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 June 30, 2002
OR
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	68-0349947
(State or other jurisdiction of incorporation or organization)	(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 June 30, 2002
Common stock, no par value	2,117,373 shares

        This report contains 27 pages. The Exhibit Index is on pages 25–26.

PART I—FINANCIAL INFORMATION
ITEM 1
	CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES UNAUDITED FINANCIAL STATEMENTS:
		CONSOLIDATED BALANCE SHEETS	3
		CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS	4
		CONSOLIDATED STATEMENTS OF INCOME FOR SIX MONTHS	5
		CONSOLIDATED STATEMENTS OF CASH FLOWS	6
		NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7 - 8
ITEM 2
	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		9 - 24
ITEM 3
	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		24
PART II—OTHER INFORMATION
ITEM 1
	LEGAL PROCEEDINGS		25
ITEM 2
	CHANGES IN SECURITIES AND USE OF PROCEEDS		25
ITEM 3
	DEFAULTS UPON SENIOR SECURITIES		25
ITEM 4
	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		25
ITEM 5
	OTHER INFORMATION		25
ITEM 6
	EXHIBITS AND REPORTS ON FORM 8-K		25
SIGNATURES			27

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PART I—Financial Information

ITEM 1. FINANCIAL STATEMENTS

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of June 30, 2002, December 31, 2001, and June 30, 2001

(dollars in thousands)

(UNAUDITED)

			June 30, 2002			December 31, 2001			June 30, 2001
Assets
Cash and Due From Banks			$	15,217		$	17,747		$	14,818
Federal Funds Sold				—			5,300			9,703
	Cash and Cash Equivalents			15,217			23,047			24,521
Investment Securities:
	Held-to-Maturity Securities, at amortized cost (fair value of $2,520, $3,698, and $3,975, respectively)			2,435			3,604			3,906
	Available-for-Sale Securities, at fair value			95,102			74,753			62,756
		Total Investment Securities		97,537			78,357			66,662
Loans and Leases				201,059			192,281			185,445
	Less: Allowance for Loan and Lease Losses			(5,817	)		(5,498	)		(5,023	)
		Net Loans and Leases		195,242			186,783			180,422
Premises and Equipment, Net				6,911			6,937			6,900
Interest Receivable				2,286			2,091			2,272
Other Real Estate Owned				698			542			580
Cash Surrender Value of Insurance Policies				5,231			5,108			4,988
Other Assets				2,278			3,140			3,121
Net Assets From Discontinued Operations				—			163			188
	Total Assets		$	325,400		$	306,168		$	289,654
Liabilities and Shareholders' Equity
Deposits:
	Noninterest-Bearing		$	58,773		$	69,968		$	60,061
	Interest-Bearing			212,685			205,608			197,679
	Total Deposits			271,458			275,576			257,740
Interest Payable				1,053			1,247			1,435
Deferred Compensation Payable				1,326			935			772
Federal Agency and Other Borrowings				20,458			120			160
Other Liabilities				2,374			1,077			2,106
Net Liabilities From Discontinued Operations				62			—			—
	Total Liabilities			296,731			278,955			262,213
Shareholders' Equity
	Common Stock, No Par Value—Authorized—20,000,000 shares
	Issued and outstanding—2,117,373 shares June 30, 2002, 2,115,419 shares December 31, 2001, and 2,008,966 shares June 30, 2001.			22,323			22,322			19,909
	Retained Earnings			5,574			4,481			7,213
	Debt Guarantee of ESOP			(120	)		(120	)		(160	)
	Accumulated Other Comprehensive Income			892			530			479
		Total Shareholders' Equity		28,669			27,213			27,441
		Total Liabilities and Shareholders' Equity	$	325,400		$	306,168		$	289,654

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

3

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands except share data)

(UNAUDITED)

			Three months ended June 30, 2002		Three months ended June 30, 2001
Interest Income:
	Interest and Fees on Loans and Leases		$	3,857	$	4,322
	Interest on Investments—
		Taxable Interest Income		1,329		1,088
		Nontaxable Interest Income		16		23
	Interest on Federal Funds Sold and Other Interest Income			7		124
		Total Interest Income		5,209		5,557
Interest Expense:
	Interest on Deposits			998		1,837
	Interest on Other Borrowings			175		11
		Total Interest Expense		1,173		1,848
		Net Interest Income		4,036		3,709
Provision for Loan and Lease Losses				150		—
	Net Interest Income After Provision for Loan and Lease Losses			3,886		3,709
Noninterest Income:
	Service Charges on Deposit Accounts			398		279
	Loan Servicing Fees			23		34
	Brokered Loan Fees			34		54
	Alternative Investment Fee Income			42		46
	Cash Surrender Value of Life Insurance Policies			74		71
	Other			27		27
		Total Noninterest Income		598		511
Noninterest Expense:
	Salaries and Employee Benefits			1,859		1,758
	Occupancy Expense			210		204
	Furniture and Equipment Expense			319		274
	Other Operating and Administrative Expense			835		853
		Total Noninterest Expense		3,223		3,089
Income Before Provision for Income Taxes				1,261		1,131
Provision for Income Taxes				462		405
	Net Income From Continuing Operations			799		726
	Income from Discontinued Operations, net of tax effect			13		14
	Net Income		$	812	$	740
Share Data:
	Earnings Per Share:
		Basic—From Continuing Operations	$	0.38	$	0.34
		Basic—After Discontinuance of Subsidiary		0.38		0.35
		Diluted—From Continuing Operations		0.38		0.34
		Diluted—After Discontinuance of Subsidiary		0.38		0.34
Weighted Average Basic Shares				2,116,626		2,109,414
Weighted Average Diluted Shares				2,122,380		2,150,182

4

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)

			Six months ended June 30, 2002			Six months ended June 30, 2001
Interest Income:
	Interest and Fees on Loans and Leases		$	7,530		$	8,609
	Interest on Investments—
		Taxable Interest Income		2,523			2,315
		Nontaxable Interest Income		36			49
	Interest on Federal Funds Sold and Other Interest Income			42			290
		Total Interest Income		10,131			11,263
Interest Expense:
	Interest on Deposits			2,078			3,907
	Interest on Other Borrowings			260			57
		Total Interest Expense		2,338			3,964
		Net Interest Income		7,793			7,299
Provision for Loan and Lease Losses				300			—
	Net Interest Income After Provision for Loan and Lease Losses			7,493			7,299
Noninterest Income:
	Service Charges on Deposit Accounts			698			531
	Loan Servicing Fees			158			192
	Brokered Loan Fees			61			66
	Alternative Investment Fee Income			84			91
	Cash Surrender Value of Life Insurance Policies			144			139
	Loss on Sale of Available-for-Sale Security			(55	)		—
	Other			74			93
		Total Noninterest Income		1,164			1,112
Noninterest Expense:
	Salaries and Employee Benefits			3,635			3,629
	Occupancy Expense			407			372
	Furniture and Equipment Expense			637			556
	Other Operating & Administrative Expense			1,576			1,720
		Total Noninterest Expense		6,255			6,277
Income Before Provision for Income Taxes				2,402			2,134
Provision for Income Taxes				876			769
	Net Income From Continuing Operations			1,526			1,365
	Income from Discontinued Operations, net of tax effect			32			26
	Net Income		$	1,558		$	1,391
Share Data:
	Earnings Per Share:
		Basic—From Continuing Operations	$	0.72		$	0.65
		Basic—After Discontinuance of Subsidiary		0.74			0.66
		Diluted—From Continuing Operations		0.72			0.64
		Diluted—After Discontinuance of Subsidiary		0.73			0.65
Weighted Average Basic Shares				2,116,026			2,109,414
Weighted Average Diluted Shares				2,127,798			2,138,626

5

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 Six-month Periods ended June 30, 2002 and June 30, 2001

(dollars in thousands)

(UNAUDITED)

			June 30, 2002			June 30, 2001
Cash Flows From Operating Activities
Net Income			$	1,558		$	1,391
Adjustments to Reconcile Net Income to Net Cash Provided by (Used For) Operating Activities:
	Depreciation and Amortization			485			433
	Provision for Loan and Lease Losses			300			—
	Loss on Disposal of Investment Security			55			—
	Gain on Sale of Other Real Estate Owned			—			(14	)
	Gain on Sale of Loans and Leases, net			(6	)		—
	(Gain) Loss on Sale of Premises and Equipment			(10	)		22
(Increase) Decrease in Assets:
	Interest Receivable			(194	)		568
	Cash Surrender Value of Insurance Policies			(122	)		(118	)
	Income Tax Receivable			500			(82	)
	Net Assets From Discontinued Operations			162			38
	Other Assets			66			136
Increase (Decrease) in Liabilities:
	Interest Payable			(194	)		(445	)
	Deferred Compensation Payable			390			141
	Net Liabilities From Discontinued Operations			62			—
	Other Liabilities			1,297			(3,268	)
		Net Cash Provided By (Used For) Operating Activities		4,349			(1,198	)
Cash Flows From Investing Activities
Net Increase in Loans and Leases				(8,910	)		(7,410	)
Purchase of Securities Available-for-Sale				(25,774	)		(21,090	)
Proceeds From Maturity of Securities Held-to-Maturity				350			1,345
Proceeds From Sales, Maturities and Calls of Securities Available-for-Sale				6,847			36,408
Proceeds From Sales of Other Real Estate Owned				—			117
Purchases of Premises and Equipment				(450	)		(376	)
		Net Cash (Used For) Provided By Investing Activities		(27,937	)		8,994
Cash Flows From Financing Activities
Net Decrease in Noninterest Bearing Deposits				(11,195	)		(3,935	)
Net Increase (Decrease) in Interest Bearing Deposits				7,077			(5,957	)
Net Increase in Other Borrowings				20,338			—
Repurchase of Common Stock				(96	)		—
Stock Options Exercised				99			—
Cash Dividends				(465	)		(442	)
		Net Cash Provided By (Used For) Financing Activities		15,758			(10,334	)
Net Decrease in Cash and Cash Equivalents				(7,830	)		(2,538	)
Cash and Cash Equivalents, Beginning of Year				23,047			27,059
Cash and Cash Equivalents, End of Period				15,217			24,521

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

6

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 June 30, 2002, December 31, 2001, and June 30, 2001, the results of its operations for the three and six-month periods ended June 30, 2002 and June 30, 2001, and cash flows for the six-month period ended June 30, 2002 and June 30, 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 three and six-month periods ended June 30, 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 on 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 that are not reflected in the financial statements. Management does not anticipate any material loss as a result of these transactions.

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

Loan Commitments	$	54,420,000
Standby Letters of Credit	$	520,000

Note 4—Cash and Stock Dividends

        In February, May, August, and November of 2001, and February and May 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

7

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 and six months ended June 30, 2002 and June 30, 2001 was $1,504,000 and $955,000, respectively, and $1,920,000 and $2,113,000, respectively, as shown in the following table.

		For the Three Months Ended				For the Six Months Ended
		June 30, 2002		June 30, 2001		June 30, 2002		June 30, 2001
Net Income		$	812	$	740	$	1,558	$	1,391
Other Comprehensive Income:
	Gain (Loss) on Available-for-Sale investment securities, net of taxes		692		215		362		722
Total Comprehensive Income		$	1,504	$	955	$	1,920	$	2,113

Note 7—Financial Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board ("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, was January 1, 2002. The Company adopted SFAS No. 141 and SFAS No. 142. Management believes that these Statements did not have a material impact on the Company's financial position or results of operations.

Note 8—Reclassifications

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

8

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 10-Q 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; 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 CIB's and the 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 June 30, 2002 were $325,400,000. This figure represents an increase of 6.3% over $306,168,000, at December 31, 2001, and an increase of 12.3% over $289,654,000, at June 30, 2001.

        Gross loans and leases were $201,059,000 at June 30, 2002, an increase of 4.6% from $192,281,000, at December 31, 2001, and an 8.4% increase from $185,445,000, at June 30, 2001. The increase in loans over the past twelve-month period is attributable to the Bank's successful business development efforts. The Bank has recommitted itself in promoting a productive sales culture that emphasizes relationship banking.

        The Company's investment portfolio at June 30, 2002 was $97,537,000, compared to $78,357,000 at December 31, 2001, and $66,662,000 at June 30, 2001. Increases in the Company's investment portfolio during the first six months of 2002 were in large part due to a change in investment strategy, whereby the Company 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 $15,217,000 at June 30, 2002, $23,047,000 at December 31, 2001, and $24,521,000 at June 30, 2001.

9

        Total deposits of the Company were $271,458,000, $275,576,000, and $257,740,000 at June 30, 2002, December 31, 2001, and June 30, 2001, respectively. The decrease at June 30, 2002 from December 31, 2001, is indicative of normal seasonal deposit fluctuations. Total deposits tend to decrease as the agricultural season intensifies, while total deposits trend upwards following the end of the agricultural season.

        The ratio of gross loans to deposits was 74.1%, 69.8%, and 72.0% at June 30, 2002, December 31, 2001, and June 30, 2001, respectively.

Loans and Leases

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

        Due to the loan and lease portfolio's composition, the Company sustains moderate variations in outstanding loan totals. More specifically, certain seasonal variations are expected to occur in the agricultural and construction loan portfolios. The table below sets forth the composition of the Company's loan and lease portfolio as of June 30, 2002, December 31, 2001, and June 30, 2001.

Composition of Loan and Lease Portfolio
(dollars in thousands)

Loan Category		June 30, 2002		December 31, 2001		June 30, 2001
Commercial		$	24,281	$	26,764	$	25,402
Agricultural			19,161		13,329		26,703
Real Estate-Construction			29,336		32,268		33,437
Real Estate-Mortgage			112,800		100,685		78,276
Leases			8,582		11,654		15,479
Consumer			4,531		4,827		4,727
Other			2,368		2,754		1,421
	Total	$	201,059	$	192,281	$	185,445

        The principal changes in the loan and lease portfolio between June 30, 2002, December 31, 2001, and June 30, 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 $2,483,000, or 9.3%, from December 31, 2001, and decreased $1,121,000, or 4.4%, from June 30, 2001. The decrease is due to fluctuations in commercial loan market demand.



•

The Bank provides agricultural production lines of credit and other agricultural loans that are secured by crops, crop proceeds, and other collateral. Agricultural loans increased $5,832,000, or 43.8%, from December 31, 2001, but decreased $7,542,000, or 28.2%, from June 30, 2001. The increase since year-end is due to the seasonality of agricultural loan demand resulting from the agriculture cycle. There were three principal factors that contributed to the decrease in agricultural loans since June 30, 2001. 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, agricultural lending competition in the Bank's core market area remains intense. The

10

decrease in agricultural loans has effectively lessened the exposure and risks associated with such loans, which were intensified by the economic adversities affecting the industry.

•

The Bank makes real estate construction loans to primarily finance a variety of commercial, office, and retail projects, as well as for the construction of single-family homes. At June 30, 2002, real estate construction loans decreased $2,932,000, or 9.1%, from December 31, 2001, and decreased $4,101,000, or 12.3%, from June 30, 2001. The decline from June 30, 2001 to June 30, 2002 is principally due to a few large loan payoffs and reclassification of some loans to the commercial category at the completion of their construction.



•

The Bank continues to realize consistent and substantial growth in its real estate mortgage loan portfolio at June 30, 2002. Mortgage loans secured by commercial, residential, and agricultural real estate increased $12,115,000, or 12.0%, over December 31, 2001, and increased $34,524,000, or 44.1%, over June 30, 2001. The increase is primarily the result of successful business development efforts and an intensified focus on Placer County as a primary market area.

The real estate mortgage portfolio comprises 56.1% of the total loan portfolio. The Directors' Loan Committee monitors real estate asset concentration on a monthly basis. Increased portfolio limits have been approved as a result of enhanced monitoring, analysis, and limitations set on the sub-classifications within this portfolio segment.

•

Lease financing receivables declined $6,897,000, or 44.6%, between June 30, 2001 and June 30, 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, the 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. During the transition period between BFS and PFSC, and in the two months working with PFSC, the Bank has not experienced any notable issues.

•

The Bank makes consumer loans, including secured and unsecured loans and lines of credit, to finance a variety of consumer needs. Consumer loans decreased $196,000, or 4.1%, between June 30, 2001 and June 30, 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 other lenders.

        During the second 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. The Company has renewed its focus on relationship banking and on providing customer centered products and services.

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

11

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 the 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 June 30, 2002, December 31, 2001, and June 30, 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 June 30, 2002, December 31, 2001, or June 30, 2001.

Composition of Nonperforming Loans and Leases
(dollars in thousands)

		June 30, 2002		% Change From June 30, 2001 To June 30, 2002	December 31, 2001		% Change From June 30, 2001 To December 31, 2001	June 30, 2001
Nonaccrual Loans and Leases
	Commercial	$	3	(99.5)%	$	—	(100.0)%	$	575
	Agricultural		224	(87.8)%		389	(78.8)%		1,836
	Real Estate-Construction		2,443	N/A		—	—		—
	Real Estate-Mortgage		2,439	45.1%		2,665	58.5%		1,681
	Leases		32	N/A		—	—		—
	Consumer		17	88.9%		6	(33.3)%		9
	Other		—	—		—	—		—
Total Nonperforming Loans and Leases		$	5,158	25.8%	$	3,060	(25.4)%	$	4,101

        Total nonperforming loans and leases have increased $1,057,000, or 25.8%, since June 30, 2001 and have increased $2,098,000, or 68.6%, since December 31, 2001. This increase is principally due to one large commercial real estate secured loan.

        The composition of the Company's nonaccrual loans and leases remains primarily limited to a few large agricultural real estate, commercial real estate, and commercial construction real estate relationships. At June 30, 2002, 93.9% of the Company's total nonaccrual loans and leases were concentrated in four relationships. Two of the relationships equaling $1,453,000, or 28.2%, are agricultural real estate; one totaling $2,443,000, or 47.3%, is a commercial real estate construction relationship; and one totaling $947,000, or 18.4%, is a commercial real estate relationship. Each of these nonaccrual loan relationships is assigned to the Company's Special Assets Department, which is responsible for and has developed written work-out arrangements for each of these relationships.

        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%, were real estate loan relationships, while the remainder, totaling $260,000, or 8.5%, was an agribusiness credit relationship.

        The Company's allowance for loan and lease losses ("ALLL") totaled $5,817,000, or 2.9% of gross loans and leases, as of June 30, 2002. This amount compares to $5,498,000, or 2.9% of gross loans and leases, as of December 31, 2001, and $5,023,000, or 2.7% of gross loans and leases, as of June 30, 2001. The ALLL is maintained at a level considered adequate by Management to provide for losses that can

12

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 $300,000 and $0 for the six-month periods ended June 30, 2002 and June 30, 2001, respectively; and $150,000 and $0 for the three-month periods ended June 30, 2002 and June 30, 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 six months ended June 30, 2002 totaled $196,000, as compared to $986,000 for the six months ended June 30, 2001. Loan and lease recoveries were $215,000 for the six months ended June 30, 2002, compared to $285,000 for the six months ended June 30, 2001. The large increase in the fourth quarter of 2001 to the provision was primarily due to an acceleration of the already softening economic environment on the Bank's exposure to a large, long running agribusiness problem credit relationship, a construction loan relationship, and a limited number of other previously identified problem credits. The Bank deemed it prudent to move aggressively to value those exposures to market and, in view of the economy, to further build loan loss reserves. The following table illustrates the activity in the Bank's ALLL for the six months ended June 30, 2002 and June 30, 2001.

13

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

		For the Three months ended June 30				For the Six months ended June 30
		2002		2001		2002			2001
Beginning Balance		$	5,790	$	5,372	$	5,498		$	5,724
Charge-offs by Loan Category:
	Commercial		—		175		—			213
	Agricultural		—		300		—			600
	Real Estate		20		—		20			—
	Leases		136		55		170			166
	Consumer		3		—		6			7
	Total		159		530		196			986
Recoveries by Loan Category:
	Commercial		3		130		10			135
	Agricultural		1		11		154			11
	Real Estate		—		—		—			34
	Leases		31		39		50			103
	Consumer		1		1		1			2
	Total		36		181		215			285
Net (Recoveries) Charge-offs			123		349		(19	)		701
Provision Charged to Expense			150		—		300			—
Balance, June 30		$	5,817	$	5,023	$	5,817		$	5,023

Investments

        The Company's investment portfolio was $97,537,000 at June 30, 2002, compared to $78,357,000 at December 31, 2001, and $66,662,000 at June 30, 2001. The increase of $30,875,000, or 46.3%, from June 30, 2001 to June 30, 2002, 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 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 June 30, 2002, the Company's "Available-for-Sale" category adjustment reflected an unrealized gain of $1,621,999. The approximate market value of the Company's investment portfolio at June 30, 2002 was $97,622,000. As of June 30, 2001, the Company's "Available-for-Sale" category adjustment reflected an unrealized gain of $870,352 and the approximate market value of the Company's investment portfolio was $66,731,000. The $751,647 change in the unrealized gain/loss between the two periods is primarily the result of decreasing interest rates and changes in the portfolio composition.

14

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2002
Compared with
Three and Six Months Ended June 30, 2001

        The Company recognized net income of $1,558,000 for the first half of 2002, resulting in diluted earnings per share after discontinuance of subsidiary of $0.73. Net income for the three-month period ending June 30, 2002 was $812,000, resulting in diluted earnings per share after discontinuance of subsidiary of $0.38. The net income and earnings per share for the three and six-month periods ended June 30, 2002 were higher than the same periods in 2001. The Company reported net income of $1,391,000, or $0.65 per share on a diluted basis after discontinuance of subsidiary, for the same six-month period in 2001 and net income of $740,000, or $0.34 per share on a diluted basis after discontinuance of subsidiary, for the same three-month period of 2001 (earnings per share calculations for the three and six-month periods ended June 30, 2001 reflect the Company's 5% stock dividend distributed on September 25, 2001).

        Net interest income rose for the six months ended June 30, 2002 to $7,793,000 from $7,299,000 for the same six-month period in 2001, which is an increase of $494,000, or 6.8%. Net interest income also increased for the three months ending June 30, 2002 to $4,036,000 from $3,709,000 for the same three-month period in 2001, which is an increase of $327,000, or 8.8%. This increase reflects the combined effects 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 and six-month periods ending June 30, 2002 and June 30, 2001.

Loans and Leases	Three-months ended June 30, 2002			Three-months ended June 30, 2001			Six-months ended June 30, 2002			Six-months ended June 30, 2001
	(dollars in thousands)
Average loans and leases outstanding	$	195,347		$	180,139		$	191,297		$	178,113
Average yields		7.90	%		9.60	%		7.87	%		9.67	%
Interest and fees earned	$	3,857		$	4,322		$	7,530		$	8,609
Average prime rate		4.75	%		7.34	%		4.75	%		7.98	%

        The three and six-month average outstanding loans and leases totals at June 30, 2002 were up $15,208,000, or 8.4%, and $13,184,000, or 7.4%, respectively, over the comparable three and six-month periods 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. 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 six-month periods ended June 30, 2002, compared to the same periods in 2001, are set forth in the following table:

Deposits	Three-months ended June 30, 2002			Three-months ended June 30, 2001			Six-months ended June 30, 2002			Six-months ended June 30, 2001
	(dollars in thousands)
Average deposits outstanding	$	268,085		$	255,557		$	269,698		$	257,801
Average rates paid		1.49	%		2.88	%		1.54	%		3.03	%
Interest expense	$	998		$	1,837		$	2,078		$	3,907

15

        The Company experienced a decrease in total interest expense of $675,000, or 36.5%, for the three-month period ended June 30, 2002, in comparison to the same three-month period for 2001. Total interest expense decreased $1,626,000, or 41.0%, for the six-month period ended June 30, 2002, in comparison to the same six-month period of 2001. Average rates paid on deposits decreased from 2.88% for the three-month period ended June 30, 2001 to 1.49% for the three-month period ended June 30, 2002. Average rates paid on deposits decreased from 3.03% for the six-month period ended June 30, 2001 to 1.54% for the six-month period ended June 30, 2002. Interest-bearing deposits comprised 78.3% of total deposits at June 30, 2002, as compared to 76.7% at June 30, 2001. The overall decrease in interest expense is primarily attributed to a decrease in interest rates.

Noninterest Income

        The Company experienced an increase in total noninterest income of $87,000, or 17.0%, for the three-month period ended June 30, 2002 versus the same period in 2001. Total noninterest income increased by $52,000, or 4.7%, for the six-month period ended June 30, 2002 over 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 $119,000, or 42.7%, for the three-month period ended June 30, 2002 over the three-month period ended June 30, 2001. Service charge income on deposit accounts showed an increase of $167,000, or 31.5%, for the six-month period ended June 30, 2002 over the six-month period ended June 30, 2001. Income derived from service charges on deposit accounts was $398,000 and $279,000 for the three-month periods ended June 30, 2002 and June 30, 2001, respectively, and $698,000 and $531,000 for the six-month periods ended June 30, 2002 and June 30, 2001, respectively. The increase in service charge income on deposit accounts is due to an increase in total deposits and an increase in charges.

        Loan servicing fee income for the three-month period ended June 30, 2002 decreased $11,000, or 32.4%, in comparison to the three-month period ended June 30, 2001. Loan servicing fee income for the six-month period ended June 30, 2002 decreased $34,000, or 17.7%, in comparison to the six-month period ended June 30, 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 June 30, 2002 decreased $20,000, or 37.0%, in comparison to the three-month period ended June 30, 2001, and decreased $5,000, or 7.6%, for the six-month period ended June 30, 2002, compared to the six-month period ended June 30, 2001. The decrease is predominantly due to unfavorable pricing variances on the brokering of non-conforming residential real estate loans.

        All other noninterest income, which consists of alternative investment fee income, cash surrender value of life insurance policies, and other noninterest income, decreased by $1,000 for the three-month period ended June 30, 2002, in comparison to the three-month period ended June 30, 2001, and decreased by $21,000 for the six-month period ended June 30, 2002, in comparison to the six-month period ended June 30, 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 June 30, 2002, the Company experienced an increase of $134,000, or 4.3%, in total noninterest expense over the three-month period ended June 30, 2001. Total noninterest expense stood at $3,223,000 for the three-month period ended June 30, 2002, compared to $3,089,000 for the three-month period ended June 30, 2001. Total noninterest expense decreased

16

$22,000, or 0.4%, for the six-month period ended June 30, 2002, in comparison to the six-month period ended June 30, 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 increased $101,000, or 5.7%, for the three-month period ended June 30, 2002, over the same period in 2001 and increased $6,000, or 0.2%, for the six-month period ended June 30, 2002, over the same period in 2001. Salaries and employee benefits for the three-month period ended June 30, 2002 were $1,859,000, compared to $1,758,000 for the same period in 2001 and $3,635,000 for the six-month period ended June 30, 2002, compared to $3,629,000 for the same period in 2001.

        Collectively, occupancy and furniture and equipment expenses increased $51,000, or 10.7%, for the three-month period ended June 30, 2002, over the same period in 2001 and increased $116,000, or 12.5%, for the six-month period ended June 30, 2002, over the same period in 2001. These two categories stood jointly at $529,000 and $478,000 for the three-month periods ended June 30, 2002 and June 30, 2001, respectively, and $1,044,000 and $928,000 for the six-month periods ended June 30, 2002 and June 30, 2001, respectively. The opening of branches in Lincoln and Roseville, California, primarily drove the year-over-year increase.

Other Operating and Administrative Expenses
(dollar in thousands)

		Three-months ended June 30, 2002		Three-months ended June 30, 2001		Six-months ended June 30, 2002		Six-months ended June 30, 2001
Legal & Professional Fees		$	176	$	120	$	295	$	330
Telephone Expense			68		81		133		173
Stationary & Supplies			52		36		102		99
Director Fees			77		75		126		130
Insurance			83		48		134		101
Other			379		493		786		887
	Total	$	835	$	853	$	1,576	$	1,720

        Legal and professional fees, consisting primarily of outside legal counsel, independent accountants, and consultants, were $176,000 for the three-month period ended June 30, 2002, compared to $120,000 for the same period in 2001, which was an increase of $56,000, or 46.7%. Legal and professional fees were $295,000 for the six-month period ended June 30, 2002, compared to $330,000 for the same period in 2001, which was a decrease of $35,000, or 10.6%.

        Telephone expenses, which include data line transmissions, decreased $13,000, or 16.0%, for the three-month period ended June 30, 2002, compared to the same period in 2001 and decreased $40,000, or 23.1%, for the six-month period ended June 30, 2002, compared to the same period in 2001.

        All other operating and administrative expenses in the aggregate decreased $61,000, or 9.4%, for the three-month period ended June 30, 2002, compared to the same period in 2001 and decreased $69,000, or 5.7%, for the six-month period ended June 30, 2002, compared to 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.

17

Provision for Income Taxes

        Applicable income taxes from continuing operations for the three and six-month periods ended June 30, 2002, were $462,000 and $876,000, respectively. This compares to $405,000 and $769,000 for the three and six-month periods, ended June 30, 2001, respectively. The Company's effective tax rate was 36.6% and 36.5% for the three and six-month periods ended June 30, 2002, respectively, and 35.8% and 36.0% for the three and six-month periods, ended June 30, 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 balance sheet 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. The Company's interest rate sensitivity analysis is discussed in the "Interest Rate Risk" section.

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 to the ALCO for carrying out the asset and liability management policies. In this capacity, Management develops guidelines and strategies that impact 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

18

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.

        Based on a 200 bp upward or downward shift in interest rates, the Company's short-term as well as long-term sensitivity analysis projects an asset sensitive forecast. For this analysis, short-term and long-term is defined as current to three months and over two years, respectively. Based on the same shift of 200 bp, the Company's intermediate-term sensitivity analysis projects a liability sensitive position. Intermediate-term refers to the period over three months yet less than two years.

        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 June 30, 2002, the Bank had $20,338,000 outstanding on these lines. There were no borrowings outstanding at December 31, 2001 and June 30, 2001.

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        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 June 30, 2002 increased by $1,456,000, or 5.4%, to $28,669,000 over December 31, 2001 total shareholders' equity of $27,213,000. The increase is attributed to net income of $1,558,000 during the first six months of 2002, and an increase in other comprehensive income, net of tax, of $362,000 associated with the market value adjustment on the Company's Available-for-Sale securities. Cash dividends paid in the amount of $465,000 offset these increases to shareholder equity. As can be seen by the following table, the Company and Bank exceeded all regulatory capital ratios on June 30, 2002.

Capital Ratios As of June 30, 2002

	Company			Bank
	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Risk Based Capital Ratios
Tier 1 Risk-Based Capital	$	27,655	11.30%	$	27,494	11.24%
Tier 1 Capital Minimum Requirement		9,786	4.00%		9,786	4.00%
Excess	$	17,869	7.30%	$	17,708	7.24%
Total Risk-Based Capital		30,747	12.57%		30,586	12.50%
Total Capital Minimum Requirement		19,573	8.00%		19,572	8.00%
Excess	$	11,174	4.57%	$	11,014	4.50%
Net Risk-Weighted Assets	$	244,657		$	244,646
Leverage Capital Ratio
Tier 1 Capital to average assets	$	27,655	8.67%	$	27,494	8.63%
Minimum leverage requirement		12,752	4.00%		12,749	4.00%
Excess	$	14,903	4.67%	$	14,745	4.63%
Average total assets	$	318,811		$	318,720

        On November 13, 2001, CIB's Board of Directors approved a plan to repurchase, as conditions warrant, up to five percent (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 three-month period ended June 30, 2002, CIB repurchased 5,191 shares of its own common stock pursuant to

20

the plan, which are the total shares repurchased since inception of the repurchase plan. All shares repurchased have been retired.

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 primarily by 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 the new laws and regulations on its financial condition or results of operations.

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SENIOR MANAGEMENT

        On May 9, 2002, the Company announced that President and Chief Executive Officer Larry D. Hartwig decided to retire from his officer and board of directors' positions with the Company to pursue other interests. Mr. Hartwig's resignation was effective on May 10, 2002. The boards of directors appointed Director John I. Jelavich to serve as the interim president and chief executive officer of CIB and the Bank. On July 16, 2002, the Company announced that John I. Jelavich has accepted a permanent appointment to the positions of president and chief executive officer of CIB and the Bank.

DIVIDENDS

        Federal and California banking and corporate laws could limit the Bank's ability to pay dividends to CIB. The FRB 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. The Statement also 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 in only one segment, the commercial banking segment.

NEW ACCOUNTING PRONOUNCEMENTS

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

        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

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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. The Company adopted SFAS 142 on January 1, 2002 and management does not believe that the adoption of these Statements had 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 that 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.

SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"

        In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Statement 145 updates, clarifies and simplifies existing accounting pronouncements including: rescinding Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect and amending Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Statement 145 is effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of

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Statement No. 4 encouraged. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations.

SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities"

        In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force (EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement 146 replaces Issue 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. In management's opinion, the adoption of this statement will not have a material impact on the Company's financial position or results of its operations.

OTHER MATTERS

Effects of Terrorism.

        The terrorist acts of September 11, 2001, and thereafter, has 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 and other products, increasing nonperforming loans and the amounts reserved for loan losses, and causing a decline in the Company's stock price.

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 18-20.) No significant changes to the market risk or interest rate risk positions of the Company have occurred since December 31, 2001.

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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.

        California Independent Bancorp's Annual Meeting of Shareholders was held on May 21, 2002, in Yuba City, California. The following resolutions were distributed to stockholders and adopted:

        To elect the following 9 (nine) nominees to serve as directors until the next Annual Meeting and until their successors are elected and have been qualified:

	For	Against	Abstain
John L. Dowdell	1,603,816	0	51,212
Harold M. Eastridge	1,618,322	0	36,706
William H. Gilbert	1,618,534	0	36,494
John I. Jelavich	1,600,044	0	54,984
Donald H. Livingstone	1,593,081	0	61,947
Alfred G. Montna	1,601,430	0	53,598
David A. Offutt	1,626,406	0	28,622
William K. Retzer	1,595,176	0	59,852
Michael C. Wheeler	1,626,795	0	28,233

        To ratify the appointment of Perry-Smith LLP as the Company's independent public accountants:

Vote	For	1,595,704
	Against	53,348
	Abstained	5,976

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.*

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3.2	Secretary's Compiled, Amended, and Restated Bylaws for 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.*
10.37	Severance Agreement between California Independent Bancorp, Feather River State Bank, and Larry D. Hartwig, dated May 8, 2002.
99.1	Certification of the Quarterly Report of the Company on Form 10-Q pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

*

Document incorporated herein by reference.

(b)

Reports on Form 8-K.

On April 5, 2002, the Company filed a Current Report on Form 8-K, regarding a change in the Company's independent public accountants, from Arthur Andersen LLP to Perry-Smith LLP, effective March 28, 2002.

On May 9, 2002, the Company filed a Current Report on Form 8-K, regarding the retirement of President and Chief Executive Officer Larry Hartwig from his directorship and officer positions with the Company, effective May 10, 2002, and the appointment of Director John I. Jelavich, as interim president and chief executive officer, of CIB and the Bank.

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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: August 12, 2002	/s/  JOHN I. JELAVICH John I. Jelavich President/Chief Executive Officer
Date: August 12, 2002	/s/  KEVIN R. WATSON Kevin R. Watson Chief Financial Officer/Corporate Secretary (Principal Financial and Accounting Officer)

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PART I—Financial Information

ITEM 1. FINANCIAL STATEMENTS

CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of June 30, 2002, December 31, 2001, and June 30, 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 INCOME (dollars in thousands except share data) (UNAUDITED)
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six-month Periods ended June 30, 2002 and June 30, 2001 (dollars in thousands) (UNAUDITED)
CALIFORNIA INDEPENDENT BANCORP AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
Composition of Loan and Lease Portfolio (dollars in thousands)
Composition of Nonperforming Loans and Leases (dollars in thousands)
Activity in Allowance for Loan and Lease Losses (dollars in thousands)
RESULTS OF OPERATIONS Three and Six Months Ended June 30, 2002 Compared with Three and Six Months Ended June 30, 2001
Other Operating and Administrative Expenses (dollar in thousands)
INTEREST RATE SENSITIVITY
MARKET RISK
INTEREST RATE RISK
LIQUIDITY
CAPITAL RESOURCES
Capital Ratios As of June 30, 2002
SUPERVISION AND REGULATION
SENIOR MANAGEMENT
DIVIDENDS
SEGMENT REPORTING
NEW ACCOUNTING PRONOUNCEMENTS
OTHER MATTERS

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-10.37

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Exhibit 10.37

SEVERANCE AGREEMENT AND RELEASE OF CLAIMS

        Larry D. Hartwig (hereinafter "Employee") on the one hand, Feather River State Bank and California Independent Bancorp (collectively hereinafter, "Employer"), on the other hand, hereby enter into this Severance Agreement and Release of Claims (hereinafter, "Agreement") under the following terms and conditions:

        1.    Background and Purpose.

        1.1  Employee was employed by Employer as President and Chief Executive Officer.

        1.2  Employee, for his part, and Employer, for its part, desire to mutually sever the employment relationship between them on the terms and conditions set forth below.

        2.    Effective Date and Severance Date.    This Agreement shall become effective on May 8, 2002 ("Effective Date"). Employee's last day of service to Employer ("Severance Date") shall be May 10, 2002.

        3.    Consideration.    In consideration of the releases and agreements set forth herein Employer agrees to provide Employee with the following severance benefits:

        3.1  Employee shall receive any unpaid portion of his earned wages, vacation pay, car allowance, and Peach Tree country club membership dues as though he worked through July 19, 2002. Employer shall match, pursuant to the plan's limitations, any contributions made by the Employee through the Effective Date of this Agreement in 2002 to Employer's 401(k) plan. Employee shall also receive reimbursement for all reasonable documented unreimbursed business expenses incurred in the performance of his duties through the Severance Date Such payment shall be made to Employee on the Severance Date.

        3.2  (a) Not later than May 15, 2002, Employee shall pay to Employer $234,992 (the "Salary Continuation Buyout Amount"). Thereafter, commencing July 1, 2005, Employer shall pay to Employee each month for a period of 180 months an amount equal to $6,250.00 (collectively, the "Salary Continuation Payout"). In the event that Employee dies prior to the expiration of the 180 month period, such payments shall be made to Employee's surviving spouse or, if none, to the duly qualified personal representative, executor or administrator of Employee's estate.

                (b) Notwithstanding the provisions of Section 3.2(a), in the event that Employer hereafter reasonably determines that the payment arrangements would result in unanticipated adverse bank regulatory or tax consequences, or not be net cost neutral to Employer, Employer may give written notice to Employee, not later than June 10, 2002, of it's election to terminate the Salary Continuation Payout. In such event, Employer shall promptly reimburse Employee for the Salary Continuation Buyout Amount (plus interest thereon to the date of payment at 4.0% per annum). In addition to such reimbursement, Employer shall pay Employee $257,279, representing an amount equal to Employer's accrued salary continuation liability through July 19, 2002 under the Executive Salary Continuation Agreement, dated October 27, 1999, between Employer and Employee.

        3.3  Employer for a two-year period from the Severance Date of this Agreement shall provide to Employee all current life insurance, medical, dental, vision and hospitalization insurance and long-term disability. After two years from the effective date of this Agreement, Employee shall be entitled to elect to receive COBRA benefits as provided by law. In the event that Employee should become employed by a new employer that offers any material insurance benefits, Employer's obligations under this paragraph shall immediately cease.

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        3.4  As of the effective date of this Agreement, paragraph 5(e)(3) of Employee's California Independent Bancorp Nonqualified Stock Option Agreement dated September 19, 2000, shall be amended to provide for the vesting of an additional 1,000 options, and that those options along with the 3,150 options that were already fully vested as of the date of this Agreement shall expire on July 31, 2003. Employee further hereby acknowledges that he is not entitled to the vesting of any additional options.

        3.5  Employee agrees that he is not entitled to any payments, including bonuses except for those payments expressly provided for in this Agreement.

        3.6  Employee will immediately provide Employer with a written resignation from all director and officer positions he currently holds with California Independent Bancorp, Feather River State Bank and with any subsidiaries or affiliates of either entity effective on the Severance Date.

Employee understands and acknowledges that he shall be entitled to no benefits from the Company other than those expressly set forth in this Section 3.

        4.    Relinquishment of Entitlement to Employment Agreement and Salary Continuation Agreement.    Except as otherwise provided for in this Agreement, Employee relinquishes any rights, or entitlement to payments or other benefits he may have pursuant to the terms of his Employment Agreement, dated July 19, 1999 with Employer, and his Executive Salary Continuation Agreement dated October 27, 1999, with Feather River State Bank.

        5.    Non-Raiding and Non-Solicitation of Customers.    Employee shall not, acting directly or indirectly, solicit, induce or attempt to induce or encourage any of the employees or consultants of Employer to leave their employment. Employee further agrees that he shall not, acting directly or indirectly, utilize any confidential information, trade secrets, or customer, borrower or depositor or other information obtained from Employer or while serving as an employee, to solicit, induce or attempt to induce or encourage any customer, borrower or depositor of Employer to end, modify or terminate its relationship with Employer.

        6.    Cooperation.    Employee agrees to reasonably cooperate with Employer in the future in the event any litigation, arbitration or other legal or administrative proceeding or investigation is initiated by or against Employer. Said cooperation includes, but is not limited to, making himself available to Employer and/or the Employer's attorneys to answer questions regarding any loans or other activities of the Employer for which Employee has knowledge, to assist the Employer by making himself available to testify as a witness at any proceeding or deposition, and to cooperate fully in any investigation the Employer may need to conduct in either prosecuting or defending any litigation involving the Employer. Employer agrees to reimburse Employee for any reasonable travel, lodging, and meal expenses or lost wages incurred by Employee in assisting Employer.

        7.    Releases of Liability.

        7.1  In consideration of the promises and covenants contained in this Agreement, Employer and Employee agree to the following releases.

        7.2  Specific Release of Age Discrimination Claim.

        7.2.a.    Age Discrimination in Employment Act.    Employee represents that he understands and acknowledges that the Age Discrimination in Employment Act, provides him the right to bring a claim against Employer if the Employee believes that he has been discriminated against on the basis of age. Employee expressly warrants that he will not file any claim or action against Employer, it officers, directors, shareholders, agents, employees or any entity or employee associated with or employed by Employer based on any alleged violations of the Age Discrimination in Employment Act arising prior to the date he executes this Agreement.

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Employee hereby waives any right to assert a claim for relief under this Act, including but not limited to, back pay, attorneys' fees, damages, reinstatement or injunctive relief.

        7.2.b    Older Workers Benefit Protection Act.    Pursuant to the terms of the Older Workers' Benefit Protection Act ("OWBPA"), Employee acknowledges that he is waiving any claims he may have under the Age Discrimination in Employment Act arising prior to the date he executes this agreement. Employee acknowledges that he has had twenty-one (21) days in which to consider the terms of this Agreement. Employee acknowledges that, by the terms of this Agreement, Employee has been advised in writing that the Employee should consult with an attorney regarding the terms and conditions of this Agreement. Employee further acknowledges that, by the terms of this Agreement, he has been advised that following execution of this Agreement, Employee has seven (7) days in which he may revoke this Agreement and that this Agreement does not become effective until the seventh day following execution of the Agreement. The date, seven (7) days following the execution of the Agreement, shall be the effective date of this Agreement. Employee further acknowledges that he has consulted with an attorney and is fully aware of the rights and claims being released by his execution of this Agreement.

        7.3    Specific Release of Statutory Rights Claims.    Employee understands and acknowledges that Title VII of the Civil Rights Act of 1964 as amended, the Civil Rights Act of 1991, the Americans With Disabilities Act, the Vietnam Era Veterans Readjustments Assistance Act of 1974, the California Family Rights Act of 1991, the Federal Family and Medical Leave Act of 1993, and the California Fair Employment and Housing Act, as amended, and applicable provisions of California's Labor Code (including, but not limited to, the Worker's Compensation and Insurance provisions contained in section 3200 et. seq.) provide the right to an employee to bring charges, claims or complaints against an employer if the employee believes he has been discriminated against on a number of bases, including race, ancestry, color, religion, sex, marital status, national origin, age, status as a veteran of the Vietnam era, request or need for family or medical leave, physical or mental disability, medical condition, or sexual preference. Employee, with full understanding of the rights afforded him under these federal and state laws, agrees that he will not file, or cause to be filed against Employer, any charges, complaints, or actions based on any alleged violation of these federal and state laws, including California Worker's Compensation laws, or any successor or replacement federal or state laws. Employee hereby waives any right to assert a claim for relief available under these federal and state laws including, but not limited to, back pay, attorneys' fees, damages, reinstatement, or injunctive relief, which Employee may otherwise recover based on any alleged violation of these federal and state laws, or any successor or replacement federal or state laws.

        7.4    General Release.    Excepting the obligations that are expressly set forth in this Agreement, Employee shall and hereby does release and forever discharge Employer, and Employer's predecessors, successors, heirs, assigns, executors, administrators, agents, employees, representatives, attorneys, affiliates, subsidiaries, and any and all past or present officers, directors and shareholders of Employer, and all of them, as well as any and all persons acting or allegedly acting by, under, through or in concert with any of them, against any and all claims, damages, actions, causes of action, liabilities, judgments, liens, contracts, agreements, rights, debts, suits, obligations, promises, acts, costs and expenses (including, but not limited to, attorneys' fees), damages and charges of whatsoever nature, whether known or unknown, suspected or unsuspected, foreseen or unforeseen, fixed or contingent, or ever filed or prosecuted (hereinafter, collectively referred to as "Claims") which Employee may now have, or claims to have, or any time heretofore had, or claimed to have had, against Employer, or any other claim, as a result of things undertaken, said, stated, done or admitted to be done up to and including the date of this Agreement.

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        7.5    Waiver of Unknown and Unanticipated Claims.    It is understood and agreed that the releases as referred to herein are full and final releases by Employee of Employer, and that such full and final releases include, without limitation, all unknown and unanticipated claims, injuries, debts, or damages, as well as those now known or disclosed. With respect to any claims by Employee against Employer, Employee expressly waives the provisions of California Civil Code section 1542 which provides as follows:

"A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor."

In that connection, Employee realizes and acknowledges that one or more of the Claims may include losses sustained by Employee on account of Employer, that are presently unknown or unsuspected, and that such losses as were sustained may give rise to additional losses and expenses in the future which are not now anticipated. Nevertheless, Employee acknowledges that this release has been negotiated and agreed upon and that in consideration for the rights and benefits under this Agreement, Employee intends and hereby does release, acquit and forever discharge Employer, and Employer's predecessors, successors, heirs, assigns, executors, administrators, agents, employees, representatives, attorneys, affiliates, subsidiaries, and any and all past or present officers, directors and shareholders of Employer, and all of them, as well as any and all persons acting or allegedly acting by, under, through or in concert with any of them as set forth above, from any and all Claims, including those that are unknown, unsuspected or unforeseen or that are presently unknown and unanticipated.

        7.6  Excepting the obligations set forth in this Agreement and for claims of intentional wrongdoing or gross negligence in the performance of Employee's duties, Employer, and its predecessors, successors, heirs, assigns, executors, administrators, agents, employees, representatives, attorneys, affiliates, subsidiaries, and any and all past or present officers and directors for their part, shall and hereby do release and forever discharge Employee and Employee's predecessors, successors, heirs, assigns, executors, administrators, agents, employees, representatives, attorneys, and all of them, as well as any and all persons acting or allegedly acting by, under, through, or in concert with any of them, against any and all other claims, damages, actions, causes of action, liabilities, judgments, liens, contracts, agreements, rights, debts, suits, obligations, promises, acts, costs and expenses (including, but not limited to, attorneys' fees), damages and charges of whatsoever nature, whether known or unknown, suspected or unsuspected, foreseen or unforeseen, fixed or contingent, or ever filed or prosecuted which Employee may now have, or claims to have, or any time heretofore had, or claimed to have had, against Employer, or any other claims, as a result of things undertaken, said, stated, done or admitted to be done up to and including the date of this Agreement

        8.    Confidentiality of Employer's Proprietary Information.    Employee acknowledges that by reason of his position with Employer, he has been given access to confidential, proprietary information, trade secrets or materials respecting Employer's business affairs. Such confidential information includes, but is not limited to, Employer's business strategies, financial results, contractual agreements between Employer and other individuals or entities, strategies and ideas, compilation of information and records which are owned by Employer and are regularly used in operation of Employer's business, customer lists, borrower or depositor lists, loan information, policy manuals, board of directors or committee meeting minutes and attachments, procedures, written descriptions, processes, research projects, protocols or other tangible items and documentation, including computer programs or computer software, reports and marketing information. Employee represents that he has held all such information confidential and will continue to do so. Employee represents and agrees that he shall not disclosed any such confidential information to any others, or take or use for Employee's own purposes, or the purposes of any others. Employee further represents that all notebook or personal computers provided

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by Employer, files, records, documents, lists policy manuals, board of directors or committee meeting minutes and attachments, equipment, inventions, computer programs, research projects, protocols, processes and similar items relating to the business of Employer, whether prepared by Employee or otherwise coming into Employee's possession, shall remain the exclusive property of Employer and shall not be removed from the premises of Employer. Employee further represents that he does not have in his possession any of the confidential information described in this paragraph and has returned all such confidential information to Employer. Employee agrees that these restrictions shall also apply to (i) confidential information belonging to third parties in the Employer's possession and (ii) confidential information conceived, originated, discovered or developed by Employee during the term of his employment.

        9.    Resolution of Disputes.    Any disputes regarding the rights or obligations of the parties under this Agreement shall be conclusively determined by binding arbitration. The arbitration shall be conducted as follows:

        9.1    Binding Arbitration.    Any dispute between the parties shall be submitted to, and conclusively determined by, binding arbitration in accordance with this paragraph. The provisions of this paragraph shall not preclude any party from seeking injunctive or other provisional or equitable relief in order to preserve the status quo of the parties pending resolution of the dispute, and the filing of an action seeking injunctive or other provisional relief shall not be construed as a waiver of that party's arbitration rights. The arbitration of any dispute between the parties to this Agreement shall be governed by the provisions of the California Arbitration Act (California Code of Civil Procedure sections 1280 et seq., including the provisions contained in section 1283.05).

        9.2    Initiation of Arbitration.    In the case of any dispute between the parties to this Agreement, either party shall have the right to initiate the binding arbitration process provided for in this paragraph by serving upon the other party a demand for arbitration. Notwithstanding any other provision of law, in order to be enforceable a demand for arbitration must be served within sixty (60) days of the date on which a party discovers, or reasonably should have discovered, facts giving rise to a dispute as defined above.

        9.3    Selection of Arbitrators.    Within thirty (30) days of service of a demand for arbitration by either party to this Agreement, the parties shall endeavor in good faith to select a single arbitrator. If they fail to do so within that time period, each party shall have an additional period of fifteen (15) days in which to appoint an arbitrator and those arbitrators within fifteen (15) days shall select an additional arbitrator. If any party fails to appoint an arbitrator or if the arbitrators initially selected by the parties fail to appoint an additional arbitrator within the time specified herein, any party may apply to have an arbitrator appointed for the party who has failed to appoint, or to have the additional arbitrator appointed, by the presiding judge for the Superior Court, Sutter County, California. If the presiding judge, acting in his or her personal capacity, is unable or unwilling to appoint the additional arbitrator, the arbitrator shall be selected in accordance with California Code of Civil Procedure section 1281.6.

        9.4    Location of Arbitration.    Any arbitration hearing shall be conducted in Sutter County, California.

        9.5    Applicable Law.    The law applicable to the arbitration of any dispute shall be the law of the State of California, excluding its conflicts of law rules.

        9.6    Arbitration Procedures.    Except as otherwise provided in this paragraph, the arbitration shall be governed by the California Arbitration Act (Code Civ. Proc. §§ 1280 et seq.). In addition, either party may choose, at that party's discretion, to request that the arbitrators resolve any dispositive motions prior to the taking of evidence on the merits of the dispute. By way of example, such dispositive motions would include, but not be limited to, those which would entitle a

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party to summary judgment or summary adjudication of issues pursuant to Code of Civil Procedure section 437c or resolution of a special defense as provided for at Code of Civil Procedure section 597. In the event a party to the arbitration requests that the arbitrators resolve a dispositive motion, the arbitrators shall receive and consider any written or oral arguments regarding the dispositive motion, and shall receive and consider any evidence specifically relating thereto, and shall render a decision thereon, before hearing any evidence on the merits of the dispute. The arbitration shall proceed with due dispatch after the appointment of the final arbitrator. Such decision shall be in such written form that a judgment may be entered on it in any court of competent jurisdiction in the State of California.

        9.7    Limitation on Scope of Arbitrators' Award or Decision.    Employer and Employee agree that if the arbitrators find any disputed claim to be meritorious, the arbitrators shall have the authority to order legal and/or equitable relief appropriate to the claim.

        9.8    Costs of Arbitration; Attorneys' Fees.    Employer shall bear the costs of the arbitration and each party shall bear their own attorneys' fees. However, at the conclusion of the arbitration, Employer and Employee agree that the arbitrators shall award to the prevailing party's attorneys' fees and such costs as are routinely recoverable in a judicial proceeding included by that party as a result of participating in the arbitration process.

        9.9    Acknowledgment of Consent to Arbitration.    NOTICE: BY EXECUTING THIS AGREEMENT YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "RESOLUTION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY EXECUTING THIS AGREEMENT, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO APPEAL UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE "RESOLUTION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR EXECUTION OF THIS AGREEMENT INDICATING YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

        BY EXECUTING THIS AGREEMENT, YOU ARE INDICATING THAT YOU HAVE READ AND UNDERSTOOD THE FOREGOING AND UNDERSTAND THAT BY EXECUTING THIS AGREEMENT YOU AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THIS ARBITRATION OF DISPUTES PROVISION TO NEUTRAL ARBITRATION.

        WE HAVE READ AND UNDERSTOOD THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THIS ARBITRATION OF DISPUTES PROVISION TO NEUTRAL ARBITRATION.

        INITIALS OF EMPLOYER'S AUTHORIZED REPRESENTATIVES:

            DAO     and     KRW    .

        INITIALS OF EMPLOYEE:     LH    

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        10.    Waiver of Jury Trial.    EMPLOYER AND EMPLOYEE EACH HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY PRESENT OR FUTURE MODIFICATION HEREOF OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM THEM RESPECT TO THIS AGREEMENT (AS NOW OR HEREAFTER MODIFIED) OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR ANY COURSE OR CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), IN EACH CASE WHETHER SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION IS NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF ANY RIGHT THEY MIGHT OTHERWISE HAVE TO TRIAL BY JURY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EMPLOYER AND EMPLOYEE TO ENTER INTO THIS AGREEMENT.

        11.    Confidentiality of Terms of Agreement.    In further consideration for the rights and benefits provided by this Agreement, Employee agrees that all terms and conditions of this Agreement shall forever remain confidential and shall not be disclosed to third parties, except as required by law. Notwithstanding this confidentiality provision, the Employee may disclose the terms and conditions of this Agreement to their attorneys or accountants for tax reporting purposes or as they may be compelled pursuant to legal process issued by a court of competent jurisdiction. Notwithstanding this confidentiality provision, Employer may disclose the terms and conditions of this Agreement, as it deems necessary in its own discretion.

        12.    Entire Agreement.    This document constitutes the entire agreement between the parties, all oral agreements being merged herein, and supersedes all prior representations and agreements. There are no representations, agreements, arrangements, or undertakings, oral or written, between or among the parties relating to the subject matter of this Agreement that are not fully expressed herein.

        13.    Waiver.    Any of the terms or conditions of this Agreement may be waived at any time by the party entitled to the benefit thereof, but no such waiver shall affect or impair the right of the waiving party to require observance, performance or satisfaction either of that term or condition as it applies on a subsequent occasion or of any other term or condition hereof.

        14.    Amendment.    The provisions of this Agreement may be modified or amended at any time by agreement of the parties. Any such amendment or modification as hereinafter may be made, shall be ineffective to modify this Agreement in any respect unless in writing and signed by the party or parties against whom enforcement of the modification or amendment is sought.

        15.    Representation by Counsel.    This Agreement has been carefully read by the parties and the contents hereof are known and understood by all parties. The parties have each received independent legal advice from attorneys of their choice with respect to the preparation, review and advisability of executing this Agreement. Prior to the execution of this Agreement by each party, the parties' attorneys reviewed the Agreement, and the parties acknowledge that they have executed this Agreement after independent investigation and without fraud, duress or undue influence.

        16.    No Admissions.    The purpose of this Agreement is to settle claims that are denied and are contested. The parties enter into this Agreement with the costs and risks of litigating and appealing the

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Action in mind. Nothing contained in this Agreement shall be deemed as an admission of any kind by Employer or Employee.

        17.    Severability.    If any provision of this Agreement is adjudicated by a court of competent jurisdiction to be invalid or enforceable, the remainder of the Agreement which can be given full force and effect without the invalid provision shall continue in full force and effect and shall in no way be impaired or invalidated.

        18.    Attorneys' Fees; Prejudgment Interest.    If the services of an attorney are required by any party to secure the performance of this Agreement or otherwise upon the breach or default of another party to this Agreement, or if any judicial remedy or arbitration is necessary to enforce or interpret any provision of this Agreement or the rights and duties of any person in relation thereto, the prevailing party shall be entitled to reasonable attorneys' fees, costs and other expenses, in addition to any other relief to which such party may be entitled. Any award of damages following judicial remedy or arbitration as a result of the breach of this Agreement or any of its provisions shall include an award of prejudgment interest from the date of the breach at the maximum amount of interest allowed by law.

        19.    Succession.    Subject to the provisions otherwise contained in this Agreement, this Agreement shall inure to the benefit of, and be binding upon, the successors and assigns of each of the respective parties hereto.

        20.    Governing Law and Consent to Jurisdiction.    The rights and obligations of the parties, and the interpretation and performance of this Agreement, shall be governed by the laws of the State of California, excluding its conflict of law rules. To the maximum extent permitted by law, the parties agree that all actions or proceedings arising in connection with this Agreement shall be tried and determined in the Superior court of the State of California, in and for the County of Sutter.

        21.    Notices.    Any notice under this Agreement shall be in writing, and any written notice or other document shall be deemed to have been duly given (i) on the date of personal service on the parties, (ii) on the third business day after mailing, if the document is mailed by registered or certified mail, (iii) one day after being sent by professional or overnight courier or messenger service guaranteeing one-day delivery, with receipt confirmed by the courier, or (iv) on the date of transmission if sent by telegram, telex, telecopy or other means of electronic transmission resulting in written copies, with receipt confirmed. Failure to give notice in accordance with any of the foregoing methods shall not defeat the effectiveness of notice actually received by the addressee.

        22.    Captions.    All paragraph captions are for reference only and should not be considered in construing this Agreement.

        23.    Non-assignability.    This Agreement shall not be assigned by any party without the prior written consent of the other parties. Any assignment contrary to the provisions of this Agreement shall be deemed a default under the Agreement, allowing the non-defaulting parties to exercise all remedies available under law.

        24.    Counterparts.    The Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one-in-the-same document.

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        25.    Banking Regulatory Agencies.    The obligations and rights of the parties hereunder are expressly conditioned upon the approval or non-disapproval of this Agreement, in the event such approvals are required, by those banking regulatory agencies that have jurisdiction over Employer.

Dated:	5/8/02	/s/  LARRY HARTWIG EMPLOYEE
		CALIFORNIA INDEPENDENT BANCORP
Dated:	5/8/02	By:	DAVID A. OFFUTT
		Its:	Chairman
		FEATHER RIVER STATE BANK
Dated:	5/8/02	By:	DAVID A. OFFUTT
		Its:	Chairman

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Exhibit 10.37

SEVERANCE AGREEMENT AND RELEASE OF CLAIMS

EX-99.1

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Exhibit 99.1

CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18,UNITED STATES CODE)

        Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United States Code), each of the undersigned officers of California Independent Bancorp, a California corporation (the "Company"), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended June 30, 2002 as filed with the Securities and Exchange Commission (the "10-Q Report") that:

(1)

the 10-Q Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

the information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 12, 2002	/s/ John I. Jelavich John I. Jelavich President and Chief Executive Officer
Dated: August 12, 2002	/s/ Kevin R. Watson Kevin R. Watson Chief Financial Officer and Corporate Secretary

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Exhibit 99.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,UNITED STATES CODE)