, 2002 compared to $3,188,000 for the three-month period ending March 31, 2001. Noninterest expenses consist of salaries and employee benefits, occupancy, furniture and equipment expense, legal and professional fees, telephone expense, and other general and administrative operating expenses.

Salaries and employee benefits decreased $95,000, or 5.1%, for the three-month period ending March 31, 2002, over the same period in 2001. Salaries and employee benefits for the three-month period ending March 31, 2002 were $1,776,000, compared to $1,871,000 for the same period in 2001.

Collectively, occupancy and furniture and equipment expenses increased $65,000, or 14.4%, for the three-month period ending March 31, 2002, over the same period in 2001. These two categories stood jointly at $515,000 and $450,000 for the three-month periods ending March 31, 2002 and March 31, 2001, respectively. The year-over-year increase was principally driven by the opening of branches in Lincoln and Roseville, California.

Other Operating and Administrative Expenses

		March 31,2002		March 31,2001
		(dollar in thousands)
Legal & Professional Fees		$	119	$	210
Telephone Expense			65		92
Stationary & Supplies			50		63
Director Fees			49		55
Other			458		447

	Total	$	741	$	867

Legal and professional fees, consisting primarily of outside legal counsel, independent accountants, and consultants, were $119,000 for the three-month period ending March 31, 2002, compared to $210,000 for the same period in 2001 which was a decrease of $91,000, or 43.3%.

Telephone expenses, which include data line transmissions, decreased $27,000, or 29.3%, for the three-month period ended March 31, 2002, versus the same period in 2001.

All other operating and administrative expenses in the aggregate decreased $8,000, or 1.4%, for the three-month period ended March 31, 2002, versus the same period in 2001. The decline in other noninterest operating and administrative expense is attributed primarily to a variety of initiatives implemented by the Company to further streamline workflow processes and improve its use of technology, thereby achieving greater operational efficiency.

Provision for Income Taxes

Applicable income taxes from continuing operations for the three-month period ended March 31, 2002, were $414,000. This compares to $364,000 for the three-month period ended March 31, 2001. The Company's effective tax rate was 36.3% for both of the three-month periods ended March 31, 2002 and March 31, 2001, respectively.

INTEREST RATE SENSITIVITY

Interest rate sensitivity is the relationship between market interest rates and net interest income ("NII") due to the repricing characteristics of assets and liabilities. As interest rates change, interest income and expense also change, thereby changing NII. If more liabilities reprice than assets in a given period, a liability sensitive position is created. If interest rates decline, a liability sensitive position will benefit NII. Alternatively, where assets reprice more quickly than liabilities in a given period (an asset sensitive position), a decline in market rates will have an adverse effect on NII.

Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management), and the ongoing maintenance and planning of liquidity and capital. The composition of the Company's statement of condition is planned and monitored by the Asset and Liability Committee ("ALCO"), a committee comprised of the Bank's executive management. The primary tool used by the ALCO to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over one and two-year time horizons has enabled Management to develop and initiate strategies for managing exposure to interest rate risks. The ALCO believes that, both individually and in the aggregate, its modeling assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure.

MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates and prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The continuous monitoring and management of this risk is an important component of the Company's asset and liability management process, and is governed by policies established by its Board of Directors which are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset and liability management policies to the ALCO. In this capacity, Management develops guidelines and strategies impacting the Company's asset and liability management related activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate levels and trends.

INTEREST RATE RISK

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change, thereby impacting NII, the primary component of the Company's earnings. The ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet as well as for off balance sheet financial instruments. This sensitivity analysis is compared to policy limits that specify a maximum tolerance level for NII exposure over a one-year horizon, assuming no balance sheet growth, given both a 200 basis point ("bp") upward and downward shift in interest rates. A parallel and pro rata shift in rate over a 12-month period is assumed. The Bank's policy limit threshold is that NII exposure shall not exceed 10% of estimated NII over the next 12 months.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of future operating results. These hypothetical estimates are based on numerous assumptions, such as: the nature and timing of interest rate levels, including yield curve shape; repayments on loans, leases, and securities; deposit rates; pricing decisions on loans and deposits; reinvestment and replacement of assets; and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, customer product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.

LIQUIDITY

The need for liquidity in a banking institution arises principally to provide for deposit withdrawals, the credit needs of its customers, and to take advantage of investment opportunities. A banking institution may achieve desired liquidity from both assets and liabilities. The Company considers cash and deposits held in other banks, federal funds sold, other short-term investments, maturing loans and investments, receipts of principal and interest on loans, investments available for sale, and potential loan sales as sources of asset liquidity. Deposit growth, access to credit lines established with correspondent banks, and market sources of funds are considered by the Company as sources of liability liquidity.

Historically, during the first half of each year the Bank experiences excess liquidity. The Bank's seasonal agricultural and construction loan demand typically occurs each year from early June through late October. This demand tends to absorb excess liquidity and usually results in a net borrowed position during that time frame.

The Bank's short-term liquid assets consist of cash and due from banks, federal funds sold, and investment securities with maturities of one year or less (exclusive of pledged securities). Irrespective of maturity, U.S. Government and Agency securities qualify as collateral for borrowings at the Federal Home Loan Bank ("FHLB"), Federal Reserve Bank, and with broker-dealers.

In order to fund its liquidity needs, the Bank has formal and informal borrowing arrangements with the Federal Reserve Bank to meet unforeseen deposit outflows or seasonal loan funding demands. The Bank has also entered an agreement to borrow funds from the FHLB secured by U.S. Government and Agency obligations in the Bank's investment portfolio. As of March 31, 2002 the Bank had $10,000,000 outstanding on these lines. There were no borrowings outstanding at December 31, 2001 and March 31, 2001.

The Bank monitors its credit facility availability and unencumbered qualifying collateral in conjunction with its asset and liability management process. Policy limits are established and monitored for maximum borrowings and minimum contingency liquidity levels.

Management believes that the Company maintains adequate amounts of liquidity to meet its needs.

CAPITAL RESOURCES

CIB and the Bank are subject to respective Federal Reserve Board ("FRB") and Federal Deposit Insurance Corporation ("FDIC") regulations governing capital adequacy. These regulations are intended to reflect the degree of risk associated with both on and off balance sheet items. Financial institutions are expected to comply with a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%. At least half of the qualifying total capital must be in Tier 1 Capital, as defined by the regulations. Federal regulatory agencies have also adopted a minimum leverage ratio of 4.0%, which is intended to supplement the risk-based capital requirements and to ensure that all financial institutions continue to maintain a minimum level of core capital.

Total shareholders' equity on March 31, 2002 increased by $183,000, or 0.7%, to $27,396,000 over December 31, 2001 total shareholders' equity of $27,213,000. The increase is attributed to net income of $746,000 during the first three months of 2002, and a decrease in other comprehensive income, net of tax, of $330,000 associated with the market value adjustment on the Company's Available-for-Sale securities. These increases to shareholder equity were offset by cash dividends paid in the amount of $233,000. As can be seen by the following table, the Company and Bank exceeded all regulatory capital ratios on March 31, 2002.

Risk Based Capital Ratio As of March 31, 2002

	Company				Bank
	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Tier 1 Risk-Based Capital	$	27,087	11.49	%	$	26,837	11.39	%
Tier 1 Capital Minimum Requirement		9,427	4.00	%		9,427	4.00	%

Excess	$	17,660	7.49	%	$	17,410	7.39	%

Total Risk-Based Capital		30,068	12.76	%		29,818	12.65	%
Total Capital Minimum Requirement		18,855	8.00	%		18,853	8.00	%

Excess	$	11,213	4.76	%	$	10,965	4.65	%

Net Risk-Weighted Assets	$	235,686			$	235,668

Leverage Capital Ratio
Tier 1 Capital to average assets	$	27,087	8.72	%	$	26,837	8.65	%
Minimum leverage requirement		12,423	4.00	%		12,416	4.00	%

Excess	$	14,664	4.72	%	$	14,421	4.65	%

Average total assets	$	310,586			$	310,412

On November 13, 2001, CIB's Board of Directors approved a plan to repurchase, as conditions warrant, up to 5% of CIB's common stock on the open market. The duration of the plan is open-ended and the timing of the purchases is dependent on market conditions. During the first three months of 2002, CIB did not repurchase any of its own common stock pursuant to the plan.

SUPERVISION AND REGULATION

CIB and the Bank operate in a highly regulated environment and are subject to supervision and examination by various federal and state regulatory agencies. CIB, as a bank holding company, is subject to regulation and supervision by primarily the FRB, and the Bank, as a California-chartered commercial bank, is subject to supervision and regulation by primarily the FDIC and the California Department of Financial Institutions ("DFI"). Federal and California state laws and regulations govern numerous matters involving both entities, including maintenance of adequate capital and financial condition, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits, and restrictions on dividend payments. The federal and state regulatory agencies possess extensive discretion and powers to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. CIB and the Bank also undergo periodic examinations by one or more of these regulatory agencies, which may subject them to changes in asset valuations, in amounts of required loss allowances, and in operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination. The Bank's operations are also subject to a wide variety of state and federal consumer protection and similar statutes and regulations. Those and other restrictions limit the manner in which CIB and the Bank may conduct business and obtain financing. The laws and regulations to which CIB and the Bank are subject can, and do, change significantly from time to time, and such changes could materially affect the Company's business, financial condition, and operating results.

USA Patriot Act of 2001

President Bush signed the USA Patriot Act of 2001 ("Patriot Act") on October 26, 2001. This legislation was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington,

D.C. on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement and the intelligence communities' ability to work together to combat terrorism on a variety of levels. The potential impact of the Patriot Act on financial institutions is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including:

1): Due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.
2): Standards for verifying customer identification at account opening.
3): Rules to promote cooperation among financial institutions, regulators, and law enforcement entities to assist in the identification of parties that may be involved in terrorism or money laundering.
4): Reports to be filed by nonfinancial trades and business with the Treasury Department's Financial Crimes Enforcement Network for transactions exceeding $10,000.
5): The filing of suspicious activities reports by securities brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

Until all new regulations, rules or standards have been developed; the Company is not able to predict the impact of such law on its financial condition or results of operations at this time.

SENIOR MANAGEMENT

On March 11, 2002, CIB's chief financial officer and corporate secretary, Robert J. Lampert, submitted his resignation, effective March 25, 2002, from all positions held with CIB, the Bank, and EPI. Kevin R. Watson has been appointed as chief financial officer and corporate secretary of CIB and the Bank. Mr. Watson, a Certified Management Accountant, came to the Bank in 2001 with more than twelve years of business experience and most recently served as the Controller of CIB and the Bank.

DIVIDENDS

Federal and California banking and corporate laws could limit the Bank's ability to pay dividends to CIB. Additionally, the Federal Reserve Board has issued a policy statement that a bank holding company should not declare or pay a cash dividend to its shareholders if the dividend would place undue pressure on the capital of its subsidiary banks or if the dividend could be funded only through additional borrowings or other arrangements that may adversely affect the financial position of the holding company. Furthermore, a bank holding company may not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention is sufficient to fully fund each dividend and appears consistent with its capital needs, asset quality, and overall financial condition.

SEGMENT REPORTING

On January 1, 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public business enterprises' reporting of information about its operating segments in its annual financial statements. The Statement requires that the enterprises report selected information concerning operating segments in interim financial reports issued to shareholders. Additionally, the Statement establishes requirements for related disclosures about products, services, geographic areas, and major customers.

SFAS No. 131 requires public business enterprises to report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. The Statement further requires

reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general purpose financial statements. It requires that all public business enterprises report information about the revenues derived from the enterprise's products or services (or groups of similar products and services), about the countries in which the enterprise earns revenues and holds assets, and about major customers regardless of whether that information is used in making operating decisions. SFAS No. 131 does not, however, require an enterprise to report information that is not prepared for internal use if reporting it would be impracticable. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997.

The adoption of the applicable provisions of SFAS No. 131 did not have a material effect on the Company, as Management believes that it operates only in one segment, the commercial banking segment.

NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires recognition of all derivatives as either assets or liabilities in the statement of financial condition and the measurement of those instruments at fair value. Recognition of changes in fair value will be recognized into income or as a component of other comprehensive income depending upon the type of the derivative and its related hedge, if any. As issued, SFAS No. 133 was to be effective for the Company beginning January 1, 2000. However, in July 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133," extending the effective date to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," to provide guidance in the implementation of certain issues related to SFAS No. 133. Upon implementation at January 1, 2001, there was no material impact on the Company's financial statements.

SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"

In September of 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("SFAS No. 140"). This Statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The Company has adopted the disclosure provisions related to the securitization of financial assets. All transactions entered into after the first quarter of 2001 will be accounted for in accordance with SFAS No. 140. This adoption does not have a material impact on the Company.

SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets"

approach. As a result, goodwill will be accounted for as an asset unless it declines in value. Companies will be required to test their goodwill valuation periodically for "impairment" or loss and to recognize any change on their books. The amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142, which for companies with calendar year ends will be January 1, 2002. Management does not believe that the adoption of these Statements will have a material impact on the Company or its ability to accomplish certain business strategies.

SFAS No. 143, "Accounting for Asset Retirement Obligations"

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets which result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not expect the adoption of this statement to have a material impact on its financial position and results of operations.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset,"

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provision of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations—Reporting the Effects of Disposal of a Segment of a Business," for the disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less costs to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. Management does not expect that the adoption of this statement will have a significant impact on the Company's current financial position or results of operations.

CHANGE IN ACCOUNTANTS

On March 28, 2002, the Company decided not to renew the engagement of Arthur Andersen LLP ("Anderson") and appointed Perry-Smith LLP ("Perry-Smith") as its new independent public accountant, effective on such date. This determination followed the Company's decision to seek proposals from independent public accountants to audit the Company's financial statements for the fiscal year ending December 31, 2002.

The decision not to renew the engagement of Andersen and to retain Perry-Smith was approved by CIB's Board of Directors upon the recommendation of its Audit Committee. The decision was based on proposals from national and regional accounting firms and reflected the Audit Committee's judgment as to which firm was best suited to deliver external audits to the Company in light of relevant factors such as the firm's depth of experience, breadth of resources, commitment to provide exceptional service, ability to handle transition issues and location of key personnel.

OTHER MATTERS

California Energy Shortage.

Throughout 2001, California experienced periodic shortages in the supply of electricity to the state. There has been, and there may be in the future, limited rolling power outages or "blackouts" throughout the state. Power outages could disrupt the Company's operations, increase operating costs, and impact its borrowers' ability to repay their debts. Contingency plans to deal with power outages have been developed; however, the frequency or duration of the power outages cannot be predicted. As a result, such outages could adversely affect the Company's future operating results.

Effects of Terrorism.

The terrorists' acts of September 11, 2001, and thereafter, have had significant adverse effects upon the United States economy. It is uncertain whether and to what extent, if any, future terrorist activities, and the response of the United States and its allies in combating terrorism on a worldwide basis will adversely impact the Company. Such events, however, have had, and may continue to have, an adverse effect on the economy in the Company's market areas. Such continued economic deterioration could adversely affect the Company's future results of operations by, among other matters, reducing the demand for the Bank's loans, other products and; increasing nonperforming loans and the amounts reserved for loan losses; and causing a decline in the Company's stock price.

Subsequent Material Event.

On May 9, 2002, the Company announced that President and Chief Executive Officer Larry D. Hartwig has decided to retire from his officer and board of directors' positions with the Company to pursue other interests. Mr. Hartwig's resignation is effective on May 10, 2002. The boards of directors have appointed Director John I. Jelavich to serve as Interim President and Chief Executive Officer of CIB and the Bank.

Interim President and Chief Executive Officer John I. Jelavich brings more than thirty years of banking experience to his positions. From 1988 to 1998, Mr. Jelavich served as the Regional Vice President for Union Bank of California's Mid Valley Region. From 1999 through February of 2000, Mr. Jelavich served as a consultant to the president and chief executive officer of the Bank. He has served on the boards of directors of CIB and the Bank since March of 2000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In Management's opinion, the Company's market risk and interest rate risk profiles are within reasonable tolerances at this time. (See Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations, sections discussing "Market Risk," "Interest Rate Risk" and "Liquidity" at pages 16-17.) No significant changes to the market risk or interest rate risk positions of the Company have occurred since December 31, 2001.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None reported.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

No changes.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

None reported.

ITEM 5. OTHER INFORMATION.

None reported.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.

(a): Exhibits.

Exhibit No.
2.1		Plan of Reorganization and Merger Agreement dated January 30, 1995 by and between Feather River State Bank, FRSB Merger Company and California Independent Bancorp. Filed as Exhibit 2.1 to the Company's General Form for Registration of Securities on Form 10 (File No. 0-26552).*
3.1		Secretary's Compiled, Amended and Restated Articles of Incorporation for California Independent Bancorp as of April 26, 2000. Filed as Exhibit 3.1 to the Company's Quarterly Report filed on Form 10Q for the period ended March 31, 2000.*
3.2		Secretary's Compiled, Amended and Restated Bylaws California Independent Bancorp as of March 31, 2000. Filed as Exhibit 3.2 to the Company's Quarterly Report filed on Form 10Q for the period ended March 31, 2000.*
10.36		Lease Servicing Agreement dated March 20, 2002, between Portfolio Financial Servicing Company, Inc., as the Servicer, and EPI Leasing Company Inc., a subsidiary of Feather River State Bank as the Originator.

*

Document incorporated herein by reference.

(b): Reports on Form 8K.

No reports on Form 8K were filed during the period.

SIGNATURES

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

		CALIFORNIA INDEPENDENT BANCORP
Date: May 10, 2002		/s/ KEVIN R. WATSON Kevin R. Watson Chief Financial Officer/Corporate Secretary (Principal Financial and Accounting Officer/Duly Authorized Officer)

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PART I—FINANCIAL INFORMATION
PART I—Financial Information

ITEM 1. FINANCIAL STATEMENTS

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 31, 2002, December 31, 2001, and March 31, 2001 (dollars in thousands) (UNAUDITED)
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except share data) (UNAUDITED)
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three-month Periods ended March 31, 2002 and March 31, 2001 (dollars in thousands) (UNAUDITED)

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

OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

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

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K.

SIGNATURES
EX-10.36 3 a2079573zex-10_36.htm EXHIBIT 10.36
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Exhibit 10.36

[PFS LOGO]

SERVICING AGREEMENT


DATED:	March 20, 2002
BETWEEN:	Portfolio Financial Servicing Company, Inc. a Delaware Corporation 2121 S.W. Broadway, Suite 200 Portland, OR 97201	("PFSC")
AND:	EPI Leasing Company, a California Corporate Subsidiary of Feather River State Bank 1227 Bridge Street, Suite C Yuba City, CA 95991	("EPI") ("FRSB")

EPI was engaged in the business of providing business leases. EPI desires to engage PFSC to provide certain services in connection with the EPI portfolio of lease transactions (the "Portfolio").

NOW, THEREFORE, the parties hereto agree as follows:

1. Portfolio Servicing. For the term of this Agreement, PFSC shall provide the services described in Schedule 1 hereto (the "Services") with respect to the EPI portfolio. PFSC hereby agrees to faithfully and diligently perform the Services in accordance with customary industry standards for servicing leases of the type, which comprise the portfolio.

2. Compensation.

2.1 Servicing Fees. From and after the Effective Date of this Agreement for the Services provided hereunder, EPI shall pay to PFSC, within 15 days of invoicing, the following:

(a): See Fee Schedule attached hereto and made a part hereof.

2.2 Reimbursement of Expenses. EPI may request PFSC to advance the following fees and costs associated with the portfolio, and EPI will reimburse PFSC for the following fees and costs upon proper receipt by EPI of evidence that such amounts have been paid:

(a): See Fee Schedule attached hereto and made a part hereof.

3. Effective Date. PFSC shall promptly commence providing the Services on May 1, 2002 (the "Effective Date").

4. Conversion. EPI is presently using the services of Bancorp Financial Services, Inc. (Bancorp) to service the portfolio. It is anticipated that a conversion will be necessary to PFSC's system. PFSC will support FRSB by providing conversion services. The conversion of the Portfolio shall entail the transfer of lease information from Bancorp's systems to the PFSC System, reconciliation and verification of such information to FRSB source systems, and completion of parallel testing for up to a thirty-day period. PFSC will meet with FRSB to identify and document FRSB operating, accounting, and service requirements for administering the Portfolio. PFSC will install access to its systems in FRSB office through a leased data line, dial-up modem, or Internet connection. PFSC will provide training for FRSB' personnel on the use of PFSC's systems. After completion of the conversion PFSC will perform all of the services described in the attached Schedule 1. A one-time fee of $4,800 will be paid in advance for the manual or electronic conversion of data. An ongoing fee of IT support will be set at an hourly rate of $150.00 for specialized training, reporting and support.

5. Power of Attorney. If required by PFSC in order to perform the Services, FRSB shall execute and deliver to PFSC a revocable and limited Power of Attorney, under which PFSC may execute, on EPI behalf, vehicle title or registration documents, and other documents relating to the Services and Other Services to be provided hereunder.

6. Term of Agreement.

6.1 Initial Term and Renewals. This Agreement shall commence on the effective date of this agreement and shall continue until May 31, 2005, for a period of three years after the Effective Date (the "Initial Term"). This Agreement will continue to automatically renew annually unless written notification is received six months prior to the current effective termination date.

6.2 Early Termination.

6.2.1 Early Termination by EPI for Cause. EPI may terminate this Agreement for cause by giving at least ten (10) days' written notice to PFSC, for a termination based upon the occurrence of any of the following:

(a) PFSC's failure to substantially provide the Services described in Schedule 1, which failure of performance is not cured within ten (10) days of written notice from EPI;

(b) Any gross or willful misconduct of PFSC resulting in a material loss or damage to EPI; or

(d) PFSC shall become insolvent, shall admit in writing its inability to pay its debt generally, or a voluntary or involuntary petition under the Federal bankruptcy laws shall be filed by or against PFSC and, in the case of an involuntary filing, the petition is not dismissed prior to entry of an order for relief.

6.2.2 Early Termination by PFSC for Cause. PFSC may terminate this Agreement for cause in the event EPI fails to pay to PFSC any payment when due hereunder and such delinquency is not cured within ten (10) days after written notice to EPI.

7. Termination. Upon termination of this Agreement for any reason, including expiration of the Initial Term or of any renewal term, PFSC shall release to EPI the files, books and records (including computer records) relating to the portfolio. Except in the case of termination by EPI for cause, EPI shall reimburse PFSC for all out-of-pocket costs and expenses incurred by PFSC and pay PFSC's then current hourly rates for any programming, technical or administrative support services requested by EPI in connection with EPI's request for the return of documents or files and transition assistance in connection with the transfer of servicing obligations. In the event of termination by EPI for cause PFSC shall be liable to EPI for all transition expenses and costs incurred EPI.

8. Representations and Warranties of PFSC. PFSC represents and warrants the following:

(a) Business Entity, Authority. PFSC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is authorized to conduct business in the State of Oregon and has obtained all necessary licenses and approvals, in all jurisdictions where the failure to be so qualified and in good standing or obtain such licenses or approvals would have a material adverse effect on PFSC's business and operations or the servicing of the Portfolio as required by this Agreement.

(b) Authorization; Binding Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action by PFSC. This Agreement has been duly and validly executed and delivered on behalf of PFSC and is binding upon and enforceable

against PFSC in accordance with its terms, except as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the rights of creditors, and except as enforceability may be limited by rules of law governing specific performance, injunctive relief or other applicable remedies.

(c) No Adverse Consequences. Neither the execution and delivery of this Agreement by PFSC nor the consummation of the transactions contemplated hereby will (a) violate any applicable law, judgment, order, decree, regulation or ruling of any governmental authority or violate any provision of the corporation of PFSC, or (b) either alone or with the giving of notice or the passage of time or both, conflict with, constitute grounds for termination of, or result in the breach of the terms, conditions, or provisions of or constitute a default under any agreement, instrument, license or permit to which PFSC is a party or by which it is bound.

(d) Compliance With Laws. PFSC has operated its business in accordance with all applicable laws and regulations and PFSC is not in violation of any such laws or regulations other than such violations which singly or in the aggregate do not, and, with the passage of time will not, have a material adverse affect on its business or assets, or its ability to perform its obligations under this Agreement.

(e) Lease Management System. PFSC will, at its own cost and expense, (1) retain a lease management system, or an alternative system of equal capability, used by the PFSC as a master record of the Leases and (2) mark the lease management system to the effect that the Leases listed therein and serviced herein are owned by the Originator exclusively.

(f) Preservation of Security Interest. PFSC shall execute and file such continuation statements and any other documents reasonably requested by EPI or which may be required by law (in any case, with respect to the Equipment, subject to the Filing Requirements) to fully preserve and protect the interest of the Originator. PFSC shall be entitled to reimbursement from EPI of any reasonable and customary funds advanced on EPI's behalf in performing services under Schedule 1.

(g) Obligations with Respect to Leases. PFSC will use commercially reasonable efforts to duly fulfill, and comply with, all obligations on the part of the "lessor" to be fulfilled under or in connection with each Lease and each Lease Contract, and PFSC will do nothing to impair the rights of EPI in the Leases, the Lease Contracts and the Equipment.

(h) Notification. PFSC agrees to notify EPI or as soon as practicable, but in no event later than three (3) Business Days after the earlier of the PFSC's discovery or its receipt of notice thereof, of a material breach of any representation or warranty contained herein, or the failure of the PFSC to perform its duties hereunder in any material respect.

(i) Lien in Force. PFSC shall not release or assign any Lien in favor of the EPI on any item of Equipment related to any Lease in whole or in part or as otherwise provided elsewhere herein without permission of EPI.

(j) Fulfill Obligations. PFSC will in all material respects duly fulfill all obligations on PFSC's part to be fulfilled under or in connection with the Leases. PFSC will not amend, rescind, cancel or modify any Lease or term or provision thereof, except in accordance with the Servicing Standard as defined herein or as contemplated elsewhere herein without permission of EPI.

(k) Preservation of the Equipment. PFSC shall, in accordance with the Servicing Standard, collect all payments required to be made by the Lessees under the Leases, enforce all material rights of EPI under the Leases and defend the Equipment against all Persons, claims and demands whatsoever. PFSC shall not assign, sell, pledge, or exchange, or in any way encumber or otherwise

dispose of the Equipment, except as permitted under this Agreement and only with permission of the EPI.

(l) No Ownership Interest. The Servicer does not have any ownership interest in the Leases and will not assert any ownership interest in the Leases.

9. Representations and Warranties of EPI. EPI represents and warrants the following:

(a) Business Entity; Authority. EPI is a corporation duly organized, validly existing and in good standing under the laws of the State of California.

(b) Authorization; Binding Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action by EPI, its directors and shareholders. This Agreement has been duly and validly executed and delivered on behalf of EPI and is binding upon and enforceable against EPI in accordance with its terms, except as enforceability may be limited or affected by applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the rights of creditors, and except as enforceability may be limited by rules of law governing specific performance, injunctive relief or other applicable remedies.

10. Access to Information. Upon giving at least 24 hours' notice, PFSC shall give EPI and its counsel, accountants and other representatives reasonable access, during normal business hours, to all of PFSC's files, books and records (including computer records) relating to the portfolio.

11. Confidentiality. Each party agrees that it shall not disclose to any third party any information concerning the customers, trade secrets, methods, processes or procedures or any other confidential, financial or business information of the other party which it learns during the course of its performance of this Agreement, without the prior written consent of such other party. Notwithstanding the foregoing, PFSC and EPI may disclose each other's confidential and proprietary information without obtaining prior written consent in the following circumstances only: (a) to employees of the disclosing party, who require such information in order to assist the disclosing party in performing this Agreement; (b) as required in order to comply with any subpoena, audit requests, court order or applicable law, provided that disclosing party gives the other party prior written notice of such disclosure, if possible; and (c) if such services have been requested by EPI hereunder, any disclosures in connection with any sales, use or property tax filing and filing under the Uniform Commercial Code. Notwithstanding anything to the contrary in this Agreement, neither PFSC nor EPI shall have an obligation to keep secret any confidential or proprietary information, which is in or becomes part of the public domain not due to the fault of any such party. The party's obligations under this Section shall survive the expiration, cancellation or other termination of this Agreement.

12. Limitation of Liability. Neither PFSC nor any of its officers, employees or agents shall be liable to EPI for any action taken or for refraining from the taking of any action in accordance with customary industry standards for servicing; leases and loans of the type which comprise the portfolio pursuant to this Agreement, or for mistakes or errors in judgment; provided, however, that this provision shall not protect PFSC from liability to EPI for any losses, claims, liabilities, or damages incurred by EPI by reason of willful misconduct or gross negligence of PFSC in the performance of its duties and obligations hereunder. In no event will PFSC be liable to EPI for any losses, claims, liabilities or damages incurred by EPI arising out of or relating to the acts or omissions of PFSC in reliance in good faith on any document, which is prepared or furnished to PFSC by EPI. EXCEPT FOR PFSC'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN A BREACH OF THIS AGREEMENT, PFSC SHALL NOT BE LIABLE FOR SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES RESULTING FROM LOSS OF DATA, REVENUE OR PROFITS) EXCEPT FOR PFSC'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN A BREACH OF THIS

AGREEMENT, THE MAXIMUM LIABILITY OF PFSC TO EPI ARISING OUT OF THIS AGREEMENT AND THE SERVICES TO BE PERFORMED HEREUNDER SHALL IN NO EVENT EXCEED TEN THOUSAND DOLLARS. No damages shall be assessed or charged against PFSC when any delay or breach on its part is caused by the failure of EPI to furnish input or information required of EPI, the failure of any utility or communications company to furnish services or for any other reasons beyond the control of PFSC.

13. Late Charge. If EPI fails to pay any amounts when due, EPI also agrees to pay to PFSC a service charge equal to one percent (1%) per month (or the daily prorated amount thereof) on any past-due amounts.

14. Amendment. This Agreement may be amended or modified only by written agreement signed by PFSC and EPI.

15. Succession. Neither party may assign this Agreement or its rights hereunder, or delegate its obligations hereunder without the prior written consent of the other party. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

16. Waiver. No delay or omission on the part of any party in exercising any right hereunder shall operate as a waiver of any such right or any other right. All waivers must be in writing.

17. Severability. If any provisions of this Agreement are found to be unenforceable as to any person or circumstance, such finding shall not render such a provision invalid or unenforceable as to any other person or circumstance and shall not invalidate any other provision or provisions of this Agreement. If feasible, the term or provision which is found to be invalid or unenforceable shall be deemed to be modified to be within the limits of validity or enforceability.

18. Law of Agreement. This Agreement shall be construed and enforced in accordance with the laws of the State of California. The parties further agree that this agreement was entered into in the State of California, County of Sutter.

19. Notices. All notices, requests, demands or other communications given hereunder shall be in writing and shall be deemed to have been duly given when delivered personally or when deposited in the United States mail, postage prepaid, as registered or certified mail, to the parties at their addresses set forth in this Agreement or to such other addresses as the parties may designate by written notice to the other party in accordance with this section. If such notice, demand or other communication is served personally, it shall be conclusively deemed made at the time of such personal service. If such notice, demand, or other communication is given by mail, it shall be conclusively deemed given seventy-two hours after the deposit thereof in the United States mail addressed to the party to whom such notice, demand or other communication is to be given.

20. Further Assurances. Each of the parties hereto shall execute and deliver any and all additional papers, documents and other assurances, and shall do any and all acts and things reasonably necessary in connection with the performance of their duties and obligations hereunder and to carry out the intent of the parties hereto.

21. Entire Agreement. This Agreement contains the entire understanding of, and supersedes all prior or contemporaneous agreements not specifically referred to herein among the parties with respect to the subject matter hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

		EPI Leasing Company a California Corporation Subsidiary of Feather River State Bank
		By:		/s/ [ILLEGIBLE]
		Title:		DIR
		PORTFOLIO FINANCIAL SERVICING COMPANY, INC.
		By:		/s/ [ILLEGIBLE]
		Title:		President/CEO

FEE SCHEDULE

PFSC will provide FRSB with a complete, tailored contract administration system that includes all functions associated with total and complete contract administration. To provide those services PFSC will charge the following fees:

Monthly Servicing Fees:
Portfolio Contract Count		Monthly Fee
0-5000		$11.00 per contract

Asset management/Remarketing Fees—PFSC will provide remarketing of assets for the following fees: 0-60% of book value—5% of net proceeds, 60-100% of book value—10% of net proceeds, 100%+ of book value—40% of net proceeds

One time Conversion and set up Fee:		$4,800.00

The above fee structure does not include:

(a): UCC financing statement filing fees; and
(b): Overnight carrier charges; and
(c): Bank lock box fees;
(d): Reimbursement for any travel related expense associated with set up/conversion
(e): Leased phone and data lines or telecommunication charges for access PFSC's systems
(f): All other telecommunications expense associated with portfolio administration.
(g): Printing expenses associated with a private label program i.e. letter head stationery, envelopes, etc.
(h): Title, UCC and registration fees, including fees associated with notation of any lenders Interest on certificates of title, UCC's and vehicle registrations;
(i): Collection costs paid to third parties, including repossession costs, attorney fees and court costs

All fees (a) through (i) will be advanced by servicer and billed to client on a monthly "pass through" basis

Optional Services

Custom programming/consulting fees $150/hr

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SERVICING AGREEMENT
FEE SCHEDULE
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