-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NMJ50ZqG2FMumVyLZB0T7TKDOtIshfoDCN8Hxwvxhqfwh+GOdJhC0lWIWxcgHAGE oPc6MaTpK9hwp98hcn1qag== 0000950008-00-000136.txt : 20000526 0000950008-00-000136.hdr.sgml : 20000526 ACCESSION NUMBER: 0000950008-00-000136 CONFORMED SUBMISSION TYPE: 8-K12G3 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20000430 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST NORTHERN COMMUNITY BANCORP CENTRAL INDEX KEY: 0001114927 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 680450397 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K12G3 SEC ACT: SEC FILE NUMBER: 000-30707 FILM NUMBER: 643106 BUSINESS ADDRESS: STREET 1: 195 N FIRST STREET CITY: DIXON STATE: CA ZIP: 95620 BUSINESS PHONE: 7076784422 MAIL ADDRESS: STREET 1: 195 N FIRST STREET CITY: DIXON STATE: CA ZIP: 95620 8-K12G3 1 FORM 8-K 12(G)(3) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K 12(g)(3) CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 May 19, 2000 ------------ (Date of earliest event reported) First Northern Community Bancorp -------------------------------- (Exact name of registrant as specified in its charter) California ---------- (State or other jurisdiction of incorporation) 68-0450397 --------------- --------------------------------- (Commission File Number) (IRS Employer Identification No.) 195 N. First St., Dixon, California 95620 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (707) 678-4422 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Page 1 Item 2. Acquisition or Disposition of Assets. ------------------------------------ Reorganization - -------------- On January 7, 2000, First Northern Bank of Dixon ("Bank"), a California state-chartered bank, announced its intention to reorganize into a bank holding company form. First Northern Community Bancorp, a California corporation ("Bancorp") was incorporated on February 8, 2000. On March 21, 2000, the Bank, Bancorp and FNCB Merger Corp., a wholly-owned subsidiary of Bancorp ("Merger Co."), entered into an Agreement and Plan of Reorganization and related Agreement of Merger, whereby Merger Co. would be merged with and into the Bank, with the Bank being the surviving corporation, the Bank would become a wholly-owned subsidiary of Bancorp, and shareholders of the Bank would receive one share of Bancorp common stock in exchange for each share of Bank common stock (the "Reorganization"). On April 25, 2000, the California Department of Corporations issued a permit with respect to the issuance of Bancorp common stock in the Reorganization, in connection with a fairness hearing held on April 25, 2000 pursuant to Section 25142 of the California Corporate Securities Law of 1968. At the Bank's Annual Meeting of Shareholders held on April 27, 2000, the Reorganization was approved by the affirmative vote of a majority of the outstanding shares of the Bank's common stock. A copy of the Proxy Statement/ Offering Circular as distributed to the Bank's shareholders in connection with the Annual Meeting is filed herewith as Exhibit 99.5. On May 19, 2000, the Agreement of Merger was filed with the Secretary of State of the State of California, and consummation of the Reorganization occurred effective as of the close of business on May 19, 2000. As a result of the consummation of the Reorganization, the Bank has become a wholly-owned subsidiary of Bancorp, and the one-for-one share exchange referred to above has been completed. Attached as Exhibit 99.1, and incorporated herein by this reference, is a copy of a press release dated May 22, 2000 with respect to the consummation of the Reorganization. Description of Common Stock - --------------------------- The description of Bancorp's authorized common stock is incorporated herein by reference to the section entitled "Proposal 3 - Organization of a Bank Holding Company -- Comparative Description of Common Stock" in the Proxy Statement / Offering Circular dated March 27, 2000, filed herewith as Exhibit 99.5. Item 7. Financial Statements and Exhibits. ---------------------------------- (a) Financial statements of businesses acquired: See the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and Quarterly Report on Form 10-Q for the quarter ended -2- March 31, 2000, filed with the FDIC pursuant to Section 12(i)of the Securities Exchange Act of 1934, as amended, and filed herewith as Exhibits 99.2 and 99.3. (b) Pro forma financial information: Not applicable. (c) Exhibits: 3(i) Articles of Incorporation of First Northern Community Bancorp. 3(ii) Bylaws of First Northern Community Bancorp. 21 Subsidiaries of First Northern Community Bancorp. 23.1 Consent of KPMG LLP, Independent Accountants 99.1 Press Release dated May 22, 2000. 99.2 Annual Report on Form 10-K for the fiscal year ended December 31, 1999 of First Northern Bank of Dixon, as filed with the FDIC. 99.3 Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 of First Northern Bank of Dixon, as filed with the FDIC. 99.4 Current Report on Form 8-K dated May 19, 2000, as filed with the FDIC by First Northern Bank of Dixon on May 23, 2000. 99.5 First Northern Bank of Dixon 1997 Stock Option Plan. 99.6 Amended and Restated First Northern Bank of Dixon Outside Directors 1997 Nonstatutory Stock Option Plan. 99.7 First Northern Bank of Dixon 1997 Employee Stock Purchase Plan. 99.8 First Northern Bank of Dixon 1997 Stock Option Plan Forms "Incentive Stock Option Agreement" and "Notice of Exercise Stock Option." 99.9 First Northern Bank of Dixon Amended and Restated Outside Directors 1997 Nonstatutory Stock Option Plan Forms "Nonstatutory Stock Option Agreement" and "Notice of Exercise of Stock Option." 99.10 First Northern Bank of Dixon 1997 Employee Stock Purchase Plan Forms "Participation Agreement" and "Notice of Withdrawal." 99.11 Statement of Computation of Per Share Earnings. 99.12 Proxy Statement/Offering Circular of First Northern Bank of Dixon and First Northern Bancorp, respectively, dated March 27, 2000. -3- 99.13 Notification of First Northern Community Bancorp to the Federal Reserve Board under 12 C.F.R. s.225.17. 99.14 Permit and Certificate of Issuance of Permit dated April 25, 2000, of the California Department of Corporations approving the Reorganization. -4- SIGNATURE 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. FIRST NORTHERN COMMUNITY BANCORP By: /s/ Owen J. Onsum -------------------------------------- Owen J. Onsum President and Chief Executive Officer Date: May 23, 2000. -5- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3(i) Articles of Incorporation of First Northern Community Bancorp. 3(ii) Bylaws of First Northern Community Bancorp. 21 Subsidiaries of First Northern Community Bancorp. 23.1 Consent of KPMG LLP, Independent Accountants 99.1 Press Release dated May 22, 2000 99.2 Annual Report on Form 10-K for the fiscal year ended December 31, 1999 of First Northern Bank of Dixon, as filed with the FDIC. 99.3 Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 of First Northern Bank of Dixon, as filed with the FDIC. 99.4 Current Report on Form 8-K dated May 19, 2000, as filed with the FDIC by First Northern Bank of Dixon on May 23, 2000. 99.5 First Northern Bank of Dixon 1997 Stock Option Plan. 99.6 Amended and Restated First Northern Bank of Dixon Outside Directors 1997 Nonstatutory Stock Option Plan. 99.7 First Northern Bank of Dixon 1997 Employee Stock Purchase Plan. 99.8 First Northern Bank of Dixon 1997 Stock Option Plan Forms "Incentive Stock Option Agreement" and "Notice of Exercise Stock Option." 99.9 First Northern Bank of Dixon Amended and Restated Outside Directors 1997 Nonstatutory Stock Option Plan Forms "Nonstatutory Stock Option Agreement" and "Notice of Exercise of Stock Option." 99.10 First Northern Bank of Dixon 1997 Employee Stock Purchase Plan Forms "Participation Agreement" and "Notice of Withdrawal." 99.11 Statement of Computation of Per Share Earnings. 99.12 Proxy Statement / Offering Circular of First Northern Bank of Dixon and First Northern Community Bancorp, respectively, dated March 27, 1999. 99.13 Notification of First Northern Community Bancorp to the Federal Reserve Board under 12 C.F.R.ss.225.17. 99.14 Permit and Certificate of Issuance of Permit dated April 25, 2000, of the California Department of Corporations approving the Reorganization. -6- EX-3.(I) 2 ARTICLES OF INCORPORATION OF FIRST NORTHERN ARTICLES OF INCORPORATION OF FIRST NORTHERN COMMUNITY BANCORP ARTICLE 1 The name of the corporation is First Northern Community Bancorp. ARTICLE 2 The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE 3 The name in the State of California of the corporation's initial agent for service of process is: CT Corporation System ARTICLE 4 The corporation is authorized to issue one class of shares to be designated Common Stock ("Common Stock"). Such shares shall be without par value. The total number of shares of Common Stock the corporation shall have authority to issue is eight million (8,000,000). ARTICLE 5 Except as specified hereinbelow, each holder of Common Stock of the corporation shall have full preemptive rights, as defined by law, to subscribe for or purchase such holder's proportionate share of any Common Stock that may be offered for sale or sold at any time by the corporation. The Board of Directors shall have the power to prescribe a reasonable period of time within which the preemptive rights to subscribe to the new shares of Common Stock must be exercised. The foregoing right shall not apply to the sale or issuance by the corporation of additional shares of Common Stock (i) in connection with the acquisition by the corporation of another entity or business segment of any such entity by merger, purchase of all or substantially all the assets or other type of acquisition transaction; (ii) pursuant to any stock option, stock purchase or other stock plan, agreement or arrangement previously approved by the corporation's shareholders; (iii) in a public offering provided that the terms of the offering include a requirement that if the offering is over-subscribed, shares will be allocated on a pro rata basis based on actual paid subscriptions received by the corporation. ARTICLE 6 6.1 In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in Section 6.2 of this Article 6, any "Business Combination" (as hereinafter defined), which shall be consummated at a time when there shall exist an "Interested Shareholder" (as hereinafter defined), shall require the affirmative vote of the holders of at least sixty-six and two thirds percent (66 2/3%) of the then outstanding shares of Common Stock of this corporation entitled to vote. Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law or otherwise. In addition to the higher vote requirement, except as otherwise expressly provided in Section 6.2 of this Article 6, prior to effecting any such Business Combination all of the following conditions shall have been met: 6.1.1 The aggregate amount of the cash and the "Fair Market Value" (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of the Common Stock in such Business Combination shall be at least equal to the higher of the following: 6.1.1.1 (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of the Common Stock acquired by it (a) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (b) in the transaction in which it became an Interested Shareholder, if within two years of the Announcement Date, whichever is higher; and 6.1.1.2 the Fair Market Value per share of the Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder the ("Determination Date"), if within two years of the Announcement Date, whichever is higher. 6.1.2 The consideration to be received by holders of the Common Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of the Common Stock . The price determined in accordance with Section 6.1.1 shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. 6.1.3 After such shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination and except to the extent that the corporation may be prohibited by law from making a distribution to shareholders: (1) there shall have been (a) no reduction in the annual rate of dividends paid on the Common Stock of this corporation (except as necessary to reflect any subdivision of the Common Stock), except as approved by at least sixty-six and two-thirds percent (66 2/3%) of the "Disinterested Directors" (as hereinafter defined), and (b) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number or outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by at least sixty-six and two-thirds percent (66 2/3%) of the Disinterested Directors; and (3) such Interested Shareholder shall -2- have not become the beneficial owner of any additional shares of stock of this corporation except as part of the transaction which results in such shareholder becoming an Interested Shareholder within the two-year period prior to such consummation. 6.1.4 After such shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by this corporation or any "Subsidiary" (as hereinafter defined), whether in anticipation of or in connection with such Business Combination or otherwise. 6.1.5 A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all holders of the Common Stock of this corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 6.2 The provisions of Section 6.1 of this Article 6 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if the Business Combination shall have been approved by at least sixty-six and two-thirds percent (66 2/3%) of the Disinterested Directors; or, if either 6.2.1 there is pending any proceeding or other action by the Federal Deposit Insurance Corporation pursuant to ss. 1818(a) or ss. 1823(c) of Title 12 of the United States Code in connection with any of the banking subsidiaries of the corporation; or 6.2.2 there is outstanding any order of the Commissioner of Financial Institutions of the State of California pursuant to California Financial Code ss.ss. 3100-3132 or ss.ss. 3180-3187 against any banking subsidiary of the corporation, or any other provision of similar purpose as hereinafter adopted and as the same may be amended at a future time. 6.3 For the purposes of this Article 6 the following definitions apply: 6.3.1 A "person" means any individual, firm, corporation or other entity. 6.3.2 "Interested Shareholder" means any person (other than this corporation or any Subsidiary) who or which: 6.3.2.1 is the beneficial owner, directly or indirectly, of ten percent (10%) or more of the issued and outstanding stock of this corporation; or 6.3.2.2 is an "Affiliate" of this corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of ten percent (10%) or more of the issued and outstanding stock of this corporation; or -3- 6.3.2.3 is an assignee of or has otherwise succeeded to any shares of stock of this Corporation which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 6.3.3 A person shall be a "beneficial owner" of stock of this corporation: 6.3.3.1 which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or 6.3.3.2 which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or 6.3.3.3 which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of stock of this corporation. 6.3.4 "Business Combination" shall include: 6.3.4.1 any merger or consolidation of the corporation or any Subsidiary with (i) any Interested Shareholder or (ii) any other corporation or other business entity (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Shareholder; or 6.3.4.2 any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value of ten percent (10%) or more of the total value of the assets of the corporation reflected in the most recent balance sheet of the corporation; or 6.3.4.3 the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of twenty percent (20%) of shareholders' equity or more; or 6.3.4.4 the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; except that this provision shall not limit the right of the shareholders to elect voluntarily to wind up or dissolve the corporation by the vote of shareholders holding shares of stock representing fifty percent (50%) or more of the stock then entitled to vote in the election of directors; or -4- 6.3.4.5 any reclassification of the corporation's securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate beneficial ownership of any Interested Shareholder or any Affiliate of any Interested Shareholder in the outstanding shares of any class of equity or convertible securities of the corporation or any Subsidiary. 6.3.5 "Affiliate," and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 2000. 6.3.6 "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 6.3.7 "Fair Market Value" means as to the stock of this corporation the fair market value on the date in question of a share of such stock as determined by the Board of Directors in good faith; and in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. 6.3.8 "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by this corporation; provided, however, that for purposes of the definition of Interested Shareholder, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned directly or indirectly by this corporation. In the event of any Business Combination in which this corporation survives, the phrase "other consideration to be received" as used in Section 6.1 of this Article 6 shall include the shares of stock of this corporation retained by the holders of such shares. 6.4 A majority of the directors shall have the power and duty to determine for the purposes of this Article 6, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of shares of stock of this corporation beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, or (D) whether the assets which are the subject of any Business Combination constitute substantially all assets of this corporation. A majority of the directors shall have the further power to interpret all of the terms and provisions of this Article 6. 6.5 Nothing contained in this Article 6 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. 6.6 Notwithstanding any other provisions of these Articles of Incorporation or the By-laws (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the By-laws) the affirmative vote of the holders of at least sixty-six -5- and two-thirds percent (66 2/3%) of the outstanding stock of this corporation shall be required to amend, repeal or adopt any provisions inconsistent with this Article 6. ARTICLE 7 The Board of Directors, when evaluating any offer of another party to (a) make a tender or exchange offer for any Equity Security (as defined hereinafter) of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase, lease, or otherwise acquire all or substantially all of the property of the corporation, shall in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its shareholders consider all of the following factors and any other factors it deems relevant: (i) the social and economic effects on the employees, shareholders, customers, suppliers, and other constituents of the corporation and its subsidiaries and on the communities in which the corporation or its subsidiaries operate or are located, including, without limitation, the availability of credit and other banking services to the communities served by the corporation; (ii) whether the proposed transaction might violate federal or state laws; and (iii) not only the consideration being offered in the proposed transaction in relation to the then current market price for or book value of the outstanding Common Stock of the corporation, but also to the market price for or book value of the Common Stock of the corporation over a period of years and the corporation's future value as an independent entity. For purposes of this Article 7, "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on January 1, 2000. ARTICLE 8 The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The corporation is authorized to provide indemnification of agents (as defined in section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. Any amendment, repeal or modification of any provision of this Article 8 shall not adversely affect any right or protection of an agent of the corporation existing at the time of such amendment, repeal or modification. Dated: February 3, 2000. /S/ Owen J. Onsum ---------------------------------------- Owen J. Onsum, Incorporator -6- EX-3.(II) 3 BYLAWS OF FIRST NORTHERN COMMUNITY BANCORP BYLAWS OF FIRST NORTHERN COMMUNITY BANCORP TABLE OF CONTENTS ----------------- PAGE ---- I OFFICES.................................................................1 1. Principal Office...............................................1 2. Other Offices..................................................1 II MEETINGS OF SHAREHOLDERS................................................1 3. Place of Meetings..............................................1 4. Annual Meetings................................................1 5. Special Meetings...............................................1 6. Notice of Shareholders'Meeting.................................2 7. Manner of Giving Notice........................................2 8. Affidavit of Notice............................................3 9. Quorum.........................................................4 10. Adjourned Meeting..............................................4 11. Voting Generally...............................................4 12. Cumulative Voting for Directors................................4 13. Waiver of Notice or Consent by Absent Shareholders............................................5 14. Shareholder Action by Written Consent without a Meeting........................................................5 15. Notice of Action Taken by Written Consent without a Meeting......................................................6 16. Record Dates for Shareholder Notice, Voting, and Giving Consents.......................................................6 17. Proxies........................................................6 18. Inspectors of Election.........................................7 III DIRECTORS...............................................................8 19. Powers.........................................................8 20. Number and Qualification of Directors..........................8 21. Nomination of Directors........................................9 22. Vacancies.....................................................10 23. Resignation...................................................11 24. Place of Meetings and Meetings by Telephone...................11 25. Annual Meetings...............................................11 26. Other Regular Meetings........................................11 27. Special Meetings..............................................12 28. Notice of Special Meetings....................................12 29. Quorum........................................................12 30. Waiver of Notice..............................................12 31. Adjournment...................................................13 32. Notice of Adjournment.........................................13 33. Action without Meeting........................................13 34. Fees and Compensation of Directors............................13 IV COMMITTEES.............................................................13 35. Committees of Directors.......................................13 36. Meetings and Action of Committees.............................14 i V OFFICERS...............................................................14 37. Officers......................................................14 38. Election of Officers..........................................14 39. Subordinate Officers..........................................15 40. Removal and Resignation of Officers...........................15 41. Vacancies in Offices..........................................15 42. Chairman of the Board.........................................15 43. President.....................................................15 44. Vice Presidents...............................................16 45. Secretary.....................................................16 46. Chief Financial Officer.......................................16 VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS.....17 47. Agents, Proceedings and Expenses..............................17 48. Actions Other Than by the Corporation.........................17 49. Actions by the Corporation....................................17 50. Successful Defense by Agent...................................18 51. Required Approval.............................................18 52. Advance of Expenses...........................................18 53. Other Contractual Rights......................................19 54. Limitations...................................................19 55. Insurance.....................................................19 56. Fiduciaries of Corporate Employee Benefit Plans...............19 VII RECORDS AND REPORTS....................................................19 57. Maintenance and Inspection of Share Register..................19 58. Maintenance and Inspection of Bylaws..........................20 59. Maintenance and Inspection of Other Corporate Records.........20 60. Inspection by Directors.......................................20 61. Annual Report to Shareholders.................................20 62. Financial Statements..........................................21 63. Annual Statement of General Information.......................21 VIII GENERAL CORPORATE MATTERS..............................................22 64. Record Date for Purposes Other Than Notice and Voting.........22 65. Checks, Drafts, Evidences of Indebtedness.....................22 66. Corporate Contracts and Instruments, Execution Of.............22 67. Certificate for Shares........................................22 68. Lost Certificates.............................................23 69. Representation of Shares of Other Corporations................23 70. Construction and Definitions..................................23 IX AMENDMENTS.............................................................23 71. Amendment by Shareholders.....................................23 72. Amendment by Directors........................................23 ii BYLAWS OF FIRST NORTHERN COMMUNITY BANCORP I OFFICES 1. Principal Office. ----------------- The Board of Directors shall fix the location of the principal executive office of this Corporation at any place which is within Solano County, State of California. 2. Other Offices. -------------- The Board of Directors may at any time establish branch offices at any place or places where the Corporation is qualified to do business. II MEETINGS OF SHAREHOLDERS 3. Place of Meetings. ------------------ Meetings of shareholders shall be held at any place within or outside Solano County, but within the State of California, designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of this Corporation. 4. Annual Meetings. ---------------- The annual meeting of the shareholders shall be held each year on a date and at a time designated by the Board of Directors. The date designated by the Board of Directors shall be within five months after the end of this Corporation's fiscal year and within 15 months after the last annual meeting. 5. Special Meetings. ----------------- A special meeting of the shareholders may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President, or by one or more shareholders holding shares in the aggregate entitled to cast no less than 10% of the votes at the meeting. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of the meeting and the general nature of the business proposed to be transacted. The request shall be delivered personally or sent by registered mail or -1- by telegraphic or other facsimile transmission to one or more of the Chairman of the Board, the President, any vice president, or the Secretary of this Corporation. The officer receiving the request shall cause notice to be given promptly to the shareholders entitled to vote, in accordance with the provisions of sections 6 and 7 of these Bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this section shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. 6. Notice of Shareholders' Meeting. -------------------------------- All notices of meetings of shareholders shall be sent or otherwise given in accordance with section 7 of these Bylaws not less than 10 nor more than 60 days before the date and hour of the meeting. The notice shall specify the place, date and time of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has direct or indirect financial interest, pursuant to section 310 of the California Corporations Code (the "Code"), (ii) an amendment of the Articles of Incorporation of this Corporation, pursuant to section 902 of the Code, (iii) a reorganization of this Corporation, pursuant to section 1201 of the Code, (iv) a voluntary dissolution of this Corporation, pursuant to section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to section 2007 of the Code, the notice shall also state the general nature of that proposal. 7. Manner of Giving Notice. ------------------------ Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of this Corporation or given by the shareholder to the Corporation for the purpose of notice. If no such address appears on the Corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the Corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of this Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of this Corporation for a period of one year from the date of the giving of the notice or report. -2- 8. Affidavit of Notice. -------------------- An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, assistant secretary, or any transfer agent of this Corporation giving the notice, and shall be filed and maintained in the records of this Corporation. 9. Agendas for Annual Meetings of Shareholders. -------------------------------------------- At any annual meeting of shareholders only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by, or at the direction of, the Board of Directors, (ii) otherwise properly brought before the meeting by, or at the direction of, the chairman of the meeting, or (iii) otherwise properly brought before the meeting by a shareholder entitled to vote at such meeting. For business to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and must have been a shareholder of record at the time such notice is given. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 70 days nor more than 90 days prior to the first anniversary date of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 20 days, or delayed by more than 70 days, from such anniversary date, notice by the shareholder to be timely must be so delivered or mailed and received not earlier than 90 days prior to such annual meeting and not later than the close of business on the later of the 70 days prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice to the Secretary shall set forth (i) as to each matter the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and (ii) as to the shareholder giving the notice (a) the name and record address of the shareholder, (b) the class and the number of shares of capital stock of the Corporation which are beneficially owned by the shareholder, (c) any material interest of the shareholder in such business and (d) whether the shareholder intends or is part of a group which intends to solicit proxies from other shareholders in support of such proposal and if part of a group, the names and addresses of such group members. No business shall be conducted at an annual meeting of shareholders unless proposed in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedure and such business shall not be transacted. To the extent this section 9. shall be deemed by the Board of Directors or the United States Securities and Exchange Commission or any applicable bank regulatory authority, or finally adjudged by a court of competent jurisdiction, to be inconsistent with the right of shareholders to request inclusion of a proposal in the Corporation's proxy statement pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, such rule shall prevail. -3- 10. Quorum. ------- The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken, other than adjournment, is approved by at least a majority of the shares required to constitute a quorum. 11. Adjourned Meeting. ------------------ Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in section 10 of these Bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than 45 days from the date set for the original meeting, in which case the Board of Directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of sections 6 and 7 of these Bylaws. At any adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. 12. Voting Generally. ----------------- The shareholders entitled to vote at any meeting shall be determined in accordance with the provisions of section 17 of these Bylaws subject to the provisions of sections 702 to 704, inclusive, of the Code, which relate to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership or subject to a voting trust. In the discretion of the chairman of the meeting, the shareholders vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any manner, other than the election of directors, shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by Code or by the Articles of Incorporation. 13. Cumulative Voting for Directors. -------------------------------- At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes, that is, to cast for any one or more candidates a number of votes greater than the number of the shareholder's shares, unless the candidates' names have been -4- placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. 14. Waiver of Notice or Consent by Absent Shareholders. --------------------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the last sentence of section 6 of these Bylaws, the waiver or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. 15. Shareholder Action by Written Consent without a Meeting. -------------------------------------------------------- Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted, provided that the Board of Directors of this Corporation, by resolution, shall have previously approved any such action. In the case of election of directors, a consent otherwise conforming to the requirements of the preceding sentence shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the directors and that was not created by the removal of a director by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the Secretary of this Corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the Secretary of this Corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. -5- 16. Notice of Action Taken by Written Consent without a Meeting. ------------------------------------------------------------ If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the Secretary of this Corporation shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in section 7 of these Bylaws. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to section 310 of the Code, (ii) indemnification of agents of this Corporation, pursuant to section 317 of the Code, (iii) a reorganization of this Corporation, pursuant to section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to section 2007 of the Code, the notice shall be given at least 10 days before the consummation of any action authorized by that approval. 17. Record Dates for Shareholder Notice, Voting, and Giving Consents. ----------------------------------------------------------------- For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall be not more than 60 days, nor less than 10 days, before the date of any such meeting nor more than 60 days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of this Corporation after the record date, except as otherwise provided in the Articles of Incorporation or in the Code. If the Board of Directors does not fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board of Directors has been taken, shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to that action, or the 60th day before the date of such other action, whichever is later. 18. Proxies. -------- Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of this Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy, whether by manual signature, typewriting, telegraphic transmission, or otherwise, by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the Corporation stating that the proxy is revoked, or by a subsequent -6- proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however that no proxy shall be valid after the expiration of 11 months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of sections 705(e) and 705(f) of the Code. 19. Inspectors of Election. ----------------------- Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one or three. If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one or three inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares of outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine the result; and (f) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 20. Conduct of Meetings. -------------------- The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board of Directors may adopt by resolution such rules and regulations for the conduct of the meeting of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of shareholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business -7- for the meeting, (ii) rules and procedures for maintaining order at the meeting and the safety of those present, (iii) limitations on attendance at or participation in the meeting to shareholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine, (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof, and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. III DIRECTORS 21. Powers. ------- Subject to the provisions of the Code and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of this Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the directors. 22. Number and Qualification of Directors. -------------------------------------- The number of directors of this Corporation shall not be less than seven nor more than 13. The exact number of directors shall be fixed from time to time, within the limits specified in this Section 22 of these Bylaws, (i) by a resolution duly adopted by the Board of Directors; or (ii) by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote; or (iii) by approval of the shareholders (as defined in Section 153 of the Code). The indefinite number of directors may be changed by a duly adopted amendment to the Articles of Incorporation and this bylaw adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote, provided that no amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one; and, further, no amendment shall change the minimum number of directors to be less than five nor the maximum number to be more than 25 directors. Subject to the foregoing provisions for changing the number of directors, the exact number of directors of this Corporation has been fixed at 11. Each director of this Corporation must hold in his or her individual name at least 350 shares of the common stock of this Corporation within one year following the date of election. No person shall be a member of the Board of Directors (a) who has not been a resident for a period of at least two years immediately prior to his or her election of a county in which any subsidiary of this Corporation maintains a office unless the election of such person shall be approved by the affirmative vote of at least two-thirds (2/3's) of the members of the Board of Directors of this Corporation then in office, or (b) who owns, together with his or her family residing with him or her, directly or indirectly, more than one percent of the outstanding shares of any banking corporation, affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, -8- other than this Corporation or any affiliate or subsidiary of this Corporation, or (c) who is a director, officer, employee, agent, nominee, or attorney of any banking corporation, affiliate, or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation, or (d) who has or is the nominee of anyone who has any contract, arrangement or understanding with any banking corporation, or affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation, or with any officer, director, employee, agent, nominee, attorney or other representative of such covered entity, that he or she will reveal or in any way utilize information obtained as a director of this Corporation or that he or she will, directly or indirectly, attempt to effect or encourage any action of this Corporation. 23. Nomination of Directors. ------------------------ Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than 30 days nor more than 60 days prior to any meeting of shareholders called for the election of directors, provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons, in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee: (a) the name, age, residence address and business address of each proposed nominee and each such person and the date as of which such nominee commenced residency at such residence address; (b) the principal occupation or employment, the name, type of business and address of the organization or other entity in which such employment is carried on of each proposed nominee and of each such person; (c) if the proposed nominee is an attorney, a statement as to whether or not either he or she or any firm with whom he or she has a relationship as partner, associate, of counsel, employee, or otherwise, acts as legal counsel for any banking corporation, affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation; (d) a statement as to each proposed nominee and a statement as to each such person stating whether the nominee or person concerned has been a participant in any proxy contest within the past ten years, and, if so, the statement shall indicate the principals involved, the subject matter of the contest, the outcome thereof, and the relationship of the nominee or person to the principals; (e) the amount of stock of the Corporation owned beneficially, directly or indirectly, by each proposed nominee or by members of his or her family residing with him or her and the names of the registered owners thereof; (f) the amount of stock of the Corporation owned of record but not beneficially by each proposed nominee or by members of his or her family residing with him or her and by each such person or by members of his or her family residing with him or her and the names of the beneficial owners thereof; (g) if any shares specified in (e) or (f) above were acquired in the last two years, a statement of the dates of acquisition and amounts acquired on each date; (h) a statement showing the extent of any borrowings to purchase shares of the -9- Corporation specified in (e) or (f) above acquired within the preceding two years, and if funds were borrowed otherwise than pursuant to a margin account or bank loan in the regular course of business of a bank, the material provisions of such borrowings and the names of the lenders; (i) the details of any contract, arrangement or understanding relating to the securities of the Corporation, to which each proposed nominee or to which each such person is a party, such as joint venture or option arrangements, puts or calls, guaranties against loss, or guaranties of profit or arrangements as to the division of losses or profits or with respect to the giving or withholding of proxies, and the name or names of the persons with whom such contracts, arrangements or understandings exist; (j) the details of any contract, arrangement, or understanding to which each proposed nominee or to which such person is a party with any banking corporation, affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation, or with any officer, director, employee, agent, nominee, attorney, or other representative of such covered entity; (k) a description of any arrangement or understanding of each proposed nominee and of each such person with any person regarding future employment or with respect to any future transaction to which the Corporation will or may be a party; (l) a statement as to each proposed nominee and a statement as to each such person as to whether or not the nominee or person concerned will bear any part of the expense incurred in any proxy solicitation, and, if so, the amount thereof; (m) a statement as to each proposed nominee and a statement as to each such person describing any conviction for a felony that occurred during the preceding ten years involving the unlawful possession, conversion or appropriation of money or other property, or the payment of taxes; (n) the total number of shares that will be voted for each proposed nominee; (o) the amount of stock, if any, owned, directly or indirectly, by each proposed nominee or by members of his or her family residing with him or her, in any banking corporation, affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation; and (p) the identity of any banking corporation, affiliate or subsidiary thereof, or bank holding company or industrial loan company, savings bank or association or finance company, other than this Corporation or any affiliate or subsidiary of this Corporation, as to which such nominee or any other such person serves as a director, officer, employee, agent, consultant, advisor, nominee or attorney, together with a description of such relationship. 24. Election and Term of Office of Directors. ----------------------------------------- The chairman of the meeting may, in his or her discretion, determine and declare to the meeting that a nomination not made in accordance with the foregoing procedure shall be disregarded. The Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting or until the director has reached the mandatory retirement age of 65 years (or, if approved by the Board of Directors by resolution, at the adjournment of the first meeting of the Board of Directors following his or her 65th birthday), died, resigned or been removed, whichever occurs first. 25. Vacancies. ---------- Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy -10- created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a meeting at which a quorum is present, or by the written consent of holders of all of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of a director's 65th birthday, death, resignation, or removal, or if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent and not involving a vacancy created by removal shall require the consent of a majority of the outstanding shares entitled to vote. 26. Resignation. ------------ Any director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 27. Place of Meetings and Meetings by Telephone. -------------------------------------------- Regular meetings of the Board of Directors may be held at any place within the State of California that has been designated from time to time by resolution of the Board of Directors. In the absence of such a designation, regular meetings shall be held at the principal executive office of this Corporation. Special meetings of the Board of Directors shall be held at any place within the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of this Corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. 28. Annual Meetings. ---------------- Within 30 days after each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization and the transaction of other business. Notice of this meeting shall not be required. 29. Other Regular Meetings. ----------------------- Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice. -11- 30. Special Meetings. ----------------- Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board or the President or the Secretary. 31. Notice of Special Meetings. --------------------------- Notice of the time and place of special meetings shall be delivered personally or by telephone (including a voice messaging system or other system or technology designed to record and communicate messages), electronic mail or other electronic means to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of this Corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. In case the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone (including voice messaging or other system or technology), electronic mail or other electronic means or to the telegraph company at least 24 hours before the time of the holding of the meeting. Any oral notice given personally or by telephone (including voice messaging or other system or technology), electronic mail or other electronic means may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of this Corporation. 32. Quorum. ------- A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in section 34 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of section 310 of the Code as to approval of contracts or transactions in which a director has a direct or indirect material financial interest, section 311 of the Code as to appointment of committees, and section 317(e) of the Code as to indemnification of directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 33. Waiver of Notice. ----------------- The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of the meeting shall also be deemed given to any director who attends the meeting without protesting before or at its commencement the lack of notice to that director. -12- 34. Adjournment. ------------ A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 35. Notice of Adjournment. ---------------------- Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than 24 hours, in which case notice of the time and place shall be given before the time of the adjourned meeting in the manner specified in section 31 of these Bylaws, to the directors who were not present at the time of the adjournment. 36. Action without Meeting. ----------------------- Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board of Directors shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. 37. Fees and Compensation of Directors. ----------------------------------- Directors and members of committees may receive such compensation for their services, and such reimbursement of expenses, as may be fixed by the Board of Directors. This section shall not be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation for those services. IV COMMITTEES 38. Committees of Directors. ------------------------ The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the Board of Directors or on any committee; (c) the fixing of compensation of the directors for serving on the Board of Directors or on any committee; -13- (d) the amendment or repeal of Bylaws or the adoption of new Bylaws; (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of this Corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; (g) the appointment of any other committees of the Board of Directors or the members of these committees; or (h) the taking of any other action which cannot, by statute, be done without approval of the Board of Directors. 39. Meetings and Action of Committees. ---------------------------------- Meetings and action of committees shall be governed by and held and taken in accordance with the provisions of section 27 of these Bylaws as to place of meetings, section 29 of these Bylaws as to regular meetings, section 30 of these Bylaws as to special meetings, section 31 of these Bylaws as to notice of special meetings, section 32 of these Bylaws as to quorum, section 33 of these Bylaws as to waiver of notice, section 34 of these Bylaws as to adjournment, and section 36 of these Bylaws as to action without a meeting, with such changes in the context of those sections as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee; special meetings of committees may also be called by resolution of the Board of Directors; and notice of special meetings of committees shall also be given to all alternate members who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. V OFFICERS 40. Officers. --------- The officers of this Corporation shall be a President, a Secretary, a Chief Financial Officer and a Chairman of the Board. The Corporation may also have, at the discretion of the Board of Directors, a Vice Chairman, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of section 42 of these Bylaws. Any number of offices may be held by the same person. 41. Election of Officers. --------------------- The officers of this Corporation, except such officers as may be appointed in accordance with the provisions of sections 42 or 44 of these Bylaws, shall be chosen by the Board of -14- Directors and each shall serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 42. Subordinate Officers. --------------------- The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of this Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. 43. Removal and Resignation of Officers. ------------------------------------ Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting of the Board of Directors, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of this Corporation under any contract to which the officer is a party. 44. Vacancies in Offices. --------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. 45. Chairman of the Board. ---------------------- The Chairman of the Board shall, if present, preside at meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or prescribed by the Bylaws. 46. Vice Chairman. -------------- In the absence or disability of the Chairman, the Vice Chairman, if any, shall perform all the duties of the Chairman of the Board. The Vice Chairman shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 47. President. ---------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the President shall be the chief executive officer of this Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of this Corporation. The President shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, at all meetings of the Board of Directors. The President shall have the general duties of management usually -15- vested in the office of the President of a Corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 48. Vice Presidents. ---------------- In the absence or disability of the President, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, and the President, or the Chairman of the Board. 49. Secretary. ---------- The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of this Corporation's transfer agent or registrar, as determined by the resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws, the President or the Chairman of the Board. 50. Chief Financial Officer. ------------------------ The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of this Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of this Corporation with such depositaries as may be designated by the Board of Directors. The Chief Financial officer shall disburse the funds of this Corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of this Corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws, the President or the Chairman of the Board. -16- VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 51. Agents, Proceedings and Expenses. --------------------------------- For the purposes of the following eight sections, "agent" means any person who is or was a director, officer, employee, or other agent of this Corporation, or is or was serving at the request of this Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of this Corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under this Article VI. 52. Actions Other Than by the Corporation. -------------------------------------- This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding, other than an action by or in the right of this Corporation, by reason of the fact that the person is or was an agent of this Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner reasonably believed to be in the best interests of this Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner reasonably believed to be in the best interests of this Corporation or that the person had reasonable cause to believe that the conduct was unlawful. 53. Actions by the Corporation. --------------------------- This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this Corporation to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Corporation, against expenses actually and reasonably incurred in connection with the defense or settlement of that action if that person acted in good faith, in a manner believed to be in the best interests of this Corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. No indemnification shall be made under this section: (a) in respect of any claim, issue, or matter as to which that person shall have been adjudged to be liable to this Corporation in the performance of duty to this Corporation, unless and only to the extent that the court in which that action was brought shall determine upon -17- application that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; or (b) of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (c) of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. 54. Successful Defense by Agent. ---------------------------- To the extent that an agent of this Corporation has been successful on the merits in defense of any proceeding referred to in sections 52 or 53 of these Bylaws, or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. 55. Required Approval. ------------------ Except as provided in section 54 of these Bylaws, indemnification shall be made by this Corporation only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in sections 52 or 53 of these Bylaws by: (a) a majority vote of a quorum consisting of directors who are not parties to the proceeding; (b) approval by the affirmative vote of a majority of the shares of this Corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For this purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (c) the court in which the proceeding is or was pending on application made by this Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this Corporation. 56. Advance of Expenses. -------------------- Expenses incurred by any agent in defending any proceeding for which indemnification is required by this Article VI shall be advanced by this Corporation before the final disposition of the proceeding on receipt of an undertaking by or on behalf of the agent to repay that amount unless it shall ultimately be determined that the agent is entitled to be indemnified under this Article VI. -18- 57. Other Contractual Rights. ------------------------- Nothing contained herein shall affect any right to indemnification to which persons other than directors and officers of this Corporation or any subsidiary hereof may be entitled by contract or otherwise. 58. Limitations. ------------ No indemnification or advance shall be made, except as provided in section 54 or section 55(c), in any circumstance where it appears: (a) that it would be inconsistent with a provision of the articles, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 59. Insurance. ---------- The Board of Directors of this Corporation may purchase and maintain insurance on behalf of any agent of this Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not this Corporation would have the power to indemnify the agent against that liability under the provisions of this section. 60. Fiduciaries of Corporate Employee Benefit Plans. ------------------------------------------------ The foregoing indemnification provisions do not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Corporation as above. Nothing contained herein shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise, which shall be enforceable to the extent permitted by applicable law. VII RECORDS AND REPORTS 61. Maintenance and Inspection of Share Register. --------------------------------------------- The Corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed, a record of its shareholders, giving names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of this Corporation holding at least five percent in the aggregate of the outstanding voting shares of this Corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five days -19- prior written demand on the Corporation, and (ii) obtain, on written demand and on the tender of the usual charges for such list, a list of the shareholders' names and addresses who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record dates for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder on or before the later of five days after the demand is received, or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this section may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 62. Maintenance and Inspection of Bylaws. ------------------------------------- The Corporation shall keep at its principal executive office the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. 63. Maintenance and Inspection of Other Corporate Records. ------------------------------------------------------ The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors or, in the absence of such designation, at the principal executive office of this Corporation. The minutes shall be kept in written form and the accounting books and records shall be kept in either written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. No such right of inspection shall extend to any confidential information relating to the depositors, borrowers or other customers of this Corporation or other information which the Corporation may not disclose under applicable law or lawful agreements with third parties. 64. Inspection by Directors. ------------------------ Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of this Corporation. This inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. 65. Annual Report to Shareholders. ------------------------------ The Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year adopted by the Corporation. This report shall be sent at least 15 days before the annual meeting of shareholders to be held during the next -20- fiscal year and in the manner specified for giving notice to shareholders of this Corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of this Corporation that the statements were prepared without audit from the books and records of this Corporation. 66. Financial Statements. --------------------- A copy of any annual financial statement and any income statement of this Corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of this Corporation as of the end of each such period, that has been prepared by the Corporation shall be kept in the principal executive office of this Corporation for 12 months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent of the outstanding shares of any class of stock of this Corporation makes a written request to the Corporation for an income statement of this Corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than 30 days before the date of the request, and a balance sheet of this Corporation as of the end of that period, the Chief Financial Officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within 30 days after the receipt of the request. If the Corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or shareholders within 30 days after the request. The Corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the Corporation or the certificate of an authorized officer of this Corporation that the financial statements were prepared without audit from the books and records of this Corporation. 67. Annual Statement of General Information. ---------------------------------------- The Corporation shall each year file with the Secretary of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of all incumbent directors, the number of vacancies on the Board of Directors, if any, the names and complete business or residence addresses of the chief executive officer, Secretary, and Chief Financial Officer, the street address of its principal executive office or principal business office in this state, and the general type of business constituting the principal business activity of this Corporation, together with a designation of the agent of this Corporation for the purpose of service of process, all in compliance with section 1502 of the Code. -21- VIII GENERAL CORPORATE MATTERS 68. Record Date for Purposes Other Than Notice and Voting. ------------------------------------------------------ For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other action, other than action by shareholders by written consent without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days before any such action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of this Corporation after the record date as fixed, except as otherwise provided in the Code. If the Board of Directors does not fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the applicable resolution or the 60th day before the date of that action, whichever is later. 69. Checks, Drafts, Evidences of Indebtedness. ------------------------------------------ All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. 70. Corporate Contracts and Instruments, Execution of. -------------------------------------------------- The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of this Corporation and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors, or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 71. Certificate for Shares. ----------------------- A certificate or certificates for shares of the capital stock of this Corporation shall be issued to each shareholder when any of these shares are fully paid. All certificates shall be signed in the name of this Corporation by the Chairman of the Board, or the President or vice president, and by the Chief Financial Officer or the Secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the Corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. -22- 72. Lost Certificates. ------------------ Except as provided in this section, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the Corporation and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board of Directors may require, including provision for indemnification of this Corporation secured by a bond or other adequate security sufficient to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 73. Representation of Shares of Other Corporations. ----------------------------------------------- The Chairman of the Board, the President, the Chief Financial Officer or any other person authorized by resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of this Corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of this Corporation. The authority granted to these officers to vote or represent on behalf of this Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. 74. Construction and Definitions. ----------------------------- Unless the context requires otherwise, the general provisions, rules of construction and definitions in the Code shall govern the construction of these Bylaws. IX AMENDMENTS 75. Amendment by Shareholders. -------------------------- New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. 76. Amendment by Directors. ----------------------- Subject to the rights of the shareholders as provided in section 75 of these Bylaws, Bylaws may be adopted, amended, or repealed by the Board of Directors; provided, however, that the Board of Directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the Articles of Incorporation or in section 22 of these Bylaws. -23- EX-23.1 4 CONSENT OF KPMG, LLP INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors First Northern Community Bancorp: We consent to incorporation by reference in the registration statement on Form S-8 of First Northern Community Bancorp of our report dated January 21, 2000, relating to the balance sheets of First Northern Bank of Dixon as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999, annual report on Form 10-K of First Northern Bank of Dixon filed with the Federal Deposit Insurance Corporation. KPMG LLP Sacramento, California May 22, 2000 EX-99.1 5 PRESS RELEASE [LETTERHEAD OF FIRST NORTHERN COMMUNITY BANCORP] Contact: Owen J. Onsum May 22, 2000 Chief Executive Officer/President FIRST NORTHERN BANK P.O. Box 547 Dixon, California (707) 678-3041 First Northern Bank Announces Completion of Holding Company Formation --------------------------------------------------------------------- First Northern Bank, headquartered in Dixon, California, has announced the completion of its corporate reorganization whereby the Bank became the wholly-owned subsidiary of First Northern Community Bancorp effective May 19, 2000. The shareholders of the Bank are now the shareholders of the Bancorp in a stock exchange on a one-for-one basis. An actual exchange of Bank share certificates will not be required because the existing Bank share certificates are deemed to represent shares of the Bancorp. However, new Bancorp share certificates will be issued when future transactions occur. "Completing the reorganization into a bank holding company structure is beneficial to us and our shareholders," said Owen J. Onsum, who is President and Chief Executive Officer of both the Bank and the Bancorp. "Our prospects for enhancing our relationships with our customers remain bright and we look forward to a successful future with this new corporate structure." First Northern Bank's stock ticker symbol "FDIX" has been delisted from the OTC Bulletin Board and replaced by First Northern Community Bancorp's ticker symbol "FNRN." In addition, the Board of Directors of the Bancorp has approved a new stock repurchase program for its outstanding Common Stock. Based on market conditions, share repurchases will be made from time to time in the open market or in privately negotiated transactions. The repurchase program, which will remain in effect until April 30, 2002, allows purchases in an aggregate amount of up to 10% of the Bancorp's equity over a rolling 12-month period. The new Bancorp program essentially replaces the Bank's stock repurchase plan that was terminated on May 19, 2000 as a result of the reorganization. As before, the stock repurchase program will provide management with an effective mechanism for capital management. Commenting on the stock repurchase program, Onsum said, "In addition to our record first quarter earnings, the Bancorp's new stock repurchase program demonstrates our continued commitment to providing fundamental value for our shareholders. We continue to believe that our common stock represents an attractive value at current prices." First Northern Bank, established in 1910, is a community based bank with branch offices strategically located in the communities of Dixon, Davis, Fairfield, Vacaville, West Sacramento, Winters and Woodland. The Bank has Real Estate offices in Davis and El Dorado Hills, and an SBA Loan Department in Sacramento. First Northern offers a wide range of SBA, real estate, commercial, agriculture and consumer loans, as well as a full array of alternative investment products. Information on First Northern Community Bancorp's stock can be obtained on the OTC Bulletin Board under the ticker symbol FNRN. Primary market makers for First Northern Bank are PaineWebber, Inc., Hoefer & Arnett, Inc., Sutro & Co. and Pacific Crest Securities. The Bank can be found on the World Wide Web at www.thatsmybank.com. EX-99.2 6 ANNUAL REPORT FORM 10-K FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D. C. 20549 Form 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ----- ACT OF 1934 For the fiscal year ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ FDIC Certificate No. 03440 First Northern Bank of Dixon (Exact name of Bank as specified in its charter) California 94-0475380 [State or other jurisdiction [I.R.S. Employer Identification No.] of incorporation or organization] 195 North First Street Dixon, California 95620 [Address of principal executive offices] [Zip Code] Bank's telephone number, including area code: (707) 678-3041 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Bank (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Bank's knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Bank was approximately $43,927,620 as of February 29, 2000, based upon the sale price on the OTC Bulletin Board reported for such date. This calculation does not reflect a determination that certain persons are affiliates of the Bank for any other purpose. 3,082,640 shares of the Bank's common stock, no par value, were outstanding at February 29, 2000. DOCUMENTS INCORPORATED BY REFERENCE Items 10 (as to directors), 11, 12, and 13 of Part III incorporate by reference information from the Bank's Proxy Statement to be filed with the Federal Deposit Insurance Corporation in connection with the solicitation of proxies for the Bank's 2000 Annual Meeting of Shareholders. -1- Part 1 ------ ITEM 1 BUSINESS This Annual Report on Form 10-K contains forward-looking statements 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. Forward-looking statements include the information concerning possible or assumed future results of operations of the Bank set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," estimate," "consider," or similar expressions are used. 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 risks discussed under "Risk Factors That May Affect Results" on pages 10 through 14 herein and other risk factors discussed elsewhere in this Report. Unless otherwise indicated, all information herein has been adjusted to give effect to a two-for-one stock split affected by the Bank in September 1998. First Northern Bank of Dixon ("First Northern" or the "Bank") was established in 1910 under State Charter as Northern Solano Bank, and opened for business on February 1st of that year. On January 2, 1912, the First National Bank of Dixon was established under a Federal Charter, and until 1955, the two entities operated side by side under the same roof and with the same management. In an effort to increase efficiency of operation, reduce operating expense, and improve lending capacity, the two banks were consolidated on April 8, 1955, with the First National Bank of Dixon as the surviving entity. In order to reduce reserve requirements and operate with higher lending limits, on January 1, 1980, the Federal Charter was relinquished in favor of a State Charter, and the Bank's name was changed to First Northern Bank of Dixon. First Northern Bank of Dixon engages in the general commercial banking business in Solano and Yolo Counties, and parts of Sacramento County. The Bank's Administrative Offices are located in Dixon. Also located in Dixon are the Data Processing/Central Operations Department and the Central Loan Department. The Bank has seven (7) full service Branches. Three are located in the Solano County cities of Dixon, Fairfield, and Vacaville. The remaining four Branches are located in the Yolo County cities of Winters, Davis, West Sacramento and Woodland. In addition, the Bank has a Real Estate Department in Davis which deals solely in residential mortgages and construction loans, a Real Estate Loan Office in El Dorado Hills, El Dorado County, and an SBA Loan Office in Sacramento, Sacramento County. First Northern is in the commercial banking business, which includes accepting demand, interest bearing transaction, savings, and time deposits, and making commercial, consumer, and real estate related loans. It also offers installment note collection, issues cashier's checks and money orders, sells travelers' checks, rents safe deposit boxes, and provides other customary banking services. The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC") and each depositor's account is insured up to $100,000. First Northern also offers a complete range of alternative investment products and services. The Bank offers these services through Select Capital Corporation, an independent broker/dealer and a member of NASD and SIPC; and Select Advisors, Inc., a registered investment advisor. All investments and/or financial services offered by the representatives of Select Capital Corporation and Select Advisors, Inc. are not insured by the FDIC. The Bank offers limited international banking services and is looking into providing trust services through an affiliation. The operating policy of the Bank since inception has emphasized serving the banking needs of individuals and small-to medium-sized businesses. In Dixon, this has included businesses involved in crop and livestock production. The economy of the Dixon area was primarily dependent upon agricultural related sources of income and most employment opportunities were also related to agriculture. Agriculture continued to be a significant factor in the Bank's business after the opening of the first Branch Office in Winters in 1970. A significant step was taken in 1976 to reduce the Bank's dependence on agriculture with the opening of the Davis Branch. -2- The Davis economy is supported significantly by the University of California, Davis. In 1981, a depository Branch was opened in South Davis, and was consolidated into the main Davis Branch in 1986. In 1983, the West Sacramento Branch was opened. The West Sacramento economy is built around transportation and distribution related business. This addition to the Bank's market area has further reduced the Bank's dependence on agriculture. In order to accommodate the demand of the Bank's customers for long-term residential real estate loans, a Real Estate Loan Office was opened in 1983. This office is centrally located in Davis, and has enabled the Bank to access the secondary real estate market. The Vacaville Branch was opened in 1985. Vacaville is a rapidly growing community with a diverse economic base including state prison (Department of Corrections), food processing, distribution, shopping centers (Factory Outlet Stores), medical, and other varied industries. In 1994, the Fairfield Branch was opened. Fairfield has also been a rapidly growing community bounded by Vacaville on the east. Its diverse economic base includes military (Travis AFB), food processing (Anheuser-Busch plant), retail (Solano Mall), manufacturing, medical, and agriculture. Fairfield is the county seat for Solano County. A Real Estate Loan Production Office was opened in El Dorado Hills, in April of 1996, to serve the growing mortgage loan demand in the foothills area north of Sacramento. A Small Business Administration (SBA) Loan Department was opened in April of 1997 in Sacramento to serve the small business and industrial loan demand throughout the Bank's entire market area. In June of 1997, the Bank's seventh Branch was opened in Woodland, the County Seat of Yolo County. Woodland is an expanding and diversified 10.5 square mile city with an economy dominated by agribusiness, retail services, and an expanding industrial sector. Through this period of change and diversification, the Bank's policy, which emphasizes serving the banking needs of individuals and small-to medium-sized businesses, has not changed. The Bank takes real estate, crop proceeds, securities, savings and time deposits, automobiles, and equipment as collateral for loans. Most of the Bank's deposits are attracted from the market of northern and central Solano County and southern and central Yolo County. The Bank is not dependent on any single person or entity for its deposits. The loss of any one or more of the Bank's depositors would not have a material adverse effect on the business of the Bank. -3- As of February 29, 2000, the Bank employed a total of 195 people: 77 officers, including four principal officers, plus 45 full-time and 73 part-time employees. First Northern has historically experienced seasonal swings in both deposit and loan volumes due primarily to the agricultural economy. Deposits have typically hit lows in February or March and peaked in November or December. Loans typically peaked in the late spring and hit lows in the fall as crops are harvested and sold. More recent experience shows the same deposit and loan swings, since the real estate and agricultural economies tend to follow the same seasonal cycle. -4- The Effect of Government Policy on Banking The earnings and growth of the Bank are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System ("FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Bank cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Bank is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Bank. Bank Regulation and Supervision The Bank is subject to regulation, supervision and regular examination by the California Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation (the "FDIC"). The regulations of these agencies affect most aspects of the Bank's business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Bank's activities and various other requirements. While the Bank is not a member of the FRB, it is also subject to certain regulations of the FRB dealing primarily with check clearing activities, establishment of banking reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B). Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital and reserve requirements, deposits and borrowings, stockholder rights and duties, and investment and lending activities. Whenever it appears that the contributed capital of a California bank is impaired, the California Commissioner of Financial Institutions ("Commissioner") shall order the bank to correct such impairment. If a bank is unable to correct the impairment, such bank is required to levy and collect an assessment upon its common shares. If such assessment becomes delinquent, such common shares are to be sold by the bank. California law permits a state chartered bank to invest in the stock and securities of other corporations, subject to a state chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the Commissioner. Federal banking laws, however, impose limitations on the activities and equity investments of state chartered, federally insured banks. The FDIC rules on investments prohibit a state bank from acquiring an equity investment of a type, or in an amount, not permissible for a national bank. Non-permissible investments must have been divested by state banks no later than December 19, 1996. FDIC rules also prohibit a state bank from engaging as a principal in any activity that is not permissible for a national bank, unless the bank is adequately capitalized and the FDIC approves the activity after determining that such activity does not pose a significant risk to the deposit insurance fund. The FDIC rules on activities generally permit subsidiaries of banks, without prior specific FDIC authorization, to engage in those activities that have been approved by the FRB for bank holding companies because such activities are so closely related to banking to be a proper incident thereto. Other activities generally require specific FDIC prior approval, and the FDIC may impose additional restrictions on such activities on a case-by-case basis in approving applications to engage in otherwise impermissible activities. -5- Capital Standards The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans. In determining the capital level the Bank is required to maintain, the federal banking agencies do not, in all respects, follow generally accepted accounting principles ("GAAP") and have special rules which have the effect of reducing the amount of capital that will be recognized for purposes of determining the capital adequacy of the Bank. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock, other types of qualifying preferred stock and minority interests in certain subsidiaries, less most other intangible assets and other adjustments. Net unrealized losses on available-for-sale equity securities with readily determinable fair value must be deducted in determining Tier 1 capital. Additionally, as of April 1, 1995, for Tier 1 capital purposes, deferred tax assets that can only be realized if an institution earns sufficient taxable income in the future will be limited to the amount that the institution is expected to realize within one year, or ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, term preferred stock and other types of preferred stock not qualifying as Tier 1 capital, term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off-balance-sheet items of 4%. On October 1, 1998, the FDIC adopted two rules governing minimum capital levels that FDIC-supervised banks must maintain against the risks to which they are exposed. The first rule makes risk-based capital standards consistent for two types of credit enhancements (i.e., recourse arrangements and direct credit substitutes) and requires different amounts of capital for different risk positions in asset securitization transactions. The second rule permits limited amounts of unrealized gains on debt and equity securities to be recognized for risk-based capital purposes as of September 1, 1998. The FDIC rules also provide that a qualifying institution that sells small business loans and leases with recourse must hold capital only against the amount of recourse retained. In general, a qualifying institution is one that is well-capitalized under the FDIC's prompt corrective action rules. The amount of recourse that can receive the preferential capital treatment cannot exceed 15% of the institution's total risk-based capital. In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. It is improbable; however, that an institution with a 3% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, must be at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. -6- As of December 31, 1999, the Bank's capital ratios exceeded applicable regulatory requirements. The following tables present the capital ratios for the Bank, compared to the standards for well-capitalized depository institutions, as of December 31, 1999 (amounts in thousands except percentage amounts).
Well Minimum Actual Capitalized Capital Ratio Requirement ------------------------------------ ------------ ----------- Capital Ratio ------- ----- Leverage................................... $32,421 8.67% 5.0% 4.0% Tier 1 Risk-Based.......................... 32,421 13.63% 6.0% 4.0% Total Risk-Based........................... 35,454 14.91% 10.0% 8.0%
The federal banking agencies must take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. The federal banking agencies must also consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluation of a bank's capital adequacy. Prompt Corrective Action and Other Enforcement Mechanisms The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated below: "Well capitalized" "Adequately capitalized" ---------------- ---------------------- Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4%. "Undercapitalized" "Significantly undercapitalized" ---------------- ------------------------------ Total risk-based capital less than 8%; Total risk-based capital less than 6%; Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or Leverage ratio less than 4%. Leverage ratio less than 3%. "Critically undercapitalized" Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. -7- Safety and Soundness Standards FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution's noncompliance with one or more standards. Restrictions on Dividends and Other Distributions The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. The federal banking agencies also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank's net income for its last three fiscal years (less any distributions to shareholders during such period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greatest of the bank's retained earnings, the bank's net income for its last fiscal year, or the bank's net income for its current fiscal year. Premiums for Deposit Insurance and Assessments for Examinations FDICIA established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of premiums will be. -8- Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate-income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. Recently Enacted Legislation On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA") which becomes effective March 11, 2000. The FSA repeals provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other's businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The Bank Holding Company Act of 1956, as amended (the "BHCA"), is also amended by the FSA, to allow new "financial holding companies" ("FHC") to offer banking, insurance, securities and other financial products to consumers. Specifically, the FSA amends section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. Bank holding companies ("BHC") may elect to become a financial holding company if all its subsidiary depository institutions are well-capitalized and well-managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it chooses to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the BHCA. However, notice must be given to the FRB within 30 days after a FHC has commenced one or more of the financial activities. Under the FSA, FDIC-insured state banks, subject to various requirements (and national banks) are permitted to engage through "financial subsidiaries" in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the state bank must also be well-capitalized and well-managed and receive at least a "satisfactory" rating in its most recent Community Reinvestment Act examination. The Bank cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for the Bank. Pending Legislation and Regulations Certain pending legislative proposals include bills to let banks pay interest on business checking accounts, to cap consumer liability for stolen debit cards, and to give judges the authority to force high-income borrowers to repay their debts rather than cancel them through bankruptcy. -9- Quantitative and Qualitative Disclosures About Market Risk While there are several varieties of market risk, the market risk material to the Bank is interest rate risk. Within the context of interest rate risk, market risk is the risk of loss due to changes in market interest rates that have an adverse effect on net interest income, earnings, capital or the fair value of financial instruments. Exposure to this type of risk is a regular part of a financial institution's operations. The fundamental activities of making loans, purchasing investment securities, and accepting deposits inherently involve exposure to interest rate risk. The Bank monitors the repricing differences between assets and liabilities on a regular basis and estimates exposure to net interest income, net income, and capital based upon assumed changes in the market yield curve. The following tables summarize the expected maturity, principal repayment and fair value of the financial instruments that are sensitive to changes in interest rates: Interest Rate Sensitivity Analysis at December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------- Expected Maturity/Repricing/Principal Payment In Thousands Within 1 1 Year to 3 Years to After 5 Total Fair Year 3 Years 5 Years Years Balance Value - ----------------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Federal funds sold 37,300 - - - 37,300 37,300 Average interest rate 5.50% - - - 5.50% Fixed rate investments 16,520 33,811 30,866 54,255 135,452 135,452 Average interest rate 6.20% 6.40% 6.40% 6.14% 6.27% Fixed rate loans (1) 5,833 2,539 64 45,575 54,011 49,930 Average interest rate 8.38% 10.80% 10.80% 7.47% 7.73% Floating rate loans (2) 83,524 14,739 - - 98,263 98,698 Average interest rate 9.89% 10.01% - - 9.91% Loans held for sale - 10,657 - - 10,657 10,667 Average interest rate - 7.80% - - 7.80% Interest-Sensitive Liabilities: NOW account deposits (2) 10,261 9,072 7,256 9,695 36,284 36,284 Average interest rate 1.35% 1.35% 1.35% 1.35% 1.35% Money market deposits (2) 15,800 13,166 13,166 10,540 52,672 52,672 Average interest rate 2.20% 2.20% 2.20% 2.20% 2.20% Savings deposits (2) 17,446 9,970 12,462 9,967 49,845 49,845 Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% Certificates of deposit 103,916 6,251 537 - 110,704 110,404 Average interest rate 4.53% 4.94% 4.47% - 4.55% Interest-Sensitive Off-Balance Sheet Items: Commitments to lend - - - - 76,101 571 Standby letters of credit - - - - 3,600 36 - -----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis at December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------- Expected Maturity/Repricing/Principal Payment In Thousands Within 1 1 Year to 3 Years to After 5 Total Fair Year 3 Years 5 Years Years Balance Value - ----------------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Federal funds sold 25,400 - - - 25,400 25,400 Average interest rate 4.75% - - - 4.75% Fixed rate investments 19,924 36,004 16,135 55,486 127,549 127,549 Average interest rate 6.22% 5.95% 5.95% 6.51% 6.09% Fixed rate loans (1) 9,739 1,608 69 11,722 23,138 23,003 Average interest rate 8.54% 10.42 10.42% 8.62% 8.72% Floating rate loans (2) 91,630 7,870 - - 99,500 103,368 Average interest rate 9.05% 8.96% - - 9.04% Loans held for sale - 29,021 - - 29,021 29,596 Average interest rate - 7.03% - - 7.03% Interest-Sensitive Liabilities: NOW account deposits (2) 10,261 9,072 7,256 9,695 36,394 36,394 Average interest rate 1.35% 1.35% 1.35% 1.35% 1.35% Money market deposits (2) 15,800 13,166 13,166 10,540 43,942 43,942 Average interest rate 2.22% 2.22% 2.22% 2.22% 2.22% Savings deposits (2) 17,446 9,970 12,462 9,967 41,844 41,844 Average interest rate 2.75% 2.75% 2.75% 2.75% 2.75% Certificates of deposit 103,808 5,251 850 - 109,909 110,410 Average interest rate 4.79% 5.10% 4.92% - 4.81% Interest-Sensitive Off-Balance Sheet Items: Commitments to lend 63,853 479 Standby letters of credit 713 7 - ----------------------------------------------------------------------------------------------------------------------------------- (1) Based upon contractual maturity dates and interest rate repricing. (2) NOW, money market and savings deposits do not carry contractual maturity dates. The actual maturities of NOW, money market, and savings deposits could vary substantially if future prepayments differ from the Bank's historical experience.
-10- The Bank controls interest rate risk by matching assets and liabilities. One tool used to ensure market rate return is variable rate loans. Loans totaling $89,357,000 or 54.84% of the total loan portfolio (including loans held for sale) are subject to repricing within one year. Loan maturities in the after five-year category increased to $45,575,000 at December 31, 1999 from $11,722,000 at December 31, 1998. The reason for this increase was due, for the most part, to transfers effective July 1, 1999 and October 1, 1999 of $25,567,000 and $3,656,000, respectively, from held for sale loans to held to maturity loans. The Bank is required by FASB 115 to mark to market the Available for Sale investments at the end of each quarter. Mark to market resulted in a negative capital entry of $3,7658,000 as reflected on the December 31, 1999 balance sheet. Mark to market impact on capital on December 31, 1998 was a positive $1,835,000. These entries were the result of fluctuating interest rates. Risk Factors That May Affect Results This Report includes forward-looking statements within the meaning of the Exchange Act. These statements are based on management's beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Bank set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," "estimate," "consider" or similar expressions are used. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including the risks discussed below and elsewhere in this Report. The Bank's actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values, including those below, are beyond the Bank's ability to control or predict. Lending Risks Associated with Commercial Banking Activities The Bank's business strategy is to focus on commercial business loans (which includes agricultural loans), construction loans and commercial and multi-family real estate loans. The principal factors affecting the Bank's risk of loss in connection with commercial business loans include the borrower's ability to manage its business affairs and cash flows, general economic conditions and, with respect to agricultural loans, weather and climate conditions. Loans secured by commercial real estate are generally larger and involve a greater degree of credit and transaction risk than residential mortgage (one to four family) loans. Because payments on loans secured by commercial and multi-family real estate properties are often dependent on successful operation or management of the underlying properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. Real estate construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment of the construction loan. Although the Bank manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks would not materialize, in which event the Bank's financial condition, results of operations, cash flows and business prospects could be materially adversely affected. Dependence on Real Estate At December 31, 1999, approximately 61% of the Bank's loans were secured by real estate. The value of the Bank's real estate collateral has been, and could in the future continue to be, adversely affected by any economic recession and any resulting adverse impact on the real estate market in Northern California such as that experienced during the early years of this decade. See "-Economic Conditions and Geographic Concentration." -11- The Bank's primary lending focus has historically been commercial (including agricultural), construction and real estate mortgage. At December 31, 1999, real estate mortgage and construction loans comprised approximately 26% and 21%, respectively, of the total loans in the Bank's portfolio. At December 31, 1999, all of the Bank's real estate mortgage and construction loans and approximately 33% of its commercial loans were secured fully or in part by deeds of trust on underlying real estate. The Bank's dependence on real estate increases the risk of loss in both the Bank's loan portfolio and its holdings of other real estate owned if economic conditions in Northern California deteriorate in the future. Deterioration of the real estate market in Northern California would have a material adverse effect on the Bank's business, financial condition and results of operations. See "-Economic Conditions and Geographic Concentration." Interest Rate Risk The income of the Bank depends to a great extent on "interest rate differentials" and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank's interest-earning assets such as loans and investment securities, and the interest rates paid on the Bank's interest-bearing liabilities such as deposits and borrowings). These rates are highly sensitive to many factors which are beyond the Bank's control, including general economic conditions and the policies of various governmental and regulatory agencies, in particular, the FRB. The Bank is generally adversely affected by declining interest rates. In addition, changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits and affect the rates received on loans and investment securities and paid on deposits, which could have a material adverse effect on the Bank's business, financial condition and results of operations. See "Quantitative and Qualitative Disclosure About Market Risk." Potential Volatility of Deposits At December 31, 1999, 13% of the dollar value of the Bank's total deposits was represented by time certificates of deposit in excess of $100,000. As such, these deposits are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits would adversely impact the Bank's liquidity, profitability, business prospects, results of operations and cash flows. Dividends The ability of the Bank to pay cash dividends in the future depends on the Bank's profitability, growth and capital needs. In addition, the California Financial Code restricts the ability of the Bank to pay dividends. No assurance can be given that the Bank will pay any dividends in the future or, if paid, such dividends will not be discontinued. See "-Supervision and Regulation-Restrictions on Dividends and Other Distributions." Competition In California generally, and in the Bank's primary market area specifically, major banks dominate the commercial banking industry. By virtue of their larger capital bases, such institutions have substantially greater lending limits than those of the Bank. In obtaining deposits and making loans, the Bank competes with these larger commercial banks and other financial institutions, such as savings and loan associations and credit unions, which offer many services which traditionally were offered only by banks. In addition, the Bank competes with other institutions such as money market funds, brokerage firms, and even retail stores seeking to penetrate the financial services market. During periods of declining interest rates, competitors with lower costs of capital may solicit the Bank's customers to refinance their loans. Furthermore, during periods of economic slowdown or recession, the Bank's borrowers may face financial difficulties and be more receptive to offers from the Bank's competitors to refinance their loans. No assurance can be given that the Bank will be able to compete with these lenders. See "-Competition." -12- Government Regulation and Legislation The Bank is subject to extensive state and federal regulation, supervision and legislation which govern almost all aspects of the operations of the Bank. The business of the Bank is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Such laws are subject to change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds and not for the protection of shareholders of the Bank. The Bank cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on the business and prospects of the Bank, but it could be material and adverse. See "-Supervision and Regulation." Economic Conditions and Geographic Concentration The Bank's operations are located and concentrated primarily in Northern California, particularly the counties of Placer, Sacramento, Solano and Yolo, and are likely to remain so for the foreseeable future. At December 31, 1999, approximately 61% of the Bank's loan portfolio consisted of real estate related loans, all of which were related to collateral located in Northern California. The performance of these loans may be adversely affected by changes in California's economic and business conditions. A deterioration in economic conditions could have a material adverse effect on the quality of the Bank's loan portfolio and the demand for its products and services. In addition, during periods of economic slowdown or recession, the Bank may experience a decline in collateral values and an increase in delinquencies and defaults. A decline in collateral values and an increase in delinquencies and defaults increase the possibility and severity of losses. California real estate is also subject to certain natural disasters, such as earthquakes, floods and mud slides, which are typically not covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may make it difficult or impossible for borrowers to repay loans made by the Bank. The occurrence of adverse economic conditions or natural disasters in California could have a material adverse effect on the Bank's financial condition, results of operations, cash flows and business prospects. Reliance on Key Employees and Others The Bank is dependent upon the continued services of its key employees, including Owen J. Onsum, President and Chief Executive Officer, Robert M. Walker, Senior Vice President and Branch Administrator, Donald J. Fish, Senior Vice President and Senior Credit Officer, and Louise A. Walker, Senior Vice President and Cashier. The loss of the services of any such employee, or the failure of the Bank to attract and retain other qualified personnel, could have a material adverse effect on the Bank's business, financial condition and results of operations. Adequacy of Allowance for Loan and Other Real Estate Losses The Bank's allowance for estimated losses on loans was approximately $7.8 million, or 4.6% of total loans, and 1,476% of total nonperforming loans at December 31, 1999. Material future additions to the allowance for estimated losses on loans may be necessary if material adverse changes in economic conditions occur and the performance of the Bank's loan portfolio deteriorates. In addition, future additions to the Bank's allowance for losses on other real estate owned may also be required in order to reflect changes in the markets for real estate in which the Bank's other real estate owned is located and other factors which may result in adjustments which are necessary to ensure that the Bank's foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties. Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically review the Bank's allowance for estimated losses on loans and the carrying value of its assets. Increases in the provisions for estimated losses on loans and foreclosed assets would adversely affect the Bank's financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Summary of Loan Loss Experience." -13- Shares Eligible for Future Sale As of February 29, 2000, the Bank had 3,082,640 shares of Common Stock outstanding, all of which are eligible for sale in the public market without restriction. Future sales of substantial amounts of the Bank's Common Stock, or the perception that such sales could occur, could have a material adverse effect on the market price of the Common Stock. In addition, options to acquire up to six percent of the outstanding shares of Common Stock at exercise prices ranging from $11.11 to $13.51 have been issued to directors and certain employees of the Bank under the Bank's 1997 Stock Option Plan and Outside Directors 1997 Nonstatutory Stock Option Plan, and options to acquire up to an additional 17% of the outstanding shares of Common Stock are reserved for issuance under such plans. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Bank's Common Stock. See "Market for the Bank's Common Stock and Related Stockholder Matters." Absence of Public Market; Volatility in Stock Price There currently is no active trading market for the Bank's Common Stock. No assurance can be given that an active public trading market will develop or that, if developed, it will be sustained. As a result of the lack of a trading market, the market price of the Bank's Common Stock may experience fluctuations that are unrelated to the operating performance of the Bank. In particular, the price of the Bank's Common Stock may be affected by general market price movements as well as developments specifically related to the financial services sector, including interest rate movements, quarterly variations, or changes in financial estimates by securities analysts and a significant reduction in the price of the stock of another participant in the financial services industry. Technology and Computer Systems Advances and changes in technology can significantly impact the business and operations of the Bank. The Bank faces many challenges including the increased demand for providing computer access to bank accounts and the systems to perform banking transactions electronically. The Bank's merchant processing services require the use of advanced computer hardware and software technology and rapidly changing customer and regulatory requirements. The Bank's ability to compete depends on its ability to continue to adapt its technology on a timely and cost-effective basis to meet these requirements. In addition, the Bank's business and operations are susceptible to negative impacts from computer system failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or failures of the Bank's data processing systems. Many computer programs were designed and developed utilizing only two digits in the date field, thereby creating the inability to recognize the year 2000 or years thereafter. This year 2000 issue creates risks for the Bank from unforeseen or unanticipated problems in its internal computer systems as well as from computer systems of the Federal Reserve Bank of San Francisco, correspondent banks, customers and vendors. Failures of these systems or untimely corrections could have a material adverse impact on the Bank's ability to conduct its business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000." Environmental Risks The Bank, in its ordinary course of business, acquires real property securing loans that are in default, and there is a risk that hazardous substances or waste, contaminants or pollutants could exist on such properties. The Bank may be required to remove or remediate such substances from the affected properties at its expense, and the cost of such removal or remediation may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, the Bank may not have adequate remedies against the prior owners or other responsible parties to recover its costs. Finally, the Bank may find it difficult or impossible to sell the affected properties either prior to or following any such removal. In addition, the Bank may be considered liable for environmental liabilities in connection with its borrowers' properties, if, among other things, it participates in the management of its borrowers' operations. The occurrence of such an event could have a material adverse effect on the Bank's business, financial condition, results of operations and cash flows. -14- Dilution As of February 29, 2000, the Bank had outstanding options to purchase an aggregate of 196,665 shares of Common Stock at exercise prices ranging from $11.11 to $13.51 per share, or a weighted average exercise price per share of $13.11. To the extent such options are exercised, shareholders of the Bank will experience dilution. See "Market for the Bank's Common Stock and Related Stockholder Matters." Competition In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and even retail establishments have offered new investment vehicles which also compete with banks for deposit business. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market. The enactment of the FSA is the latest evidence of this trend, and it is anticipated that this trend will continue as financial services institutions combine to take advantage of the FSA's elimination of the barriers against such affiliations. In order to compete with major financial institutions and other competitors in its primary service areas, the Bank relies upon the experience of its executive and senior officers in serving business clients, and upon its specialized services, local promotional activities and the personal contacts made by its officers, directors, and employees. For customers whose loan demand exceeds the Bank's legal lending limit, the Bank may arrange for such loans on a participation basis with correspondent banks. The seasonal swings discussed earlier have, in the past, had some impact on the Bank's liquidity. The management of investment maturities, sale of loan participations, federal fund borrowings, qualification for funds under the Federal Reserve Bank's seasonal credit program, and the ability to sell mortgages in the secondary market have allowed the Bank to satisfactorily manage its liquidity. The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate Banking and Branching Act of 1995 have increased competition within California. It is believed that the recent enactment of the FSA will further increase competition within California. Moreover, regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. -15- ITEM 2 - PROPERTIES Dixon Branch - Consists of a two-story building with approximately 16,600 square feet of space situated in the central business district in the city of Dixon in northern Solano County. This property is owned by the Bank with no encumbrances. Vacaville Branch - Approximately 5,000 square feet of space situated in a shopping center in the city of Vacaville in north central Solano County. The property is subject to a lease expiring in December 2005. The term of the lease is fifteen years with options to extend this lease for an additional nineteen years. Fairfield Branch - Approximately 3,800 square feet of space situated in an office complex in the city of Fairfield in western Solano County. Property is subject to a lease expiring in December 2001. Operations Center - Consists of a one-story building with approximately 33,500 square feet of space situated in the central business district in the city of Dixon in northern Solano County. The property is owned by the Bank with no encumbrances. Future Bank Site - Vacant lot situated in the city of Dixon in northern Solano County. The property is owned by the Bank with no encumbrances. Winters Branch - Consists of a two-story building with approximately 2,800 square feet of space situated in the central business district in the city of Winters in southern Yolo County. The property is owned by the Bank with no encumbrances. Davis Branch - Approximately 5,000 square feet of space situated in the central business district in the city of Davis in southern Yolo County. The property is subject to a lease expiring in March 2004. Real Estate Department - Approximately 2,200 square feet of space situated in the central business district in the city of Davis in southern Yolo County. The property is subject to a month-to-month lease. West Sacramento Branch - Consists of a one-story building with approximately 5,000 square feet of space situated in the Port of Sacramento industrial park in the city of West Sacramento in southern Yolo County. The property is owned by the Bank with no encumbrances. Woodland Branch - Approximately 3,800 square feet of space situated in the central business district in the city of Woodland in central Yolo County. The property is subject to a lease expiring in April 2002. The Bank has options to extend this lease an additional fifteen years. El Dorado Hills Loan Production Office - Approximately 800 square feet of space situated in an office complex in the city of El Dorado Hills in El Dorado County. The property is subject to a month-to-month lease. SBA Loan Production Office - Approximately 800 square feet of space situated in the central business district, in an office complex, in the city of Sacramento in Sacramento County. Property is subject to a lease expiring in April 2000. The term of the lease is one year. ITEM 3 - LEGAL PROCEEDINGS The Bank is not a party to or the subject of, nor is any of the property of the Bank the subject of any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank's business. -16- ITEM 4 - SUBMISSION OF MATTERS TO A VOATE OF SECURITY HOLDERS Not Applicable. -17- PART II ------- ITEM 5 - MARKET FOR THE BANK'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS The Bank's common stock is not listed on any exchange, nor is it included on NASDAQ. However, trades may be reported on the OTC Bulletin Board under the symbol "FDIX". The Bank is aware that Hoefer & Arnett, Inc., Sutro & Co. and PaineWebber, Inc. all make a market in the Bank's common stock. Management is aware that there are also private transactions in the Bank's common stock although the data set forth below may not reflect all such transactions. The following table summarizes the range of sales prices of the Bank's Common Stock for each quarter during the last two fiscal years and is based on information provided by Hoefer & Arnett, Inc. The quotations reflect the price that would be received by the seller without retail mark-up, mark-down or commissions and may not have represented actual transactions: QUARTER/YEAR HIGH LOW ------------ ---- --- 4th Quarter 1999 $14.00 $13.50 3rd Quarter 1999 $14.50 $13.25 2nd Quarter 1999 $14.00 $12.75 1st Quarter 1999 $13.50 $11.75 4th Quarter 1998* $15.00 $13.00 3rd Quarter 1998 $30.50 $26.00 2nd Quarter 1998 $29.38 $27.63 1st Quarter 1998 $30.00 $27.68 * On September 30, 1998, the Board of Directors authorized a two-for-one stock split of the Bank's common stock in which each share of the Bank's stock was converted into two shares. As of February 29, 2000, there were approximately 868 holders of record of the Bank's common stock, no par value, which is the only class of equity securities authorized or issued. In the last two years the Bank has declared the following stock dividends: Shareholder Dividend Date Record Date Percentage Payable ----------- ---------- ------- February 26, 1999 5% March 31, 1999 February 27, 1998 5% March 31, 1998 The Bank has not paid a cash dividend in the past five years and does not expect to pay a cash dividend in the foreseeable future. There are regulatory limitations on cash dividends that may be paid by the Bank under state and federal laws. See "Supervision and Regulation - Restrictions on Dividends and Other Distributions." -18- ITEM 6 - SELECTED FINANCIAL DATA The selected consolidated financial data below have been derived from the Bank's audited financial statements. The selected consolidated financial data set forth below as of December 31, 1996, and 1995 have been derived from the Bank's historical financial statements not included in this Report. The financial information for 1999, 1998 and 1997 should be read in conjunction "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is in Part I (Item 7) of this Report and with the Bank's audited financial statements and the notes thereto, which are included in Part II (Item 8) of this Report.
Summary of Operations for the year ended December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Interest Income and Loan Fees $ 25,916,802 $ 24,308,654 $ 22,021,809 $ 20,797,132 $ 21,396,091 Interest Expense (7,835,726) (8,497,727) (8,100,283) (7,431,902) (6,914,349) --------------- --------------- --------------- ---------------- --------------- Net Interest Income 18,081,076 15,810,927 13,921,526 13,365,230 14,481,742 Recovery of (Provision for) Loan Losses 800,000 (760,000) (2,115,500) (8,331,900) (2,820,700) --------------- --------------- --------------- ---------------- --------------- Net Interest Income after Recovery of (Provision for) Loan Losses 18,881,076 15,050,927 11,806,026 5,033,330 11,661,042 Other Operating Income 1,963,997 1,971,965 1,718,789 1,759,424 1,339,779 Other Operating Expense (14,640,645) (12,797,185) (11,369,002) (12,233,188) (10,658,175) --------------- --------------- --------------- ---------------- --------------- Earnings (Loss) before Taxes 6,204,428 4,225,707 2,155,813 (5,440,434) 2,342,646 (Provision) Benefit for Taxes (2,121,443) (1,224,864) (426,144) 2,703,100 (467,421) --------------- --------------- --------------- ---------------- --------------- Net Earnings (Loss) $ 4,082,985 $ 3,000,843 $ 1,729,669 $ (2,737,334) $ 1,875,225 =============== =============== =============== ================ =============== Basic Earnings (Loss) Per Share * $1.25 $0.92 $0.53 ($0.84) $0.57 =============== =============== =============== ================ =============== Diluted Earnings (Loss) Per Share * $1.24 $0.91 $0.53 ($0.84) $0.57 =============== =============== =============== ================ =============== Total Assets $ 370,990,606 $ 343,308,775 $ 305,935,629 $ 264,620,686 $ 258,154,994 =============== =============== =============== ================ =============== Weighted Average Shares of Common Stock outstanding Used for Basic Earnings Per Share Computation 3,276,362 3,276,230 3,267,942 3,267,942 3,267,942 =============== =============== =============== ================ =============== Weighted Average Shares of Common Stock outstanding Used for Diluted Earnings Per Share Computation 3,289,199 3,284,258 3,272,006 3,267,942 3,267,942 =============== =============== =============== ================ =============== Return on Average Total Assets 1.16% 0.96% 0.62% (1.05%) 0.76% Net Earnings/Average Equity 12.83% 10.49% 6.70% (9.71%) 6.96% Net Earnings/Average Deposits 1.29% 1.06% 0.69% (1.19%) 0.85% Average Loans/Average 51.04% 49.12% 55.98% 66.85% 68.60% Average Equity to Average Total Assets 9.08% 9.18% 9.18% 10.78% 10.87% - ----------------------------------------------------------------------------------------------------------------------------------- * Earnings per share have been restated as required by the Bank's adoption of SFAS No. 128, Earnings Per Share, which replaces APB Opinion 15, Earnings Per Share.
-19- ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains forward-looking statements 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. Forward-looking statements include the information concerning possible or assumed future results of operations of the Bank set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements also include statements in which words such as "expect," "anticipate," "intend," "plan," "believe," estimate," "consider," or similar expressions are used. 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 risks discussed under "Risk Factors That May Affect Results" on pages 10 through 15 herein other risk factors discussed elsewhere in this Report. -20- The following statistical information and discussion should be read in conjunction with the Selected Financial Data included in Part I (Item 6) and the audited financial statements and accompanying notes included in Part II (Item 8) of this Annual Report on Form 10-K. Distribution of Assets, Liabilities and Shareholders' Equity; ------------------------------------------------------------- Interest Rates and Interest Differential ---------------------------------------- The following table summarizes the distribution, by amount (in thousands of dollars) and percentage, of the daily average assets, liabilities, and shareholders' equity of the Bank for 1999, 1998 and 1997. Average balances have been computed using daily balances. Tax exempt income is not shown on a tax equivalent basis.
1999 1998 1997 ---------------------------- ---------------------------- --------------------------- Average Average Average Balance Percent Balance Percent Balance Percent ----------- ------------- ------------ ------------ ------------ ------------ ASSETS - ------ Cash and Due From Banks $ 18,115 5.17% $ 16,514 5.30% $ 14,011 4.99% Investment Securities: U.S. Government Securities 32,904 9.38% 33,389 10.71% 27,829 9.91% Obligations of States & Political Subdivisions 66,096 18.84% 61,351 19.68% 45,458 16.18% Other Securities 27,179 7.75% 18,851 6.05% 6,773 2.41% Federal Funds Sold 30,198 8.61% 30,719 9.85% 29,033 10.34% Loans 1 161,246 45.97% 139,467 44.73% 141,036 50.21% Other Assets 15,000 4.28% 11,522 3.70% 16,736 5.96% ----------- ------------- ------------ ------------ ------------ -------------- Total Assets $ 350,738 100.00% $ 311,813 100.00% $ 280,876 100.00% =========== ============= ============ ============ ============ ============== LIABILITIES & - ------------- SHAREHOLDERS' EQUITY - -------------------- Deposits: Demand $ 77,663 22.14% $ 64,957 20.83% $ 52,920 18.84% Interest-Bearing Transaction Deposits 35,620 10.16% 31,259 10.03% 24,133 8.59% Savings & MMDAs 93,058 26.53% 78,816 25.28% 72,592 25.85% Time Certificates 109,581 31.24% 108,873 34.92% 102,315 36.43% Borrowed Funds 1,020 0.29% 1,006 0.32% 1,139 0.41% Other Liabilities 1,962 0.56% (1,712) -0.55% 1,979 0.71% Shareholders' Equity 31,834 9.08% 28,614 9.18% 25,798 9.19% ----------- ------------- ------------ ------------ ------------ -------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 350,738 100.00% $ 311,813 100.00% $ 280,876 100.00% =========== ============= ============ ============ ============ ============= - ------------------------------------------------------------------------------------------------------------------------------------ 1. Average Balances for Loans include nonaccrual loans and are net of the allowance for loan losses.
-21- Net Interest Earnings --------------------- Average Balances, Yields and Rates ---------------------------------- (In thousands of dollars)
1999 1998 1997 ------------------------------- ---------------------------- ----------------------------- Yields Yields Yields Interest Earned/ Interest Earned/ Interest Earned/ Average Income/ Rates Average Income/ Rates Average Income/ Rates Assets Balance Expense Paid Balance Expense Paid Balance Expense Paid - ------ --------- ---------- ------ --------- ------- ------- --------- -------- ------ Securities: U.S. Government $ 32,904 $ 1,942 5.90% $ 33,389 $ 1,993 5.97% $ 27,829 $ 1,746 6.27% Obligations of States and Political Subdivisions(1) 66,096 4,128 6.25% 61,351 3,915 6.38% 45,458 3,014 6.63% Other Securities 27,179 1,630 6.00% 18,851 1,133 6.01% 6,773 428 6.32% --------- ---------- ------ --------- ------- ------- --------- -------- ------ Total Investment 126,179 7,700 6.10% 113,591 7,041 6.20% 80,060 5,188 6.48% Securities Federal Funds Sold 30,198 1,498 4.96% 30,719 1,636 5.33% 29,033 1,570 5.41% Loans(2) 161,246 14,787 9.17% 139,467 13,518 9.69% 141,036 13,845 9.82% Loan Fees - 1,932 1.20% - 2,114 1.52% - 1,419 1.01% --------- ---------- ------ --------- ------- ------- --------- -------- ------ Total Loans, Including Loan Fees 161,246 16,719 10.37% 139,467 15,632 11.21% 141,036 15,264 10.82% --------- ---------- ------ --------- ------- ------- --------- -------- ------ Total Earning Assets 317,623 $ 25,917 8.16% 283,777 $ 24,309 8.57% 250,129 $ 22,022 8.80% ========== ====== ======= ======= ======== ====== Cash and Due from Banks 18,115 16,514 14,011 Premises and Equipment 6,215 6,481 6,361 Interest Receivable and Other Assets 8,785 5,041 10,375 --------- --------- --------- Total Assets $ 350,738 $ 311,813 $ 280,876 ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------ (1) Interest income and yields on tax exempt securities are not presented on a tax equivalent basis. (2) Average Balances for Loans include nonaccrual loans and are net of the allowance for loan losses, but nonaccrued interest thereon is excluded.
-22- Continuation of --------------- Net Interest Earnings --------------------- Average Balances, Yields and Rates ---------------------------------- (In thousands of dollars)
1999 1998 1997 ----------------------------- ---------------------------- ---------------------------- Yields Yields Yields Interest Earned/ Interest Earned/ Interest Earned/ Liabilities and Average Income/ Rates Average Income/ Rates Average Income/ Rates Shareholders' Equity Balance Expense Paid Balance Expense Paid Balance Expense Paid - -------------------- ------- ------- ----- ------- ------- ----- ------- ------- ---- Interest-Bearing Deposits: Interest-Bearing Transaction $ 35,620 $ 526 1.48% $ 31,259 $ 597 1.91% $ 24,133 $ 486 2.01% Deposits Savings & MMDAs 93,058 2,347 2.52% 78,816 2,236 2.84% 72,592 2,064 2.84% Time Certificates 109,581 4,915 4.49% 108,873 5,604 5.15% 102,315 5,500 5.38% --------- ------- ------- --------- -------- ------ --------- ------- ------- Total Interest-Bearing Deposits 238,259 7,788 3.27% 218,948 8,437 3.85% 199,040 8,050 4.04% Borrowed Funds 1,020 48 4.71% 1,006 61 6.06% 1,139 50 4.39% --------- ------- ------- --------- -------- ------ --------- ------- ------- Total Interest-Bearing Deposits and Funds 239,279 7,836 3.27% 219,954 8,498 3.86% 200,179 8,100 4.05% Demand Deposits 77,663 - - 64,957 - - 52,920 - - --------- ------- ------- --------- -------- ------ --------- ------- ------- Total Deposits and Borrowed Funds 316,942 $ 7,836 2.47% 284,911 $ 8,498 2.98% 253,099 $ 8,100 3.20% --------- ======= ======= --------- ======== ====== --------- ======= ======= Accrued Interest and Other Liabilities 1,962 (1,712) 1,979 Shareholders' Equity 31,834 28,614 25,798 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 350,738 $ 311,813 $ 280,876 ========= ========= ========= Net Interest Income and Net Interest Margin(1) $ 18,081 5.69% $ 15,811 5.57% $ 13,922 5.57% ======= ======== ======= Net Interest Spread(2) 4.89% 4.71% 4.75% - ------------------------------------------------------------------------------------------------------------------------------- (1) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (2) Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
-23- Analysis of Changes ------------------- in Interest Income and Interest Expense --------------------------------------- (In thousands of dollars) Following is an analysis of changes in interest income and expense (in thousands of dollars) for 1999 over 1998 and 1998 over 1997. Changes not solely due to rate or volume have been allocated proportionately to rate and volume.
1999 Over 1998 1998 Over 1997 -------------------------------------- ------------------------------------- Volume Rate Change Volume Rate Change Increase (Decrease) in Interest Income: Loans & Banker's Acceptances $ 1,933 $ (664) $ 1,269 $ (149) $ (178) $ (327) Investment Securities 772 (113) 659 2,066 (213) 1,853 Federal Funds Sold (27) (111) (138) 88 (22) 66 Loan Fees (182) - (182) 695 - 695 ---------- --------- ---------- ---------- --------- --------- $ 2,496 $ (888) $ 1,608 $ 2,700 $ (413) $ 2,287 ========== ========= ========== ========== ========= ========= Increase (Decrease) in Interest Expense: Deposits: Interest-Bearing Transaction Deposits $ 116 $ (187) $ (71) $ 133 $ (22) $ 111 Savings & MMDAs 295 (184) 111 172 - 172 Time Certificates 36 (725) (689) 311 (207) 104 Borrowed Funds 1 (14) (13) (5) 16 11 ---------- --------- ---------- ---------- --------- --------- $ 448 $ (1,110) $ (662) $ 611 $ (213) $ 398 ========== ========= ========== ========== ========= ========= Increase (Decrease) in Net Interest Income: $ 2,048 $ 222 $ 2,270 $ 2,089 $ (200) $ 1,889 ========== ========= ========== ========== ========= =========
-24- INVESTMENT PORTFOLIO -------------------- Composition of Investment Securities ------------------------------------ The mix of investment securities at December 31, for the previous three fiscal years is as follows (amounts in thousands of dollars):
1999 1998 1997 --------------- -------------- --------------- Investment securities available for sale: U.S. Treasury Securities $ 14,986 28,646 26,614 Securities of U.S. Government Agencies and Corporations 20,867 8,254 4,844 Obligations of State & Political Subdivisions 65,950 66,945 - Mortgage Backed Securities 9,995 9,707 1,032 Other Bonds, Notes and Debentures 23,654 13,997 8,663 Investment securities held to maturity: Obligations of State & Political Subdivisions - - 60,141 --------------- -------------- --------------- Total Investments $ 135,452 127,549 101,294 =============== ============== ===============
Maturities of Investment Securities The following table is a summary of the relative maturities (in thousands of dollars) and yields of the Bank's investment securities as of December 31, 1999. The yields on tax exempt securities are not shown on a tax equivalent basis. Period to Maturity ------------------
After One But After Five But Within One Year Within Five Years Within Ten Years --------------------------- ----------------------------- ----------------------- Security Amount Yield Amount Yield Amount Yield - -------- ------ ----- ------ ----- ------ ----- U.S. Treasury Securities $ 6,510 5.89% $ 8,476 6.06% $ - - Securities of U.S. Government Agencies and Corporations 995 5.64% 15,029 5.94% 4,843 5.92% Obligations of State & Political Subdivisions 4,810 7.00% 21,512 6.85% 26,362 6.05% Mortgage Backed Securities 2,205 5.27% 3,312 6.58% 2,056 6.85% Other Bonds, Notes and Debentures 2,000 6.60% 16,348 6.37% 3,129 7.20% -------------- ---------- --------------- ---------- ------------ -------- TOTAL $ 16,520 6.20% $ 64,677 6.40% $ 36,390 6.18% ============== ========== =============== ========== ============ ======== After Ten Years Total --------------------------- ----------------------------- Security Amount Yield Amount Yield - -------- ------ ----- ------ ----- U.S. Treasury Securities $ - - $ 14,986 5.99% Securities of U.S. Government Agencies and Corporations - - 20,867 5.92% Obligations of State & Political Subdivisions 13,266 5.90% 65,950 6.35% Mortgage Backed Securities 2,422 6.37% 9,995 6.30% Other Bonds, Notes and Debentures 2,177 6.68% 23,654 6.53% -------------- ---------- --------------- ---------- TOTAL $ 17,865 6.06% $ 135,452 6.27% ============== ========== =============== ==========
Securities Exceeding Ten Percent of Stockholders' Equity -------------------------------------------------------- The Bank holds no investment securities of a single issuer which had an aggregate book value which exceeded ten percent of stockholder's equity at December 31, 1999. -25- LOAN PORTFOLIO -------------- Composition of Loans -------------------- The mix of loans, net of deferred origination fees and allowance for loan losses at December 31, for the previous five fiscal years is as follows (amount in thousands of dollars) includes loans held for sale:
December 31, ---------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------- ------------------------------- ----------------------------- Balance Percent Balance Percent Balance Percent -------------- -------------- ------------- -------------- ------------- ------------- Commercial $ 57,799 35.5% $ 42,659 28.1% $ 43,885 34.5% Agricultural 21,951 13.5% 21,709 14.3% 21,612 17.0% Real Estate Mortgage 42,796 26.3% 41,458 27.3% 24,450 19.3% Real Estate Construction 34,235 21.0% 40,059 26.4% 30,628 24.1% Personal 6,150 3.7% 5,774 3.9% 6,429 5.1% -------------- -------------- ------------- -------------- ------------- ------------- TOTAL $ 162,931 100.0% $ 151,659 100.0% $ 127,004 100.0% ============== ============== ============= ============== ============= =============
1996 1995 -------------------------------- ------------------------------- Balance Percent Balance Percent -------------- -------------- ------------- -------------- Commercial $ 68,249 47.1% $ 70,825 47.9% Agricultural 24,453 16.9% 27,599 18.7% Real Estate Mortgage 22,638 15.7% 16,900 11.4% Real Estate Construction 22,979 15.9% 25,890 17.5% Personal 6,311 4.4% 6,726 4.5% -------------- -------------- ------------- -------------- TOTAL $ 144,630 100.0% $ 147,940 100.0% ============== ============== ============= ==============
Commercial loans are primarily for financing the needs of a diverse group of businesses located in the Bank's market area. The Bank also makes loans to individuals for investment purposes. Most of these loans are substantially short-term and secured by various types of collateral. Real estate construction loans are generally for financing the construction of single family residential homes for well-qualified individuals and builders. These loans are secured by real estate and have short maturities. As shown in the comparative figures for loan mix during 1999, the amount of commercial loans and real estate mortgage loans has increased and the amount of real estate construction loans has decreased. Total loans increased in 1998 compared to 1997 as a result of increases in real estate mortgage and real estate construction loans, which were partially offset by decreases in commercial and personal loans. Maturities and Sensitivities of Loans to Changes in Interest Rates ------------------------------------------------------------------ Loan maturities of the loan portfolio at December 31, 1999 are as follows (amounts in thousands of dollars):
Fixed Variable Maturing Rate Rate Total - ---------------------------------------- ---------------- ---------------- ---------------- Within one year $ 6,154 $ 88,740 $ 94,894 After one year through five years 13,400 15,121 28,521 After five years 48,128 - 48,128 ---------------- ---------------- ---------------- Total $ 67,682 $ 103,861 $ 171,543 ================ ================ ================
Nonaccrual, Past Due and Restructured Loans ------------------------------------------- It is the Bank's policy to recognize interest income on an accrual basis. Accrual of interest is suspended when a loan has been in default as to principal or interest for 90 days, unless well secured by collateral believed by management to have a fair market value that at least equals the book value of the loan plus accrued interest receivable and in the process of collection. Real estate acquired through foreclosure is written down to its estimated fair market value at the time of acquisition and is carried as a nonearning asset until sold. Any write-down at the time of acquisition is charged against the allowance for loan losses; subsequent write-downs or gains or losses upon disposition are credited or charged to noninterest income/expense. The Bank has made no foreign loans. The following table shows the aggregate amounts of assets (in thousands of dollars) in each category at December 31, for the years indicated:
1999 1998 1997 1996 1995 -------------- -------------- ------------- ------------- -------------- Nonaccrual Loans $ 528 $ 1,702 $ 2,064 $ 5,085 $ 7,004 90 Days Past Due But Still Accruing 2 330 983 535 42 -------------- -------------- ------------- ------------- -------------- Total Nonperforming Loans 530 2,032 3,047 5,620 7,046 Other Real Estate Owned, Net - 906 1,821 1,698 5,318 -------------- -------------- ------------- ------------- -------------- Total Nonperforming Assets $ 530 $ 2,938 $ 4,868 $ 7,318 $ 12,364 ============== ============== ============= ============= ============== Performing Restructured Loans $ - $ - $ - $ 1,257 $ 1,819 ============== ============== ============= ============= ==============
If interest on nonaccrual loans had been accrued, such income would have approximated $32,000, $133,000, and $199,000 during the years ended December 31, 1999, 1998 and 1997, respectively. Income actually recognized for these loans approximated $50,000, $64,000 and $115,000 for the years ended December 31,1999, 1998 and 1997, respectively. There was a $2,408,000 decrease in nonperforming assets for 1999 over 1998. At December 31, 1999, nonperforming assets included four nonaccrual agricultural loans totaling $451,000 and one nonaccrual commercial loan totaling $77,000. Additional nonperforming assets included one loan past due more than 90 days totaling $2,000. There were no Other Real Estate Owned ("OREO") properties at December 31, 1999. -26- Potential Problem Loans ----------------------- In addition to the nonperforming assets described above, the Bank's Branch Managers each month submit to the Loan Committee of the Board of Directors a report detailing the status of classified loans and those loans that are past due over sixty days. Also included in the report are those loans that are not necessarily past due, but the branch manager is aware of problems with these loans which may result in a loss. In addition, the Monthly Allowance for Loan Loss Analysis Report is prepared based on Problem Loan/Possible Loss Reports, internal loan grading, regulatory classifications and loan review classifications and is reviewed by the Management Loan Committee of the Bank. The report, dated December 31, 1999, was reviewed by the Management Loan Committee of the Bank on February 1, 2000. This report included any nonperforming loan reported in the table on the previous page, if that loan continued to be considered a problem loan or had some potential for loss. A total of twenty-seven loans with an aggregate balance of $5,059,000 was reported. Ten of the twenty-seven loans with an aggregate balance of $690,000 were deemed by management to be fully collectable. Seventeen of the loans totaling $4,369,000 may have some loss potential which management believes is sufficiently covered by the Bank's existing loan loss reserve (Allowance for Loan Losses). The ratio of the Allowance for Loan Losses to total loans at December 31, 1999 was 4.56%. SUMMARY OF LOAN LOSS EXPERIENCE ------------------------------- The Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes credit reviews of the loan portfolio and considers current economic conditions, loan loss experience, and other factors in determining the adequacy of the reserve balance. The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Analysis of the Allowance for Loan Losses ----------------------------------------- (In Thousands of Dollars)
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ------------- Balance at Beginning of Period $ 8,144 $ 7,356 $ 8,403 $ 4,308 $ 2,553 (Recovery of) Provision for Loan Losses (800) 760 2,116 8,332 2,821 Loans Charged-Off: Commercial (106) (635) (2,634) (844) (1,496) Real Estate Mortgage (40) (47) (968) (3,634) (6) Real Estate Construction - - - - - Installment Loans to Individuals (11) (100) (24) (38) (74) ----------- ----------- ----------- ----------- ------------- Total Charged-Off (157) (782) (3,626) (4,516) (1,576) ----------- ----------- ----------- ----------- ------------- Recoveries: Commercial 171 786 127 263 500 Real Estate Mortgage 438 6 330 7 - Real Estate Construction - - - - - Installment Loans to Individuals 29 18 6 9 10 ----------- ----------- ----------- ----------- ------------- Total Recoveries 638 810 463 279 510 ----------- ----------- ----------- ----------- ------------- Net Recoveries (Charge-Offs) 481 28 (3,163) (4,237) (1,066) Balance at End of Period $ 7,825 $ 8,144 $ 7,356 $ 8,403 $ 4,308 =========== =========== =========== =========== ============= Ratio of Net Recoveries (Charge-Offs) During the period to Average Loans Outstanding During the Period 0.30% 0.02% (2.24%) (2.75%) (0.71%) =========== =========== =========== =========== =============
-27- Allocation of the Allowance for Loan Losses ------------------------------------------- The Allowance for Loan Losses (the "Reserve") has been established as a general reserve available to absorb possible future losses throughout the Loan Portfolio. The following table is an allocation of the Reserve balance on the dates indicated (amounts in thousands of dollars):
December 31, 1999 December 31, 1998 December 31, 1997 ----------------- ----------------- ----------------- Allocation of Loans as a % Allocation of Loans as a % Allocation of Loans as a % Reserve Balance of Total Loans Reserve Balance of Total Loans Reserve Balance of Total Loans ------------------------------- ---------------- --------------- ---------------- ------------ Loan Type: Commercial $ 3,233 48.95% $ 3,697 42.45% $ 3,418 51.56% Real Estate Mortgage 3,272 26.27% 3,083 27.33% 2,695 19.25% Real Estate Construction - 21.01% - 26.41% - 24.12% Installment 146 3.69% 142 3.61% 140 4.79% Other Loans - 0.08% - 0.20% - 0.28% Unallocated 1,174 - 1,222 - 1,103 - -------- ----------- --------- ---------- -------- ---------- Total $ 7,825 100.00% $ 8,144 100.00% $ 7,356 100.00% ======== =========== ========= ========== ======== ==========
December 31, 1996 December 31, 1995 ----------------- ----------------- Allocation of Loans as a % Allocation of Loans as a % Reserve Balance of Total Loans Reserve Balance of Total Loans ------------------------------ ---------------- -------------- Loan Type: Commercial $ 3,356 64.10% $ 3,262 66.53% Real Estate Mortgage 3,474 15.65% 56 11.42% Real Estate Construction - 15.89% 4 17.50% Installment 313 4.23% 340 4.39% Other Loans - 0.13% - 0.16% Unallocated 1,260 - 646 - -------- ----------- --------- --------- Total $ 8,403 100.00% $ 4,308 100.00% ======== =========== ========= =========
The Bank believes that any breakdown or allocation of the Reserve into loan categories lends an appearance of exactness which does not exist, because the Reserve is available for all loans. The Reserve breakdown shown above is computed taking actual experience into consideration but should not be interpreted as an indication of the specific amount of actual charge-offs that may ultimately occur. -28- DEPOSITS -------- The following table sets forth the average amount and the average rate paid on each of the listed deposit categories (amounts in thousands of dollars):
1999 1998 1997 ------------------------- ------------------------- -------------------------- Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------------ ----------- ----------- ---------- ----------- ----------- Deposit Type: Noninterest-Bearing Demand $ 77,663 - $ 64,957 - $ 52,290 - Interest-Bearing Demand (NOW) $ 35,620 1.48% $ 31,259 1.91% $ 24,133 2.01% Savings and MMDAs $ 93,058 2.52% $ 78,816 2.84% $ 75,592 2.84% Time $ 109,581 4.49% $ 108,873 5.15% $ 102,315 5.38%
The following table sets forth by time remaining to maturity the Bank's time deposits in the amount of $100,000 or more (in thousands of dollars) as of December 31, 1999: 1999 ----------- Three months or less $ 21,663 Over three months through twelve months 19,872 Over twelve months 1,691 ----------- Total $ 43,226 =========== RETURN ON EQUITY AND ASSETS --------------------------- The following table shows key financial ratios for the years indicated:
1999 1998 1997 1996 1995 ---------- ---------- ---------- ----------- ----------- Return on Average Total Assets 1.16% 0.96% 0.62% (1.05%) 0.76% Return on Average Shareholders' Equity 12.83% 10.49% 6.70% (9.71%) 6.96% Dividend Payout Ratio - - - - - Average Equity to Average Total Assets 9.08% 9.18% 9.18% 10.78% 10.87% - --------------------------------------------------------------------------------------------------------------------------------- 1. No Cash Dividends Paid
SHORT-TERM BORROWINGS --------------------- The Bank had no short-term borrowings at December 31, 1999. -29- Results of Operations --------------------- Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net income for the year ended December 31, 1999, was $4,083,000, representing an increase of $1,082,000, or 36% over net income of $3,001,000 for the year ended December 31, 1998. The increase in net income is principally attributable to a $2,270,100 increase in net interest income and a $1,560,000 decrease in the provision for loan losses, which increases were partially offset by a $896,000 increase in salaries and employee benefits expenses, a $340,000 increase in occupancy and equipment expenses and a $666,000 increase in other expense. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net income for the year ended December 31, 1998, was $3,001,000, representing an increase of $1,271,000, or 57% over net income of $1,730,000 for the year ended December 31, 1997. The increase in net income is principally attributable to a $1,889,000 increase in net interest income and a $1,356,000 decrease in the provision for loan losses, which increases were partially offset by a $1,431,000 increase in salaries and employee benefits expenses and a $178,000 increase in occupancy and equipment expenses. Net Interest Income ------------------- Net interest income is the excess of interest and fees earned on the Bank's loans, investment securities, federal funds sold and banker's acceptances over the interest expense paid on deposits, mortgage notes and other borrowed funds. It is primarily affected by the yields on the Bank's interest-earning assets and loan fees and interest-bearing liabilities outstanding during the period. The $2,270,000 increase in the Bank's net interest income in 1999 from 1998, and the $1,889,000 increase in 1998 from 1997 were due to the combined effects of rates, volume and mix of loans and deposits. The "Analysis of Changes in Interest Income and Interest Expense" set forth on Page 24 of this Annual Report on Form 10-K identifies the effects of rate and volume. Another significant factor that contributed to the increase in net interest income was the earning asset to total asset ratio. This ratio was 90.6% in 1999, 91.0% in 1998 and 89.1% in 1997. Interest income on loans (including loan fees) was $16,719,000 for 1999, representing an increase of approximately $1,087,000, or 7.0% from $15,632,000 for 1998. This compared to an increase in 1998 of approximately $368,000 or 2.4% more than loan interest income earned in 1997. The increased interest income on loans in 1999 over 1998 was the result of a decrease of approximately $182,000 in loan fees, which was partially offset by a 15.62% increase in loan volume and a .52% decrease in loan interest rates. As noted, loan fee comparisons were impacted by a net increase in deferred loan fees of $37,000 in 1998 and a net increase in deferred loan fees of $204,000 in 1999. Average outstanding federal funds sold fluctuated slightly during this period, ranging from $29,033,000 in 1997 to $30,719,000 in 1998 and $30,198,000 in 1999 (at year end 1999 federal funds sold were $37,300,000). Federal funds are used primarily as a short term investment to provide liquidity for funding of loan commitments or to accommodate seasonal deposit fluctuations. Interest rates on federal funds sold in 1999 generally provided lower yields, compared to investment securities rates, than in 1998. This rate spread between federal funds and investment securities went from (1.07%) in 1997 to (0.87%) in 1998 and to (1.14%) in 1999. The average total level of investment securities increased $12,588,000 from 1998 to 1999 with increases in all categories. The level of securities interest income attributable to investment securities increased from $7,041,000 for 1998 to $7,700,000 for 1999, primarily because of the larger volume of investments. The Bank's strategy for this period has emphasized the use of the investment portfolio to maintain the Bank's overall level of income in an expected environment of stable to increasing loan demand. The Bank continues to reinvest maturing securities to provide future liquidity and to attempt to maximize the rate of return considering the current yield curve. The average total level of investment securities increased $33,531,000 from 1997 to 1998, with increases in all categories. The level of securities interest income attributable to investment securities increased from $5,188,000 for 1997 to $7,041,000 for 1998, primarily because of the larger volume of investments. -30- Total interest expense decreased from $8,498,000 in 1998 to $7,836,000 in 1999, and increased to $8,498,000 in 1998 from $8,100,000 in 1997, representing a 7.8% decrease in 1999 over 1998 and a 5.0% increase in 1998 over 1997. The decrease in total interest expense from 1998 to 1999 is primarily due to a decrease in interest rates in 1999, which was partially offset by an increase in deposits. The increase in total interest expense from 1997 to 1998 was primarily due to an increase in deposits in 1998, which was partially offset by a decrease in interest rates paid on deposits. Changes in interest expense resulted primarily from changes in rates and volume of total deposits, and changes in the mix of deposits. The mix of deposits for the previous three years is as follows (amounts are in thousands of dollars):
1999 1998 1997 ------------------------- --------------------------- -------------------------- Average Average Average Balance Percent Balance Percent Balance Percent ----------- ---------- ----------- ---------- ----------- --------- Noninterest-Bearing Demand $ 77,663 24.5% $ 64,957 22.9% $ 52,920 21.0% Interest-Bearing Demand (NOW) 35,620 11.3% 31,259 11.0% 24,133 9.6% Savings and MMDAs 93,058 29.5% 78,816 27.8% 72,592 28.8% Time 109,581 34.7% 108,873 38.3% 102,315 40.6% ----------- ---------- ----------- ---------- ----------- --------- Total $ 315,922 100.0% $ 283,905 100.0% $ 251,960 100.0% =========== ========== =========== ========== =========== ========= ===================================================================================================================================
The period from 1997 to 1999 has been characterized by fluctuating interest rates. Loan rates and deposit rates both increased in 1997, while loan rates and deposit rates both decreased in 1998 and 1999. The net spread between the rate for total earning assets and the rate for total deposits and borrowed funds decreased 4 basis points in the period from 1997 to 1998 and increased 18 basis points in the period from 1998 to 1999. The Bank's net interest margin (net interest income divided by average earning assets) was 5.69% in 1999, 5.57% in 1998 and 5.57% in 1997. Provision for Loan Losses ------------------------- The provision for loan losses is established by charges to earnings based on management's overall evaluation of the collectibility of the loan portfolio. Based on this evaluation the provision for loan losses was adjusted in 1999. The provision for loan losses decreased from $760,000 in 1998 to ($800,000) in 1999, primarily as a result of an adjustment made because of improved market conditions and loan quality in the Bank's loan portfolio. The amount of loans charged-off decreased in 1999 to $157,000 from $782,000 in 1998 and recoveries decreased to $638,000 in 1999 from $810,000 in 1998. The ratio of the allowance for loan losses to total loans at December 31, 1999 was 4.56%. The ratio of the allowance for loan losses to total nonaccrual loans and loans past due 90 days or more at December 31, 1999 was 1,476.4% compared to 400.8% at December 31, 1998. The provision for loan losses decreased from $2,115,000 in 1997 to $760,000 in 1998, primarily as a result of decreased problem assets. The amount of loans charged-off decreased in 1998 to $782,000 from $3,626,000 in 1997, and recoveries increased to $810,000 in 1998 from $463,000 in 1997. The ratio of the allowance for loan losses to total loans at December 31, 1998 was 5.08%. The ratio of the allowance for loan losses to total nonaccrual loans and loans past due 90 days or more at December 31, 1998 was 400.8% compared to 241.4% at December 31, 1997. Other Income and Expenses ------------------------- Other income consisted primarily of service charges on deposit accounts. Service charges on deposit accounts increased $59,000 in 1999 over 1998, and decreased $96,000 in 1998 over 1997. The decrease in 1998 was due, for the most part, to decreased nonsufficient funds and overdraft fees. The Bank sold investment securities at gains of $62,000 in 1999, $49,000 in 1998, and $13,000 in 1997. -31- Other operating expenses consist of salaries and employee benefits, occupancy and equipment expense and other operating expenses. Other operating expenses increased from $12,797,000 in 1998 to $14,641,000 in 1999, and increased from $11,369,000 in 1997 to $12,797,000 in 1998, representing an increase of $1,844,000, or 14.4% in 1999 over 1998, and an increase of $1,428,000, or 12.6% in 1998 over 1997. As detailed below, the increases in other operating expenses from 1998 to 1999 was primarily attributable to a combination of increases in salaries and employee benefits; occupancy and equipment; and other miscellaneous expenses. The increase in other operating expenses from 1997 to 1998 was primarily the result of the opening of the Woodland Branch and the SBA Department. Following is an analysis of the increase or decrease in the components of other operating expenses (amounts are in thousands of dollars):
1999 over 1998 1998 over 1997 ------------------------------- --------------------------------- Amount Percent Amount Percent ---------- ----------- ---------- ----------- Salaries and Employee Benefits $ 896 11.7% $ 1,431 23.0% Occupancy and Equipment 341 17.1% 178 9.8% Data Processing 88 25.1% 51 17.1% Stationery and Supplies 29 8.9% 12 3.8% Advertising (90) (24.5%) 73 24.7% Directors Fees (7) (5.9%) (13) (9.8%) Other Real Estate Owned (78) (100.0%) (113) (59.2%) Other Expense 665 35.2% (191) (9.2%) ---------- ----------- ---------- ----------- Total 1,844 14.4% 1,428 12.6% ========== =========== ========== ===========
In 1999, salaries and employee benefits increased $896,000 to $8,562,000 from $7,666,000 for 1998. This increase was due, for the most part, to increases in number of employees, commissions paid for real estate loans and increases in profit sharing distributions and incentive compensation. Occupancy and equipment expense increased $341,000 to $2,341,000 in 1999 from $2,000,000 for 1998. This increase was due to charges to depreciation for obsolete computer hardware and software. The increases in other miscellaneous expenses were due to increased consulting fees, in-house training and a credit to miscellaneous expense, in 1998, to reverse items expensed in 1996 for litigation contingencies. In 1998, salaries and employee benefits increased $1,431,000 to $7,666,000 from $6,235,000 for 1997. This increase was due, for the most part, to the opening of the Woodland Branch and the SBA department during the second half of 1997 and increased real estate mortgage referral fees, profit sharing distributions and incentive compensation. Occupancy and equipment expense increased $178,000 to $2,000,000 in 1998 from $1,822,000 for 1997. This increase was also due to the opening of the Woodland Branch and the SBA Department during the second half of 1997. Also, in 1998, other real estate owned (OREO) expense decreased $113,000 to $78,000 from $191,000 for in 1997. This decrease was due, for the most part, to decreases in OREO properties. OREO reserves totaled $-0- and $1,930,000 at December 31, 1998 and 1997, respectively. Other expenses decreased $203,000 to $1,779,000 in 1998, from $1,983,000 for 1997. This decrease was primarily due to a reduction in legal expenses. -32- Income Taxes ------------ The provision for income taxes is primarily affected by the tax rate, the level of earnings before taxes and the amount of tax shelter provided by nontaxable earnings. In 1999, taxes increased $896,000 to $2,121,000 from $1,225,000 for 1998. In 1998, taxes increased $799,000 to $1,225,000 from 426,000 for 1997. The effective tax rate was 34%, 29% and 20% for the years ended December 31, 1999, 1998 and 1997, respectively. Nontaxable municipal bond income was $1,447,000, $1,689,000 and $1,533,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Liquidity and Capital Resources ------------------------------- The Bank needs to maintain appropriate liquidity and adequate capital. Liquidity is measured by various ratios, the most common of which is the ratio of loans to deposits. This ratio was 48.5% on December 31, 1999, 49.0% on December 31, 1998, and 46.0% on December 31, 1997. As discussed in Part 1(Item 1) of this Annual Report of Form 10-K, the Bank does experience seasonal swings in deposits which impact liquidity. Management has adjusted to this seasonal swing by scheduling investment maturities and developing seasonal credit arrangements with the Federal Reserve Bank and Federal Fund lines of credit with correspondent banks. In addition, the ability of the Bank's real estate department to originate and sell loans into the secondary market has provided another tool for the management of liquidity. The capital of the Bank historically has been maintained at a level that is in excess of regulatory guidelines. The policy of annual stock dividends has allowed the Bank to, over time, match capital and asset growth through retained earnings and a managed program of geographic growth. Year 2000 Compliance -------------------- The Bank previously recognized the material nature of the business issues surrounding computer processing of dates into and beyond the Year 2000 and began taking corrective action as required pursuant to the interagency statements issued by the Financial Institutions Examination Council. Management believes the Bank has completed all of the activities within their control to ensure that the Bank's systems are Year 2000 compliant. The Bank's Year 2000 readiness costs were approximately $400,000. The Bank does not currently expect to apply any further funds to address Year 2000 issues. The Bank has not experienced any material disruptions of internal computer systems for software applications due to the start of the Year 2000 nor has it experienced any problems with the computer systems or software applications of their third party vendors, suppliers or service providers. The Bank will continue to monitor these third parties to determine the impact, if any, on the business of the Bank and the actions either must take, if any, in the event of non-compliance by any of these third parties. Based on the Bank's assessment of compliance by third parties there does not appear to be any material business risk posed by any such non-compliance. Although the Bank's Year 2000 rollover did not present any material business disruption, there are some remaining Year 2000 related risks. Management believes that appropriate actions have been taken to address these remaining Year 2000 issues and contingency plans are in place to minimize the financial impact to the Bank. Management, however, cannot be certain that Year 2000 issues affecting customers, suppliers or service providers of the Bank will not have a material adverse impact on the Bank. -33-
Financial Statements and Financial Statement Schedules Filed: Independent Auditor's Report Page 35 Balance Sheets as of December 31, 1999 and Page 36 Statements of Operations for years ended December 31, 1999, 1998, and Page 37 Statements of Stockholders' Equity and Comprehensive Income for years ended December 31, 1999, 1998, and 1997 Page 38 Statements of Cash Flows for years ended December 31, 1999, 1998, and 1997 Page 39 Notes to Financial Statements Page 40-60
Schedules not included: Schedule I - Securities: See Investment Portfolio (page 25) Schedule II - Loans to Officers, Directors, Principal Security Holders, and any Associates of the Foregoing Persons: See Note 9 of Notes to Financial Statements (page Schedule III - Loans: See Note 4 of Notes to Financial Statements (page 46). Schedule IV - Bank Premises and Equipment: See Note 5 of Notes to Financial Statements (page 47) Schedule V - Investments in, Income From Dividends, and Equity in Earnings or Losses of Subsidiaries and Associated Companies: Not Applicable Schedule VI - Allowance for Possible Loan Losses: See Note 4 of Notes to Financial Statements (page 47). -34- LOGO 400 Capitol Mail Telephone 916 448 4700 Sacramento, CA 95814 Fax 916 554 1199 Independent Auditors' Report The Board of Directors First Northern Bank of Dixon: We have audited the accompanying balance sheets of First Northern Bank of Dixon as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Northern Bank of Dixon as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP January 21, 2000 -35- LOGO FIRST NORTHERN BANK OF DIXON Balance Sheets December 31, 1999 and 1998
Assets 1999 1998 ----------------------- ------------------------ Cash and due from banks $ 19,806,022 23,784,700 Federal funds sold 37,300,000 25,400,000 Investment securities - available for sale 135,451,683 127,549,279 Loans, net 152,273,772 122,637,549 Loans held for sale 10,656,803 29,020,827 Premises and equipment, net 6,031,711 6,373,621 Other assets 9,470,615 8,542,799 ----------------------- ------------------------ Total assets $ 370,990,606 343,308,775 ======================= ======================== Liabilities and Stockholders' Equity Deposits: Demand $ 86,123,941 77,214,242 Interest-bearing transaction deposits 36,284,409 36,393,544 Savings and MMDAs 102,517,387 85,786,486 Time, under $100,000 67,478,374 68,462,027 Time, $100,000 and over 43,225,823 41,446,791 ----------------------- ------------------------ Total deposits 335,629,934 309,303,090 Accrued interest payable and other liabilities 3,287,969 2,222,023 ----------------------- ------------------------ Total liabilities 338,917,903 311,525,113 ----------------------- ------------------------ Stockholders' Equity: Common stock, no par value; 8,000,000 shares authorized; 3,092,273 shares issued and outstanding in 1999; 2,943,874 shares issued and outstanding in 1998 23,322,001 21,260,388 Additional paid-in capital 976,850 976,850 Retained earnings 9,513,151 7,490,878 Accumulated other comprehensive (loss) income, net (1,739,299) 2,055,546 ----------------------- ------------------------ Total stockholders' equity 32,072,703 31,783,662 ----------------------- ------------------------ Commitments and contingencies Total liabilities and stockholders' equity $ 370,990,606 343,308,775 ======================= ========================
See accompanying notes to financial statements. -36- FIRST NORTHERN BANK OF DIXON Statements of Operations Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ----------------- ------------------ ------------------ Interest income: Interest and fees on loans $ 16,719,346 15,631,647 15,264,220 Federal funds sold 1,497,961 1,635,539 1,570,062 Investment securities: Taxable 6,252,576 5,352,643 3,654,975 Nontaxable 1,446,919 1,688,825 1,532,552 ----------------- ------------------ ------------------ Total interest income 25,916,802 24,308,654 22,021,809 Interest expense: Time deposits $100,000 and over 2,146,492 2,301,017 2,141,673 Other deposits 5,641,060 6,135,881 5,908,977 Other borrowings 48,174 60,829 49,633 ----------------- ------------------ ------------------ Total interest expense 7,835,726 8,497,727 8,100,283 ----------------- ------------------ ------------------ Net interest income 18,081,076 15,810,927 13,921,526 Provision for (recovery of) loan losses (800,000) 760,000 2,115,500 ----------------- ------------------ ------------------ Net interest income after provision for (recovery of) loan losses 18,881,076 15,050,927 11,806,026 Other operating income: Service charges on deposit accounts 1,154,148 1,094,758 1,190,798 Net realized gains on held-to-maturity securities -- 73,355 13,300 Net realized gains (losses) on available-for-sale securities 61,533 (24,056) -- Other income 748,316 827,908 514,691 ----------------- ------------------ ------------------ Total other operating income 1,963,997 1,971,965 1,718,789 ----------------- ------------------ ------------------ Other operating expenses: Salaries and employee benefits 8,561,921 7,666,086 6,234,743 Occupancy and equipment 2,340,653 2,000,316 1,821,941 Data processing 438,379 350,112 298,542 Stationery and supplies 355,907 326,573 314,577 Advertising 277,756 368,480 295,423 Directors fees 111,800 119,200 131,800 Other real estate owned -- 77,717 191,160 Other 2,554,229 1,888,701 2,080,816 ----------------- ------------------ ------------------ Total other operating expenses 14,640,645 12,797,185 11,369,002 ----------------- ------------------ ------------------ Income before income tax expense 6,204,428 4,225,707 2,155,813 Provision for income tax expense 2,121,443 1,224,864 426,144 ----------------- ------------------ ------------------ Net income $ 4,082,985 3,000,843 1,729,669 ================= ================== ================== Basic income per share $ 1.25 0.92 0.53 ================= ================== ================== Diluted income per share $ 1.24 0.91 0.53 ================= ================== ==================
See accompanying notes to financial statements. -37- FIRST NORTHERN BANK OF DIXON Statements of Stockholders' Equity and Comprehensive Income Years Ended December 31, 1999, 1998 and 1997
Accumulated Additional Other Common Stock Comprehensive Paid-in Retained Comprehensive Description Shares Amounts Income Capital Earnings (Loss)Income Total ----------- ----------- ----------- ------------ ----------- ----------- ---------------------- Balance at December 31, 1996 2,688,474 $ 17,848,671 976,850 6,079,140 68,252 24,972,913 Comprehensive income: Net income $ 1,729,669 1,729,669 1,729,669 ------------ Other comprehensive income: Unrealized holding gains arising during the current period, net of tax effect of $92,039 138,057 ------------ Total other comprehensive income 138,057 138,057 138,057 ------------ Comprehensive income $ 1,867,726 ============ 4% stock dividend 106,790 1,281,480 (1,281,480) -- Stock options exercised 1,200 14,700 14,700 Cash in lieu of fractional shares (8,987) (8,987) --------- ----------- ----------- ----------- ----------- ---------- Balance at December 31, 1997 2,796,464 19,144,851 976,850 6,518,342 206,309 26,846,352 Comprehensive income: Net income $ 3,000,843 3,000,843 3,000,843 ------------ Other comprehensive income: Unrealized holding gains arising during the current period, net of tax effect of $1,223,203 1,834,803 Reclassification adjustment due to losses realized, net of tax effect of $9,622 14,434 ------------ Total other comprehensive income, net of tax effect of $1,232,825 1,849,237 1,849,237 1,849,237 ------------ Comprehensive income $ 4,850,080 ============ 5% stock dividend 139,122 2,017,269 (2,017,269) -- Cash in lieu of fractional shares (11,038) (11,038) Stock options exercised 1,200 14,700 14,700 Common shares issued 7,088 83,568 83,568 ----------- ----------- ----------- ----------- ----------- ---------- Balance at December 31, 1998 2,943,874 21,260,388 976,850 7,490,878 2,055,546 31,783,662 Comprehensive income: Net income $ 4,082,985 4,082,985 4,082,985 ------------ Other comprehensive income: Unrealized holding losses arising during the current period, net of tax effect of $2,505,283 (3,757,925) Reclassification adjustment due to gains realized, net of tax effect of $24,613 (36,920) ------------ Total other comprehensive income, net of tax effect of $2,529,896 (3,794,845) (3,794,845) (3,794,845) ------------ Comprehensive income $ 288,140 ============ 5% stock dividend 146,820 2,055,480 (2,055,480) -- Cash in lieu of fractional shares (5,232) (5,232) Common shares issued 7,725 89,104 89,104 Stock repurchase and retirement (6,146) (82,971) (82,971) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1999 3,092,273 $ 23,322,001 976,850 9,513,151 (1,739,299) 32,072,703 =========== =========== =========== =========== =========== ==========
-38- FIRST NORTHERN BANK OF DIXON Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------------ ------------------ --------------- Cash flows from operating activities: Net income $ 4,082,985 3,000,843 1,729,669 Adjustments to reconcile net income to net cash provided by operating activities: Provision for (recovery of) loan losses (800,000) 760,000 2,115,500 Depreciation 1,085,770 863,978 777,390 Accretion and amortization, net 291,654 317,987 48,231 Net realized gains on held-to-maturity securities -- (73,355) (13,300) Net realized (gains) losses on available-for-sale securities (61,533) 24,056 -- Gain on sale of OREO (90,878) (180,594) -- Provision for deferred income taxes 601,306 436,897 521,033 Proceeds from sales of loans held for sale 54,550,621 45,519,795 30,409,688 Originations and purchases of loans held for sale (65,409,597) (65,453,411) (36,196,899) Increase in deferred loan origination fees 204,054 36,623 11,652 (Increase) decrease in accrued interest receivable and other assets 95,140 (423,372) 1,466,040 (Decrease) increase in accrued interest payable and other liabilities 1,065,946 (1,037,392) 569,014 ------------------ ------------------ --------------- Net cash provided by operating activities (4,384,532) (16,207,945) 1,438,018 ------------------ ------------------ --------------- Cash flows from investing activities: Proceeds from maturities of available for sale securities 19,289,989 13,587,080 11,580,000 Proceeds from sales of available for sale securities 7,103,751 -- -- Purchase of available for sale securities (40,851,006) (36,324,461) (24,272,805) Proceeds from maturities of held-to-maturity securities -- 5,130,535 4,029,901 Purchase of held-to-maturity securities -- (5,834,931) (25,598,009) Net (increase) decrease in loans 182,723 (6,711,726) 19,823,989 Purchases of bank premises and equipment, net (743,860) (912,261) (551,683) Proceeds from sale of other real estate owned 996,512 2,290,536 1,339,021 ------------------ ------------------ --------------- Net cash used in investing activities (14,021,891) (28,775,228) (13,649,586) ------------------ ------------------ --------------- Cash flows from financing activities: Net increase in deposits 26,326,844 33,473,228 38,872,490 Cash dividends paid in lieu of fractional shares (5,232) (11,038) (8,987) Common stock issued 89,104 98,268 14,700 Repurchase of common stock (82,971) -- -- ------------------ ------------------ --------------- Net cash provided by financing activities 26,327,745 33,560,458 38,878,203 ------------------ ------------------ --------------- Net change in cash and cash equivalents 7,921,322 (11,422,715) 26,666,635 Cash and cash equivalents at beginning of year 49,184,700 60,607,415 33,940,780 ------------------ ------------------ --------------- Cash and cash equivalents at end of year $ 57,106,022 49,184,700 60,607,415 ================== ================== ===============
See accompanying notes to financial statements. -39- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (1) Summary of Accounting Policies First Northern Bank of Dixon (the Bank) is a California state chartered bank. The accounting and reporting policies of the Bank conform with generally accepted accounting principles and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from those estimates applied in the preparation of the accompanying financial statements. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. (a) Cash Equivalents For purposes of the statement of cash flows, the Bank considers due from banks, federal funds sold for one-day periods and short-term bankers acceptances to be cash equivalents. (b) Investment Securities Investment securities consist of U.S. Treasury securities, U.S. Agency securities, obligations of states and political subdivisions, obligations of U.S. Corporations, mortgage backed securities and other securities. At the time of purchase of a security the Bank designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs and intent to hold. The Bank does not purchase securities with the intent to engage in trading activity. Held-to-maturity securities are recorded at amortized cost, adjusted for amortization or accretion of premiums or discounts. Available- for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect, reported as a separate component of stockholders' equity until realized. A decline in the market value of any available-for-sale or held-to- maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security. No such declines have occurred. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to- maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Bank adopted Statement of Financial Accounting Standards (SFAS) No.133, "Accounting for Derivative Instruments and Hedging Activity," effective October 1, 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, inch ding certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Bank does not hold any derivatives at December 31, 1999. Under SFAS No. 133, a one-time transfer of held-to-maturity securities to available-for-sale or held-for-sale is permitted. During the year ended December 31, 1998, the Bank transferred $60,890,726 of held-to-maturity securities to available-for-sale and as a result recorded a cumulative increase of $2,853,904 in unrealized gains, which is a component of accumulated other comprehensive income. -40- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31,1999, 1998 and 1997 (c) Loans Loans are reported at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. An impaired loan is measured based upon the present value of future cash flows discounted at the loan's effective rate, the loan's observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan loss. Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield are deferred and amortized over the contractual term of the loan using the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Restructured loans are loans on which concessions in terms have been granted because of the borrowers' financial difficulties. Interest is generally accrued on such loans in accordance with the new terms. (d) Loans Held for Sale Loans originated and held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. (e) Allowance for Loan Losses The allowance for loan losses is established through a provision charged to expense. Loans are charged off against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans, standby letters of credit, overdrafts and commitments to extend credit based on evaluations of collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current and anticipated economic conditions that may affect the borrowers' ability to pay. While management uses these evaluations to recognize the provision for loan losses, future provisions may be necessary based on changes in the factors used in the evaluations. Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, the Federal Deposit Insurance Corporation (FDIC), as an integral part of its examination process, periodically reviews the Bank's allowance for loan losses. The FDIC may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. -41- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (f) Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed substantially by the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the estimated useful lives of the improvements or the terms of the related leases, whichever is shorter. The useful lives used in computing deprecation are as follows: Buildings and improvements 15 to 50 years Furniture and equipment 3 to 10 years (g) Other Real Estate Owned Other real estate acquired by foreclosure, is carried at the lower of the recorded investment in the property or its fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Fair value of other real estate owned is generally determined based on an appraisal of the property. Any subsequent operating expenses or income, reduction in estimated values and gains or losses on disposition of such properties are included in other operating expenses. Revenue recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, revenue recognition may be deferred until these criteria are met. (h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) Gain or Loss on Sale of Loans and Servicing Rights Servicing assets and other retained interests in transferred assets are measured by allocating the previous carrying amount of the transferred assets between the assets sold, if any and retained interests, if any, based on their relative fair value at the date of transfer. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or loss and assessed for asset impairment or increased obligation based on fair value. Fair values are estimated using discounted cash flows based on a current market interest rate. The Bank recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. In accordance with SFAS No. 125, the fair value of the servicing assets is estimated based upon the present value of the estimated expected future cash flows. The Bank measures the impairment of the servicing asset based on the difference between the carrying amount of the servicing asset and its current fair value. As of December 31, 1999 and 1998, there was no impairment in mortgage servicing asset. A sale is recognized when the transaction closes and the proceeds are other than beneficial interest in the assets sold. A gain or loss is recognized to the extent that the sales proceeds and the fair value of the servicing asset exceed or are less than the book value of the loan. Additionally, a normal cost for servicing the loan is considered in the determination of the gain or loss. When servicing rights are sold, a gain or loss is recognized at the closing date to the extent that the sales proceeds, less costs to complete the sale, exceed or are less than the carrying value of the servicing rights held. -42- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (j) Income Taxes The Bank accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Stock Option Plan The Bank accounts for stock-based compensation using the intrinsic value method, under which compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. (l) Earnings Per Share (EPS) Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. (m) Comprehensive Income Components of comprehensive income are net income and all other non-owner changes in equity. The Bank has chosen to disclose comprehensive income in the statement of stockholders' equity and comprehensive income, in which the components of comprehensive income are displayed net of income taxes. (n) Year 2000 For the year ended December 31, 1999, the Bank bad expended $175,000 on the Year 2000 project which included $74,000 of staff salaries that were shifted to Year 2000 project, $69,000 for system upgrades or replacements, $16,000 for customer communications, and $16,000 for lawyer and consultant fees and other miscellaneous costs. (2) Cash and Due From Banks The Bank is required to maintain reserves with the Federal Reserve Bank based on a percentage of deposit liabilities. Aggregate reserves of $0 and $6,767,000 were required at December 31, 1999 and 1998, respectively. The Bank has met its average reserve requirements during 1999 and 1998 and the minimum required balance at December 31, 1999 and 1998. -43- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (3) Investment Securities The amortized cost and estimated market values of investments in debt and equity securities at December 31, 1999 are summarized as follows:
Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------------ ------------------ ------------- ------------- Investment securities available for sale: U.S. Treasury securities $ 15,007,037 29,708 (50,895) 14,985,850 Securities of U.S. government agencies and corporations 21,529,693 - (662,663) 20,867,030 Obligations of U.S. corporations 22,008,003 4,366 (535,027) 21,477,342 Obligations of states and political subdivisions 67,460,149 466,866 (1,976,821) 65,950,194 Mortgage backed securities 10,168,828 125 (174,486) 9,994,467 ------------------ ------------------ ------------- ------------- Total debt securities 136,173,710 501,065 (3,399,892) 133,274,883 Other securities 2,176,800 - 2,176,800 ------------------ ------------------ ------------- ------------- $ 138,350,510 501,065 (3,399,892) 135,451,683 ================== ================== ============= ==============
During the year ended December 31, 1999, the Bank became a member of the Federal Home Loan Bank (FHLB). To become a member, the Bank had to purchase FHLB stock which is carried at cost and had a balance of $1,066,800 as of December 31, 1999. -44- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (3) Investment Securities The amortized cost and estimated market values of investments in debt securities at December 31, 1998 are summarized as follows:
Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------------- --------------- ----------- ---------------- Investment securities available for sale: U.S. Treasury securities $ 28,103,062 542,943 - 28,646,005 Securities of U.S. government agencies and corporations 8,183,401 70,473 - 8,253,874 Obligations of U.S. corporations 12,698,444 241,899 (2,778) 12,937,565 Obligations of states and political subdivisions 64,322,726 2,696,813 (75,003) 66,944,536 Mortgage backed securities 9,755,732 18,857 (67,290) 9,707,299 -------------------- --------------- ----------- ---------------- Total debt securities 123,063,365 3,570,985 (145,071) 126,489,279 Other securities 1,060,000 - - 1,060,000 -------------------- --------------- ----------- ---------------- $ 124,123,365 3,570,985 (145,071) 127,549,279 ==================== =============== =========== ================
The amortized cost and estimated market value of debt securities at December 31, 1999 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Market Cost Value --------------------- ------------------- Due in one year or less $ 16,517,106 16,519,844 Due after one year through five years 65,525,353 64,676,453 Due five years through ten years 37,604,005 36,390,057 Due after ten years 18,704,046 17,865,329 --------------------- ------------------ Total debt and equity securities $ 138,350,510 135,451,683 ===================== ==================
Investment securities carried at $17,464,268 and $13,655,752 at December 31, 1999 and 1998, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law. -45- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (4) Loans The composition of the Bank's loan portfolio at December 31, is as follows: 1999 1998 --------------- ---------------- Commercial 83,970,454 68,069,088 Real estate: Mortgage 34,404,344 14,818,975 Construction 36,044,291 42,363,493 Installment 6,327,989 5,794,366 Other loans 139,182 319,256 --------------- ---------------- 160,886,260 131,365,178 Allowance for loan losses (7,825,255) (8,144,450) Net deferred origination fees (787,233) (583,179) --------------- ---------------- Loans, net $ 152,273,772 122,637,549 =============== ================ The Bank's customers are primarily located in Solano and Yolo Counties. As of December 31, 1999, approximately 22% of the Bank's loans are for real estate construction. Additionally 21% of the Bank's loans are mortgage type loans which are secured by both commercial and residential real estate. Approximately 52% of the Bank's loans are for general commercial uses including professional, retail, agricultural and small businesses. Generally, real estate loans are secured by real and commercial property and other loans are secured by funds on deposit, business or personal assets. Repayment is generally expected from the proceeds of the sales of property for real estate construction loans, and from cash flows of the borrower for other loans. The Bank's access to this collateral is through foreclosure and/or judicial procedures. The Bank's exposure to credit loss if the real estate or other security proved to be of no value is the outstanding loan balance. Loans which were sold and were being serviced by the Bank totaled approximately $54,550,621 and $45,519,795 at December 31,1999 and 1998, respectively. The Bank's servicing assets related to sold loans were immaterial at December 31, 1999 and 1998. Effective July 1, and October 1, 1999, the Bank transferred $25,567,000 and $3,656,000, respectively, held for sale portfolio to their loans held to maturity portfolio. Nonaccrual loans totaled approximately $528,000, $1,702,000 and $2,064,000 at December 31, 1999, 1998 and 1997, respectively. If interest on these nonaccrual loans had been accrued, such income would have approximated $32,000, $133,000 and $199,000 during the years ended December 31, 1999, 1998 and 1997, respectively. The Bank did not restructure any loans in 1999 or 1998. -46- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due. Impaired loans totaled approximately $528,000 and $1,702,000 at December 31, 1999 and 1998, respectively, and had valuation allowances of $141,000 and $347,000 at December 31, 1999 and 1998, respectively. The average outstanding balance of impaired loans was $1,131,000, $2,139,000 and $5,385,000, on which $50,000, $64,000 and $115,000 of interest income was recognized for the years ended December 31, 1999, 1998 and 1997, respectively. Loans in the amount of $1,145,852 and $1,341,300 at December 31, 1999 and 1998, respectively, were pledged to secure potential borrowings from the Federal Reserve Bank. Changes in the allowance for loan losses for the years ended December 3 1, are summarized as follows: 1999 1998 1997 ------------- ------------ ------------- Balance, beginning of year $ 8,144,450 7,355,536 8,403,253 Provision (recovery credited) charged to operations (800,000) 760,000 2,115,500 Loans charged-off (156,945) (782,399) (3,625,674) Recoveries of loans previously charged-off 637,750 811,313 462,457 ------------- ------------ ------------- Balance, end of year $7,825,255 8,144,450 7,355,536 ============= ============ ============= (5) Premises and Equipment Premises and equipment consist of the following at December 31: 1999 1998 -------------- --------------- Land $ 1,394,455 1,370,455 Buildings 4,527,074 4,274,175 Furniture and equipment 7,840,540 7,681,763 Leasehold improvements 567,194 557,123 --------------- --------------- 14,329,263 13,883,516 Less accumulated depreciation 8,297,552 7,509,895 --------------- --------------- $ 6,031,711 6,373,621 =============== =============== Depreciation expense included in occupancy and equipment expense, is $1,085,770, $863,978 and $777,390 for the years ended December 31, 1999, 1998 and 1997, respectively. -47- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (6) Other Assets Other assets consisted of the following at December 31: 1999 1998 ------------ --------------- Accrued interest $ 3,582,710 3,317,056 Other real estate owned, net - 905,634 Software, net of amortization 429,331 373,846 Prepaid and other 1,714,306 2,130,585 Deferred tax assets, net 3,744,268 1,815,678 ------------ --------------- $ 9,470,615 8,542,799 ============ =============== The Bank amortizes capitalized software costs on a straight-line basis using a useful life from three to five years. Changes in the allowance for losses on other real estate owned at December 31 are summarized as follows:
1999 1998 1997 ----------- ------------- ------------- Balance, beginning of year $ -- 1,929,992 2,651,622 Provision charged to operations -- -- -- Charge-offs, net of recoveries -- (1,929,992) (721,630) ----------- ------------- ------------- Balance, end of year $ -- -- 1,929,992 =========== ============= =============
(7) Income Taxes The provision for income tax expense consists of the following for the years ended December 31
1999 1998 1997 ---------------- -------------- ------------- Current: Federal $ 1,017,760 514,831 (56,866) State 502,377 273,136 (38,023) ---------------- -------------- ------------- 1,520,137 787,967 (94,889) ---------------- -------------- ------------- Deferred: Federal 456,893 277,736 249,320 State 144,413 159,161 271,713 ---------------- -------------- ------------- 601,306 436,897 521,033 ---------------- -------------- ------------- $ 2,121,443 1,224,864 426,144 ================ ============== =============
-48- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 consist of:
1999 1998 ----------------- ------------- Deferred tax assets: Allowance for loan losses $ 2,196,918 2,747,637 Allowance for write-downs of other real estate owned - 31,923 Deferred compensation 105,509 119,208 Alternative minimum tax carryover 695,603 978,079 Current state franchise taxes 178,228 92,866 Other - 144,674 Investment securities unrealized losses 1,159,531 - ----------------- ------------- Deferred tax assets 4,335,789 4,114,387 Less valuation allowance - (192,000) ----------------- ------------- Total deferred tax assets 4,335,789 3,922,387 Deferred tax liabilities: Fixed assets 276,986 371,798 State franchise taxes 190,713 285,712 Other 123,822 78,834 Investment securities unrealized gains - 1,370,365 ----------------- ------------- Total deferred tax liabilities 591,521 2,106,709 ----------------- ------------- Net deferred tax assets $ 3,744,268 1,815,678 ================= ============
The valuation allowance for deferred tax assets decreased by $192,000 in 1999. The reduction was the result of net changes in temporary differences, improved operating results in 1999 and projected operating results in 2000. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Bank will realize the benefits of these deductible differences. -49- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 A reconciliation of income taxes computed at the federal statutory rate of 34% and the provision for income taxes is as follows:
1999 1998 1997 ------------- ------------- -------------- Income tax expense at statutory rates $ 2,109,506 1,436,740 732,976 Reduction for tax exempt interest (475,051) (548,693) (484,308) State franchise tax, net of federal income tax benefit 426,881 285,316 154,235 Change in beginning of year valuation. allowance (192,000) - - Other 252,107 51,501 23,241 ------------- ------------- -------------- $ 2,121,443 1,224,864 426,144 ============= ============= ==============
(8) Outstanding Shares and Earnings Per Share On September 30, 1998, the Board of Directors authorized a two-for-one stock split of the Bank's common stock in which each share of the Bank's common stock was converted into two shares. Consequently, all related information in this report has been restated to reflect the effect of the stock split. On January 20, 2000, the Board of Directors of the Bank declared a 6% stock dividend payable as of March 31, 2000. All income per share amounts have been adjusted to give retroactive effect to the stock dividend. Earnings Per Share (EPS) Basic and diluted earnings per share for the years ended December 31, 1999, 1998 and 1997 were computed as follows:
1999 1998 1997 ----------- ------------ ----------- Basic earnings per share: Net income $ 4,082,985 3,000,843 1,729,669 ----------- ------------ ----------- Weighted average common shares outstanding 3,276,362 3,276,230 3,267,942 ----------- ------------ ----------- Basic EPS $ 1.25 0.92 0.53 =========== ============ =========== Diluted earnings per share: Net income $ 4,082,985 3,000,843 1,729,669 ----------- ------------ ----------- Denominator: Weighted average common stock outstanding 3,276,362 3,276,230 3,267,942 Weighted average options outstanding 12,837 8,028 4,064 ----------- ------------ ----------- 3,289,199 3,284,258 3,272,006 ----------- ------------ ----------- Diluted EPS $ 1.24 0.91 0.53 =========== ============ ============
-50- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (9) Related Party Transactions The Bank, in the ordinary course of business, has loan and deposit transactions with directors and executive officers. In management's opinion, these transactions were on substantially the same terms as comparable transactions with other customers of the Bank. The amount of such deposits totaled approximately $918,000 and $938,000 at December 31, 1999 and 1998, respectively. The following is an analysis of the activity of loans to executive officers and directors for the years ended December 31:
1999 1998 1997 ----------- ------------ ------------ Outstanding balance, beginning of year $ 586,000 2,100,000 4,388,000 Credit granted 341,000 377,000 1,886,000 Repayments (639,000) (1,891,000) (4,174,000) ----------- ------------ ------------ Outstanding balance, end of year $ 288,000 586,000 2,100,000 =========== ============ ============
(10) Profit Sharing Plan The Bank maintains a profit sharing plan for the benefit of its employees. Employees who have completed 12 months and 1,000 hours of service are eligible. Under the terms of this plan, a portion of the Bank's profits, as determined by the Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees. Contributions to the plan, included in salaries and employee benefits in the statements of income, were $653,915, $579,197 and $123,122 in 1999, 1998 and 1997, respectively. (11) Stock Compensation Plans At December 31, 1999, the Bank has three stock-based compensation plans, which are described below. Had compensation cost for the Bank's three stock-based compensation plans been determined consistent with the fair value method, the Bank's net income and income per share would have been reduced to pro forma amounts indicated below: Net income: As reported $ 4,082,985 3,000,843 1,729,669 =========== =========== =========== Pro forma under SFAS No. 123 $ 3,906,110 2,854,677 1,636,746 =========== =========== =========== Basic earnings per share: As reported $ 1.25 0.92 0.53 =========== =========== =========== Pro forma under SFAS No. 123 $ 1.19 0.87 0.50 =========== =========== =========== Diluted earnings per share: As reported $ 1.24 0.91 0.53 =========== =========== =========== Pro forma under SFAS No. 123 $ 1.19 0.87 0.50 =========== =========== ===========
Fixed Stock Option Plans The Bank has two fixed option plans. Under the 1997 Employee Stock Option Plan, the Bank may grant options to an employee for an amount up to 25,000 shares of common stock each year. There arc 551,250 shares authorized under the plan. The plan will terminate February 27, 2007. The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price, vestings or duration of the option. Under the 1997 Outside Directors Nonstatutory Stock Option Plan, the Bank may grant options to an outside director for an amount up to 6,615 shares of common stock. There are 165,375 shares authorized under the Plan. The Plan will terminate February 27, 2007. The exercise price of each option equals the market price of the Bank's stock on the date of grant, and an option's maximum term is five years. Options vest at the rate of 20% per year beginning on the grant date. Other than a grant of 6,615 shares to a new director, any future grants require shareholder approval. -51- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 The weighted average fair value at date of grant for options granted during years ended December 31, 1999, 1998 and 1997, was $6.66, $4.36 and $4.78 per share, respectively. The fair value of each option grant was estimated on the date of the grant using Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ----------- ----------- ----------- Expected dividend yield 0.0% 0.0% 0.0% Expected volatility 23.00% 22.89% 15.26% Risk-free interest rate 6.39% 4,73% 5.42% Expected term in years 10 5.5 3
Stock option activity for the outside directors stock option plan and the employee stock option plan during the periods indicated is as follows:
Outside Directors Employee Stock Stock Option Plan Option Plan -------------------------------- ---------------------------------- Weighted- Weighted Number of Average Number of Average Shares Exercise Price Shares Exercise Price -------------- ----------------- --------------- ------------------ Balance at December 31, 1996 - $ - - $ - Granted 72,765 11.11 39,690 12.70 Exercised (1,323) 11.11 - - Forfeited (5,292) 11.11 - - Expired - - - - ----------- --------------- ------------ --------------- Balance at December 31, 1997 66,150 11.11 39,690 12.70 Granted - - 64,050 13.51 Exercised (1,323) 11.11 - - Forfeited - - - Expired - - - - ----------- --------------- ------------ --------------- Balance at December 31, 1998 64,827 11.11 103,740 13.19 Granted - - 33,390 12.86 Exercised - - Forfeited (5,292) 11.11 - - Expired - - - ----------- --------------- ------------ --------------- Balance at December 31, 1999 59,535 $ 11.11 137,130 $ 13.11 =========== =============== ============ ================
At December 31, 1999, the range of exercise prices and weighted-average remaining contractual life of all outstanding options was $11.11 - $13.51 and 5.43 years, respectively. Options exercisable as of December 31 were 91,833 shares in 1999, 45,160 shares in 1998 and 19,200 shares in 1997, at a weighted-average exercise price of $12.32, 12.57 and $12.91, respectively. -52- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 Employee Stock Purchase Plan Under the 1997 Employee Stock Purchase Plan, the Bank is authorized to issue to an eligible employee shares of common stock. There are 551,250 shares authorized under the plan. The plan will terminate February 27, 2007. An eligible employee is one who has been continually employed for at least ninety (90) days prior to commencement of a participation period. Under the terms of the Plan, employees can choose to have up to 10 percent of their compensation withheld to purchase the Bank's common stock each participation period. The purchase price of the stock is 85 percent of the lower of the fair market value on the last trading day before the Date of Participation or the fair market value on the last trading day during the participation period. Approximately 50 percent of eligible employees are participating in the Plan in the current participation period, which began November 24, 1999. At the end of the participation period, which began November 24, 1998 and ended November 23, 1999, there were $89,622 in contributions, and 7,725 shares were purchased at $11.53 totaling $89,104. (12) Commitments and Contingencies The Bank is obligated for rental payments under certain operating lease agreements, some of which contain renewal options. Total rental expense for all leases included in net occupancy and equipment expense amounted to approximately $464,403, $471,251 and $407,206 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the future minimum payments under noncancelable operating leases with initial or remaining terms in excess of one year are as follows: Year Ended December 31: ------------ 2000 $ 274,375 2001 295,160 2002 251,155 2003 194,340 2004 158,380 Thereafter 140,400 ----------------- $ 1,313,810 ================= -53- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999,1998 and 1997 At December 31, 1999, the aggregate maturities for time deposits are as follows: Year Ended December 31: ------------ 2000 $ 103,915,893 2001 5,038,751 2002 1,212,769 2003 414,693 2004 122,091 ---------------- $ 110,704,197 ================ The Bank is subject to various legal proceedings in the normal course of its business. In the opinion of management, after having consulted with legal counsel, the outcome of the legal proceedings should not have a material effect on the financial condition or results of operations of the Bank. (13) Financial Instruments with Off-Balance Sheet Risk The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31, 1999 are as follows: Undisbursed loan commitments $ 76,100,895 Standby letters of credit 3,600,611 --------------- $ 79,701,506 =============== Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inve itory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of December 31, 1999, the Bank has no off-balance sheet derivatives requiring additional disclosure. -54- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (14) Capital Adequacy and Restriction on Dividends The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below). First, a bank must meet a minimum Tier I Capital ratio (as defined in the regulations) ranging from 3% to 5% based upon the bank's CAMELS (capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk) rating. Second, a bank must meet minimum Total Risk-Based Capital to risk-weighted assets ratio of 8%. Riskbased capital and asset guidelines vary from Tier I capital guidelines by redefining the components of capital, categorizing assets into different risk classes, and including certain off-balance sheet items in the calculation of the capital ratio. The effect of the risk-based capital guidelines is that banks with high exposure will be required to raise additional capital while institutions with low risk exposure could, with the concurrence of regulatory authorities, be permitted to operate with lower capital ratios. In addition, a bank must meet minimum Tier I Capital to average assets ratio. Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must meet the minimum ratios as set forth above. There are no conditions or events since that notification that management believes have changed the institution's category. -55- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 The Bank's actual capital amounts and ratios as of December 31, 1999 are as follows:
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes: Action Provisions: -------------------- ----------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ------- ------- ------ Total Risk-Based Capital (to Risk Weighted Assets) $ 35,454,000 14.9% $ 19,027,000 8.0% $ 23,784,000 10.0% Tier I Capital (to Risk Weighted Assets) 32,421,000 13.6% 9,514,000 4.0% 14,270,000 6.0% Tier I Capital (to Average Assets) 32,421,000 8.7% 14,962,000 4.0% 18,703,000 5.0%
The Bank's actual capital amounts and ratios as of December 31, 1998 are as follows:
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes: Action Provisions: -------------------- -------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total Risk-Based Capital (to Risk Weighted Assets) $ 32,300,000 16.0% $ 16,159,000 8.0% $ 20,199,000 10.0% Tier I Capital (to Risk Weighted Assets) 29,706,000 14.7% 8,079,000 4.0% 12,119,000 6.0% Tier I Capital (to Average Assets) 29,706,000 8.9% 13,374,000 4.0% 16,717,000 5.0%
Cash dividends are restricted under California state banking laws to the lesser of the Bank's retained earnings or the Bank's net income for the latest three fiscal years, less dividends previously declared during that period. -56- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (15) Fair Values of Financial Instruments The following methods and assumptions were used by the Bank in estimating its fair value disclosures for financial instruments: Cash and cash equivalents The carrying amounts reported in the balance sheet for cash and short-term instruments are a reasonable estimate of fair value. Investment securities Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value. Commitments to extend credit and standby letters of credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying amount of accrued interest payable approximates its fair value. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, property, plant, equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in may of the estimates. -57- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 The estimated fair values of the Bank's financial instruments are approximately as follows:
1999 ----------------------------------- Carrying Fair Amount Value Financial assets: Cash and federal funds sold 57,106,000 57,106,000 Investment securities 135,452,000 135,452,000 Loans: Fixed rate: Commercial and construction 11,187,000 10,818,000 Mortgage 40,485,000 37,017,000 Consumer 5,353,000 5,109,000 --------------- ------------ Total fixed rate 57,025,000 52,944,000 Variable rate 103,861,000 104,296,000 Less allowance for loan losses (7,825,000) (7,825,000) Net deferred origination fees (787,000) (787,000) --------------- ------------ Net loans $ 152,274,000 148,628,000 =============== ============ Loans hold for sale $ 10,657,000 10,667,000 =============== ============ Financial liabilities: Deposits: Demand $ 224,926,000 224,926,000 Certificate of deposits 110,704,000 110,404,000 --------------- ------------ Total deposits $ 335,630,000 335,330,000 =============== ============
Contract Carrying Fair Amount Amount Value -------------- -------------- ------------ Unrecognized financial instruments: Commitments to extend credit $ 76,101,000 -- 571,000 =============== ========= ========= Standby letters of credit $ 3,600,000 -- 36,000 =============== ========= =========
-58- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 The estimated fair values of the Bank's financial instruments are approximately as follows:
1998 --------------------------------------- Carrying Fair Amount Value --------------------------------------- Financial assets: Cash and federal funds sold $ 49,185,000 49,185,000 ================ =========== Investment securities $ 127,549,000 127,549,000 ================ =========== Loans: Fixed rate: Commercial and construction $ 17,426,000 17,275,000 Mortgage 2,676,000 2,691,000 Consumer 4,683,000 4,684,000 --------------- ----------- Total fixed rate 24,785,000 24,650,000 Variable rate 106,580,000 103,368,000 Less allowance for loan losses (8)44,000) (8,144,000) Net deferred origination fees (583,000) (583,000) --------------- ----------- Net loans $ 122,638,000 119,291,000 ================ =========== Loans held for sale $ 29,021,000 29,596,000 ================ =========== Financial liabilities: Deposits: Demand $ 199,394,000 199,394,000 Certificate of deposits 109,909,000 110,410,000 --------------- ----------- Total deposits $ 309,303,000 309,804,000 ================ ===========
Contract Carrying Fair Amount Amount Value --------------- ------------- -------------- Unrecognized financial instruments: Commitments to extend credit $ 63,853,000 -- 479,000 =============== ============= ============== Standby letters of credit $ 713,000 -- 7,000 =============== ============= ==============
-59- FIRST NORTHERN BANK OF DIXON Notes to Financial Statements December 31, 1999, 1998 and 1997 (16) Supplemental Statements of Cash Flows Information Supplemental disclosures to the Statements of Cash Flows for the years ended December 31, are as follows:
1999 1998 1997 ---------- ---------- ------------ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 7,923,311 8,436,720 7,996,605 ============= =========== ============ Income taxes $ 1,779,000 1,705,100 34,000 ============= =========== ============ Supplemental disclosure of noncash investing and financing activities: Loans transferred to other real estate -- 1,194,758 1,461,935 ============= =========== ============ Stock dividend distributed $ 2,055,480 2,017,269 1,281,480 ============= =========== ============ Loans held for sale transferred to loans $ 29,223,000 -- -- ============= =========== ============
(17) Subsequent Event On January 6, 2000, the Board of Directors of the Bank approved the creation of a bank holding company to be called "First Northern Community Bancorp" to be effected through a corporate reorganization in which the Bank will become a wholly-owned subsidiary of First Northern Community Bancorp. -60- ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III -------- ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK (a) Directors of the Bank The information called for by this item with respect to director information is incorporated herein by reference from the sections of the Bank's proxy statement for the 2000 Annual Meeting of Shareholders entitled "Security Ownership of Management" and "Nomination and Election of Directors". (b) Principal Officers of the Bank
Name of Officer/Position Held Age* Position Held Since ----------------------------- --- ------------------- Owen J. Onsum / President, CEO 55 01/01/97 Robert M. Walker / Sr. VP, Branch Administrator 49 09/01/91 Donald J. Fish / Sr. VP, Senior Credit Officer 60 01/06/97 Louise A. Walker / Sr. VP, Cashier 39 01/01/97 * as of February 29, 2000.
Owen J. Onsum is President and Chief Executive Officer of the Bank. Prior to that appointment on January 1 1997, Mr. Onsum served as the Bank's Executive Vice President for 15 years. Robert M. Walker is Senior Vice President and Branch Administrator of the Bank. Prior to that appointment on September 1, 1991, Mr. Walker was a Branch Manger at the Bank's West Sacramento Branch. Donald J. Fish is Senior Vice President and Senior Credit Officer of the Bank. Prior to that appointment on January 6, 1997, Mr. Fish was Executive Vice President and Senior Credit Officer with Valliwide Bank for ten years. Louise A. Walker is Senior Vice President and Cashier of the Bank. Prior to that appointment on January 1, 1997, Mrs. Walker was the Bank's Vice President and Cashier for eight years. None of the principal officers was selected pursuant to any arrangement or understanding other than with the directors and officers of the Bank acting in their capacities as such. (c) Family Relationships and Involvement in certain Legal Proceedings. NONE -61- ITEM 11 - EXECUTIVE COMPENSATION The information called for by this item is incorporated by reference herein to the sections of the Bank's proxy statement for the 2000 Annual Meeting of Shareholders entitled "Nomination and Election of Directors" and "Executive Compensation." ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated herein by reference from the sections of the Bank's proxy statement for the 2000 Annual Meeting of Shareholders entitled "Security Ownership of Management" and "Nomination and Election of Directors". ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated herein by reference from the sections of the Bank's proxy statement for the 2000 Annual Meeting of Shareholders entitled "Report of Compensation Committee of the Board of Directors on Executive Compensation" "Indebtedness of Management," "Indebtedness of Certain Directors" and "Transactions with Management." -62- PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) Financial Statements and Financial Statement Schedules filed: Reference is made to the Index to Financial Statements under Item 8 in Part II of this Form 10-K (B) Reports on Form 8-K: The Bank did not file any reports on Form 8-K during the last quarter of the year ended December 31,1999. (C) Exhibits: The following is a list of all exhibits filed as part of this Annual Report on Form 10-K.
Exhibit Number Exhibit ------- ------- 3.1(1) Articles of Incorporation of the Bank, as amended. 3.2(2) Certificate of Amendment to Articles of Incorporation. 3.3(3) By-laws of the Bank, as amended. 4.1(4) Form of Common Stock Certificate 10.1(5) First Northern Bank of Dixon 1997 Stock Option Plan. 10.2(6) Amended and Restated First Northern Bank of Dixon Outside Directors 1997 Nonstatutory Stock Option Plan. 10.3(5) First Northern Bank of Dixon 1997 Employee Stock Purchase Plan. 10.4(4) First Northern Bank of Dixon 1997 Stock Option Plan Forms "Incentive Stock Option Agreement." and "Notice of Exercise of Stock Option" 10.5(4) First Northern Bank of Dixon Amended and Restated Outside Directors 1997 Nonstatutory Stock Option Plan Forms "Nonstatutory Stock Option Agreement" and "Notice of Exercise of Stock Option" 10.6(4) First Northern Bank of Dixon 1997 Employee Stock Purchase Plan Forms "Participation Agreement" and "Notice of Withdrawal" 11 Statement of Computation of Per Share Earnings (See Page 43 of this Form 10-K) 21(7) Subsidiaries of the Bank 24 Power of Attorney (See Page 64) of this Form 10-K) - ------------------------------------------------------------------------------------------------------------------------- 1. Filed with the Bank's Annual Report on Form F-1 for the fiscal year ended December 31, 1986. 2. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended December 31, 1989. 3. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended December 31, 1993. 4. Filed with the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 5. Filed with the Bank's definitive proxy statement for the 1997 Annual Meeting of Shareholders. 6. Filed with the Bank's definitive proxy statement for the Special Meeting of Shareholders held on September 11, 1997. 7. Filed with the Bank's Annual Report on Form F-2 for the fiscal year ended December 31, 1996.
-63- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2000. FIRST NORTHERN BANK OF DIXON By: /s/ Owen J. Onsum ---------------------------- Owen J. Onsum President/Chief Executive Officer/Director (Principal Executive Officer) POWER OF ATTORNEY KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes a Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Bank and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Owen J. Onsum President/Chief Executive Officer 3/16/00 - -------------------------------------------------------- ------------------ Owen J. Onsum (Principal Executive Officer) and Director /s/ Louise A. Walker Senior Vice President/Cashier 3/16/00 - -------------------------------------------------------- ------------------ Louise A. Walker (Principal Financial Officer) /s/ Stanley R. Bean Vice President/Controller 3/16/00 - -------------------------------------------------------- ------------------ Stanley R. Bean /s/ Lori J. Aldrete Director 3/16/00 - -------------------------------------------------------- ------------------ Lori J. Aldrete /s/ Frank J. Andrews, Jr. Director 3/16/00 - -------------------------------------------------------- ------------------ Frank J. Andrews, Jr. /s/ John M. Carbahal Director 3/16/00 - -------------------------------------------------------- ------------------ John M. Carbahal /s/ Gregory DuPratt Director 3/16/00 - -------------------------------------------------------- ------------------ Gregory DuPratt /s/ John F. Hamel Director 3/16/00 - -------------------------------------------------------- ------------------ John F. Hamel /s/ Diane P. Hamlyn Director 3/16/00 - -------------------------------------------------------- ------------------ Diane P. Hamlyn /s/ William H. Jones, Jr. Director 3/16/00 - -------------------------------------------------------- ------------------ William H. Jones, Jr. /s/ Foy S. McNaughton Director 3/16/00 - -------------------------------------------------------- ------------------ Foy S. McNaughton /s/ David W. Schulze Director 3/16/00 - -------------------------------------------------------- ------------------ David W. Schulze /s/ Thomas S. Wallace Director 3/16/00 - -------------------------------------------------------- ------------------ Thomas S. Wallace
-64- EX-99.3 7 QUARTERLY REPORT ON FORM 10-Q FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D. C. 20549 Form 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - - ACT OF 1934 For the quarterly period ended March 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ FDIC Certificate No. 03440 First Northern Bank of Dixon (Exact name of Bank as specified in its charter) California 94-0475380 [State of Incorporation] [I.R.S. Employer Identification No.] 195 North First Street Dixon, California 95620 [Address of principal executive offices] [Zip Code] Bank's telephone number, including area code: (707) 678-3041 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value 3,244,733 shares of the Bank's common stock, no par value, were outstanding at March 31, 2000. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNAUDITED CONDENSED BALANCE SHEETS ASSETS
March 31, 2000 December 31, 1999 Cash and due from banks $ 19,094,306 $ 19,806,022 Federal funds sold 32,500,000 37,300,000 Investment securities - available for sale 133,881,543 135,451,683 Loans, net of allowance for loan losses of $7,518,015 at March 31, 2000 and $7,825,255 at December 31, 1999 166,657,107 162,930,575 Premises and equipment, net 6,229,731 6,031,711 Accrued interest receivable and other assets 9,384,884 9,470,615 ---------------- ---------------- TOTAL ASSETS $ 367,747,571 $ 370,990,606 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand $ 85,347,492 $ 86,123,941 Interest-bearing transaction deposits 36,579,999 36,284,409 Savings & MMDA's 100,126,179 102,517,387 Time 110,554,144 110,704,197 ---------------- ---------------- Total deposits 332,607,814 335,629,934 Accrued interest payable and other liabilities 2,647,780 3,287,969 ---------------- ---------------- TOTAL LIABILITIES 335,255,594 338,917,903 Stockholders' equity Common stock, no par value; 4,000,000 shares authorized; 3,244,733 shares issued and outstanding in 2000 and 3,092,273 shares issued and outstanding in 1999 25,387,922 23,322,001 Capital surplus 976,850 976,850 Retained earnings 8,115,531 9,513,151 Accumulated other comprehensive loss (1,988,326) (1,739,299) ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 32,491,977 32,072,703 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 367,747,571 $ 370,990,606 ================ ================ See notes to unaudited condensed financial statements.
2 UNAUDITED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months Three months Ended ended March 31, 2000 March 31, 1999 Interest Income Loans $ 3,980,532 $ 3,694,337 Federal funds sold 521,091 277,584 Investment securities Taxable 1,849,941 1,484,988 Non-taxable 287,882 370,998 ------------------ ------------------ Total interest income 6,639,446 5,827,907 Interest Expense Deposits 2,086,673 1,893,263 Other borrowings 14,488 9,048 ------------------ ------------------ Total interest expense 2,101,161 1,902,311 ------------------ ------------------ Net interest income 4,538,285 3,925,596 ------------------ ------------------ Provision for loan losses - 75,000 Net interest income after provision for loan losses 4,538,285 3,850,596 ------------------ ------------------ Other operating income Service charges on deposit accounts 293,705 261,761 Gains on securities transactions 10,300 20,496 Other income 352,855 410,296 ------------------ ------------------ Total other operating income 656,860 692,553 ------------------ ------------------ Other operating expenses Salaries and employee benefits 2,138,646 2,067,218 Occupancy and equipment 500,040 498,520 Data processing 100,806 97,252 Stationery and supplies 145,063 99,113 Advertising 69,853 44,695 Other Real Estate Expense - 39,705 Other 694,485 647,618 ------------------ ------------------ Total other operating expense 3,648,893 3,494,121 ------------------ ------------------ Income before income tax expense 1,546,252 1,049,028 Provision for income tax expense 423,812 320,600 ------------------ ------------------ Net income $ 1,122,440 $ 728,428 Other Comprehensive Income: Unrealized loss on available for sale securities, net of tax effect (249,027) (624,411) Total Comprehensive Income $ 873,413 $ 104,017 ================== ================== Basic Income per share $ 0.34 $ 0.22 ================== ================== Diluted Income per share $ 0.34 $ 0.22 ================== ================== See notes to unaudited condensed financial statements.
3 UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Three months Three months Ended ended March 31, 2000 March 31, 1999 -------------- -------------- Operating Activities Net Income $ 1,122,440 $ 728,428 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation 199,208 221,610 Provision for loan losses - 75,000 Decrease in accrued interest receivable and other assets 85,731 523,337 (Decrease) increase in accrued interest payable and other liabilities (640,189) 158,289 Net cash provided by operating activities 767,190 1,706,664 Investing Activities Net decrease in investment securities 1,321,113 2,685,174 Net increase in loans (3,726,532) (487,343) Purchases of premises and equipment, net (397,228) (107,002) Net cash (used in) provided by investing activities (2,802,647) 2,090,829 Financing Activities Net decrease in deposits (3,022,120) (12,366,962) Cash dividends paid in lieu of fractional shares (5,811) (5,232) Repurchase of stock (448,328) - Net cash used in financing activities (3,476,259) (12,372,194) Net change in cash and cash equivalents (5,511,716) (8,574,701) Cash and cash equivalents at beginning of period 57,106,022 49,184,700 Cash and cash equivalents at end of period $ 51,594,306 $ 40,609,999 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: - ------------------------------------------------------------------------------------------------------------------------------------ Cash paid during the period for: Interest $ 2,101,161 $ 1,902,311 Income Taxes $ - $ - - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of noncash investing and financing activities: Loans transferred to other real estate $ - $ - Stock dividend distributed $ 2,514,249 $ 2,055,480 - ------------------------------------------------------------------------------------------------------------------------------------ See notes to unaudited condensed financial statements.
4 NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS March 31, 2000 and December 31, 1999 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed financial statements should be read in conjunction with the financial statements and notes thereto contained in the Bank's Annual Report to shareholders and Form 10-K for the year ended December 31, 1999. 2. RECLASSIFICATIONS Certain reclassifications have been made to the 1999 financial statements to conform with the 2000 presentation. 3. OUTSTANDING SHARES AND EARNINGS PER SHARE On January 20, 2000, the Board of Directors of the Bank declared a 6% stock dividend payable as of March 31, 2000. All income per share amounts have been adjusted to give retroactive effect to the stock dividend. Earnings Per Share (EPS) Basic and diluted earnings per share for the three month periods ending March 31, 2000 and March 31, 1999 were computed as follows: Three months ended March 31 2000 1999 ----------------------------------------------------------------------------- Basic earnings per share: Net income $ 1,122,440 $ 728,428 ----------------------------------------------------------------------------- Weighted average common shares outstanding 3,265,549 3,275,226 ----------------------------------------------------------------------------- Basic EPS $ 0.34 $ 0.22 ============================================================================= Diluted earnings per share: Net income $ 1,122,440 $ 728,428 ----------------------------------------------------------------------------- Denominator: Weighted average common shares outstanding 3,265,549 3,275,226 Incremental shares due to dilutive stock options 22,056 5,007 ----------------------------------------------------------------------------- 3,287,605 3,280,233 --------------------------------------------------------------------------- Diluted EPS $ 0.34 $ 0.22 ============================================================================= 5 4. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at levels considered adequate by management to provide for possible loan losses. The allowance is based on management's assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses during the three months ended March 31, 2000 and 1999 and for the year ended December 31, 1999 were as follows:
Three months ended Year ended March 31, December 31, 2000 1999 1999 ------------- ------------ ----------------- Balance, beginning of period $ 7,825,255 $ 8,144,450 $ 8,144,450 Provision for (recovery of) loan losses - 75,000 (800,000) Loan charge-offs (323,157) (82) (156,945) Loan recoveries 15,917 38,111 637,750 ------------- ------------ ----------------- Balance, end of period $ 7,518,015 $ 8,257,479 $ 7,825,255 ============= ============ =================
5. SUBSEQUENT EVENT On April 27, 2000, at the Annual Meeting of Shareholders, the shareholders of the Bank approved the creation of a bank holding company to be called "First Northern Community Bancorp" to be effected through a corporate reorganization in which the Bank will become a wholly-owned subsidiary of First Northern Community Bancorp. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of the significant changes in the Unaudited Condensed Balance Sheets and of the significant changes in income and expenses reported in the Unaudited Condensed Statements of Income and Comprehensive Income for the three month periods ended March 31, 2000 and 1999. SUMMARY The Bank recorded net income of $1,122,000 for the three month period ended March 31, 2000, representing an increase of $394,000 or 54.1% over $728,000 for the same period in 1999. The increase in net income over the three month period ended March 31, 2000 as compared to the same period a year ago, resulted primarily from an increase in net interest income combined with decreases in the provision for loan losses and other real estate expense which were partially offset by increases in salaries and benefits, stationery and supplies, advertising, and other miscellaneous expense and a decrease in other income. On January 20, 2000, the Board of Directors of the Bank declared a 6% stock dividend payable as of March 31, 2000. All income per share amounts have been adjusted to give retroactive effect to the stock dividend. CHANGES IN FINANCIAL CONDITION The asset side of the Unaudited Condensed Balance Sheet showed a $712,000 decrease in cash and due from banks, a $4,800,000 decrease in fed funds sold, a $1,570,000 decrease in investment securities, a $3,727,000 increase in loans and a $86,000 decrease in accrued interest receivable and other assets from December 31, 1999 to March 31, 2000. The reason for the decrease in cash and due from banks was due, for the most part, to decreases in cash and the Federal Reserve Bank due from account combined with an increase in items in the process of collection. The decrease in fed funds sold was due, for the most part, to a decrease in deposits and funding of new loans. The decrease in investment securities was due to maturities and calls, the proceeds of which were used to fund new loans. The increase in loans was, for the most part, in real estate loans. The liabilities side of the Unaudited Condensed Balance Sheet showed a decrease in total deposits of $3,022,000 compared to year-end 1999 deposit totals. The decrease in deposits was due, for the most part, to lower demand, savings and money market deposit totals. The decrease in deposits is consistent with historical trends which reflect a seasonal decline in deposits during the first quarter that is typically associated with the local agricultural industry. Other liabilities decreased $640,000 from December 31, 1999 to March 31, 2000. The decrease in other liabilities was due, for the most part, to decreases in accrued expenses. 6 CHANGES IN RESULTS OF OPERATIONS Interest Income Interest income on loans for the three month period ended March 31, 2000 is up 7.8% over the same period for 1999, from $3,694,000 to $3,981,000. The increase over the three month period ended March 31, 2000 as compared to the same period a year ago, was due to an increase in average loans combined with a .62% increase in loan yields. Interest income on securities for the three month period ended March 31, 2000 is up 15.19% over the same period for 1999, from $1,856,000 to $2,138,000. The increases are due to an increase in average securities over the three month period ended March 31, 2000, as compared to the same period a year ago, combined with a .53% increase in securities yields. Interest income on fed funds sold for the three month period ended March 31, 2000 is up 87.7% over the same period for 1999 from $278,000 to $521,000. The increase in fed funds income over the three month period ended March 31, 2000 was due, for the most part, to increases in average fed funds sold combined with increases in fed funds rates. Interest Expense Interest expense on deposits was up 10.2% for the three month period ending March 31, 2000 over the same period in 1999 from $1,893,000 to $2,087,000. The increased interest expense over the three month period ended March 31, 2000 was due to higher deposit rates combined with increased average deposits. Provision for Loan Losses The provision for loan losses was down for the three month period ending March 31, 2000 over the same period in 1999 from $75,000 to $-0-. The decrease over the three month period ended March 31, 2000 was due to a zero provision for that period due to improved market conditions and loan quality in the Bank's loan portfolio. The March 31, 2000 allowance for loan losses of approximately $7,500,000 is 4.3% of total loans compared to $7,800,000 or 4.6% of total loans at December 31, 1999. Other Operating Income Other operating income was down 5.2% for the three month period ended March 31, 2000 over the same period in 1999. This decrease was primarily due to a decrease in gains on sales of loans and gains on securities transactions, which was partially offset by increased service charges on deposit accounts, gains on sales of OREO properties and debit card fees. Other Operating Expense Total other operating expense was up 4.4% for the three month period ending March 31, 2000 over the same period in 1999 from $3,494,000 to $3,649,000. The main reason for this increase was a combination of: increases in salaries & benefits; advertising; and other miscellaneous expenses. The increase in salaries & benefits was due to increases in the number of employees and increases in profit sharing and incentive compensation provisions due to increased income which was partially offset by decreases in commissions for real estate loans. The increase in advertising was due, for the most part, to timing differences. The increases in other miscellaneous expenses were due to increased dues, legal fees, accounting and audit fees and consulting fees. Asset Quality The Bank manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and mix. The Bank strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values, and to maintain an adequate allowance for loan losses at all times. It is generally the Bank's policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected. Non-accrual loans amounted to $834,000 at March 31, 2000, and were comprised of four commercial loans one consumer loan and two agricultural loans. At December 31, 1999, non-accrual loans amounted to $528,000 and were comprised of four agricultural loans, and one commercial loan. At March 31, 1999, non-accrual loans amounted to $1,706,000 and were comprised of one non-farm non-residential mortgage loans, one commercial loan, one agricultural loan, and two residential mortgage loans. At March 31, 2000, the Bank had loans 90 days past due and still accruing totaling $47,000. Such loans amounted to $2,000 at December 31, 1999 and $-0- at March 31, 1999. At March 31, 2000, the Bank did not have any OREO properties. OREO's amounted to $-0- at December 31, 1999 and $906,000 at March 31, 1999. 7 Liquidity and Capital Resources To be able to serve our market area, the Bank must maintain proper liquidity and adequate capital. Liquidity is measured by various ratios, with the most common being the ratio of loans to deposits. This ratio was 52.4% on March 31, 2000. In addition, on March 31, 2000 the Bank had the following short term investments: $32,500,000 in fed funds sold; $14,000,000 in securities due within one year; and $57,000,000 in securities due in one to five years. To meet unanticipated funding requirements, the Bank maintains short term lines of credit with other banks totaling $14,700,000. Capital adequacy is generally measured by comparing the total of equity capital and reserve for loan losses to total assets. On December 31, 1999 this ratio was 10.75% and on March 31, 2000 it was 10.88%. These figures are well above the levels currently considered adequate by bank regulators. Year 2000 Compliance The Bank previously recognized the material nature of the business issues surrounding computer processing of dates into and beyond the Year 2000 and began taking corrective action as required pursuant to the interagency statements issued by the Financial Institutions Examination Council. Management believes the Bank has completed all of the activities within their control to ensure that the Bank's systems are Year 2000 compliant. The Bank's Year 2000 readiness costs were approximately $400,000. The Bank does not currently expect to apply any further funds to address Year 2000 issues. The Bank has not experienced any material disruptions of internal computer systems for software applications due to the start of the Year 2000 nor has it experienced any problems with the computer systems or software applications of their third party vendors, suppliers or service providers. The Bank will continue to monitor these third parties to determine the impact, if any, on the business of the Bank and the actions either must take, if any, in the event of non-compliance by any of these third parties. Based on the Bank's assessment of compliance by third parties there does not appear to be any material business risk posed by any such non-compliance. Although the Bank's Year 2000 rollover did not present any material business disruption, there are some remaining Year 2000 related risks. Management believes that appropriate actions have been taken to address these remaining Year 2000 issues and contingency plans are in place to minimize the financial impact to the Bank. Management, however, cannot be certain that Year 2000 issues affecting customers, suppliers or service providers of the Bank will not have a material adverse impact on the Bank. 8 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2000 from that presented in the Bank's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. PART II - OTHER INFORMATION AND SIGNATURES ITEM 1. Legal Proceedings Not Applicable. ITEM 2. Changes in Securities Not Applicable. ITEM 3. Defaults upon Senior Securities Not Applicable. ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable. ITEM 5. Other Information Not Applicable. ITEM 6. Exhibits and Reports on Form 8 - K. There were no Reports on Form 8-K. SIGNATURES FIRST NORTHERN BANK OF DIXON Date: 5/12/00 By: /s/ Stanley R. Bean ----------------- --------------------------------- Stanley R. Bean, Vice President/ Controller 9 EX-99.4 8 CURRENT REPORT ON FORM 8-K FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 May 19, 2000 ------------ (Date of earliest event reported) First Northern Bank of Dixon ---------------------------- (Exact name of registrant as specified in its charter) California ---------- (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 195 North First Street, Dixon, California 95620 ----------------------------------------------- (Address of principal executive offices) (Zip Code) (707) 678-4422 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name or former address, if changed since last report) Page 1 Item 2. Acquisition or Disposition of Assets. ------------------------------------- On January 7, 2000, First Northern Bank of Dixon ("Bank"), a California state-chartered bank, announced its intention to reorganize into a bank holding company form. First Northern Community Bancorp, a California corporation ("Bancorp") was incorporated on February 8, 2000. On March 21, 2000, the Bank, Bancorp and FNCB Merger Corp., a wholly-owned subsidiary of Bancorp ("Merger Co."), entered into an Agreement and Plan of Reorganization and related Agreement of Merger, whereby Merger Co. would be merged with and into the Bank, with the Bank being the surviving corporation, the Bank would become a wholly-owned subsidiary of Bancorp, and shareholders of the Bank would receive one share of Bancorp common stock in exchange for each share of Bank common stock (the "Reorganization"). On April 25, 2000, the California Department of Corporations issued a permit with respect to the issuance of Bancorp common stock in the Reorganization, in connection with a fairness hearing held on April 25, 2000 pursuant to Section 25142 of the California Corporate Securities Law of 1968. At the Bank's Annual Meeting of Shareholders held on April 27, 2000, the Reorganization was approved by the affirmative vote of a majority of the outstanding shares of the Bank's common stock. On May 19, 2000, the Agreement of Merger was filed with the Secretary of State of the State of California, and consummation of the Reorganization occurred effective as of the close of business on May 19, 2000. As a result of the consummation of the Reorganization, the Bank has become a wholly-owned subsidiary of Bancorp, and the one-for-one share exchange referred to above has been completed. Attached as Exhibit 99.1, and incorporated herein by this reference, is a copy of a press release dated May 22, 2000 with respect to the consummation of the Reorganization. Item 7. Financial Statements and Exhibits. ---------------------------------- (a) Financial statements of businesses acquired: None. (b) Pro forma financial information: None. (c) Exhibits: 99.1 Press Release dated May 22, 2000. SIGNATURE 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. FIRST NORTHERN BANK OF DIXON By: /s/ Owen J. Onsum -------------------------------------- Owen J. Onsum President and Chief Executive Officer Date: May 23, 2000. EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 99.1 Press Release dated May 22, 2000. Exhibit 99.1 [LETTERHEAD OF FIRST NORTHERN COMMUNITY BANCORP] Contact: Owen J. Onsum May 19, 2000 Chief Executive Officer/President FIRST NORTHERN BANK P.O. Box 547 Dixon, California (707) 678-3041 First Northern Bank Announces Completion of Holding Company Formation --------------------------------------------------------------------- First Northern Bank, headquartered in Dixon, California, has announced the completion of its corporate reorganization whereby the Bank became the wholly-owned subsidiary of First Northern Community Bancorp effective May 19, 2000. The shareholders of the Bank are now the shareholders of the Bancorp in a stock exchange on a one-for-one basis. An actual exchange of Bank share certificates will not be required because the existing Bank share certificates are deemed to represent shares of the Bancorp. However, new Bancorp share certificates will be issued when future transactions occur. "Completing the reorganization into a bank holding company structure is beneficial to us and our shareholders," said Owen J. Onsum, who is President and Chief Executive Officer of both the Bank and the Bancorp. "Our prospects for enhancing our relationships with our customers remain bright and we look forward to a successful future with this new corporate structure." First Northern Bank's stock ticker symbol "FDIX" has been delisted from the OTC Bulletin Board and replaced by First Northern Community Bancorp's stock ticker symbol "FNRN." In addition, the Board of Directors of the Bancorp has approved a new stock repurchase program for its outstanding Common Stock. Based on market conditions, share repurchases will be made from time to time in the open market or in privately negotiated transactions. The repurchase program, which will remain in effect until April 30, 2002, allows purchases in an aggregate amount of up to 10% of the Bancorp's equity over a rolling 12-month period. The new Bancorp program essentially replaces the Bank's stock repurchase plan that was terminated on May 19, 2000 as a result of the reorganization. As before, the stock repurchase program will provide management with an effective mechanism for capital management. Commenting on the stock repurchase program, Onsum said, "In additon to our record first quarter earnings, the Bancorp's new stock repurchase program demonstrates our continued commitment to providing fundamental value for our shareholders. We continue to believe that our common stock represents an attractive value at current prices." First Northern Bank, established in 1910, is a community based bank with branch offices strategically located in the communities of Dixon, Davis, Fairfield, Vacaville, West Sacramento, Winters and Woodland. The Bank has Real Estate offices in Davis and El Dorado Hills, and an SBA Loan Department in Sacramento. First Northern offers a wide range of SBA, real estate, commercial, agriculture and consumer loans, as well as a full array of alternative investment products. Information on First Northern Community Bancorp's stock can be obtained on the OTC Bulletin Board under the ticker symbol FNRN. Primary market makers for First Northern Bank are PaineWebber, Inc., Hoefer & Arnett, Inc., Sutro & Co. and Pacific Crest Securities. The Bank can be found on the World Wide Web at www.thatsmybank.com. EX-99.5 9 1997 STOCK OPTION PLAN FIRST NORTHERN BANK OF DIXON 1997 STOCK OPTION PLAN TABLE OF CONTENTS ----------------- Page ---- SECTION 1. ESTABLISHMENT AND PURPOSE....................................1 SECTION 2. DEFINITIONS..................................................1 (a) Board of Directors...........................................1 (b) Change in Control............................................1 (c) Code.........................................................2 (d) Committee....................................................2 (e) Company......................................................2 (f) Employee.....................................................2 (g) Exchange Act.................................................2 (h) Exercise Price...............................................2 (i) Fair Market Value............................................2 (j) ISO..........................................................2 (k) Nonstatutory Option..........................................2 (l) Option.......................................................2 (m) Optionee.....................................................2 (n) Outside Director.............................................3 (o) Plan.........................................................3 (p) Service......................................................3 (q) Share........................................................3 (r) Stock........................................................3 (s) Stock Option Agreement.......................................3 (t) Subsidiary...................................................3 (u) Total and Permanent Disability...............................3 SECTION 3. ADMINISTRATION...............................................3 (a) Committee Procedures.........................................3 (b) Committee Responsibilities...................................3 SECTION 4. ELIGIBILITY..................................................4 (a) General Rule.................................................4 (b) Limitation On Grants.........................................4 (c) Ten-Percent Shareholders.....................................5 (d) Attribution Rules............................................5 (e) Outstanding Stock............................................5 SECTION 5. STOCK SUBJECT TO PLAN........................................5 (a) Basic Limitation.............................................5 (b) Additional Shares............................................5 SECTION 6. TERMS AND CONDITIONS OF OPTIONS..............................5 (a) Stock Option Agreement.......................................5 (b) Number of Shares.............................................5 (c) Exercise Price...............................................5 (d) Withholding Taxes............................................6 -i- (e) Exercisability and Term......................................6 (f) Nontransferability...........................................6 (g) Exercise of Options Upon Termination of Service..............6 (h) No Rights as a Stockholder...................................6 (i) Modification, Extension and Renewal of Options...............6 (j) Restrictions on Transfer of Shares...........................7 SECTION 7. PAYMENT FOR SHARES...........................................7 (a) General Rule.................................................7 (b) Surrender of Stock...........................................7 SECTION 8. ADJUSTMENT OF SHARES.........................................7 (a) General......................................................7 (b) Reorganizations..............................................7 (c) Reservation of Rights........................................7 SECTION 9. LEGAL AND REGULATORY REQUIREMENTS............................8 SECTION 10. NO EMPLOYMENT RIGHTS.........................................8 SECTION 11. DURATION AND AMENDMENTS......................................8 (a) Term of the Plan.............................................8 (b) Right to Amend or Terminate the Plan.........................8 (c) Effect of Amendment or Termination...........................8 SECTION 12. EXECUTION...................................................9 -ii- FIRST NORTHERN BANK OF DIXON 1997 STOCK OPTION PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. ---------- -------------------------- The Plan is being established to offer selected key employees an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, by purchasing Shares of the Company's Common Stock. The Plan provides for the grant of Options to purchase Shares. Options granted under the Plan may include Nonstatutory Options as well as ISOs intended to qualify under Code section 422. SECTION 2. DEFINITIONS. ---------- ------------ (a) "Board of Directors" shall mean the Board of Directors of the Company, ------------------ as constituted from time to time. (b) "Change in Control" shall mean the occurrence of any of the following ----------------- events: (i) Approval by the shareholders of the Company of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if either: (A) The Company is not the continuing or surviving entity; or (B) More than 50% of the combined voting power of the Company's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization; (ii) A change in the composition of the Board of Directors, as a result of which fewer than on-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (iii) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then -1- outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person result- ing solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's owner- ship of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" shall mean the committee designated by the Board of --------- Directors, which is authorized to administer the Plan under Section 3 hereof. The Committee shall have membership composition which enables the Plan to qualify under Rule 16b-3 with regard to the grant of Options or other rights under the Plan to persons who are subject to Section 16 of the Exchange Act. (e) "Company" shall mean the First Northern Bank of Dixon, a California ------- corporation. (f) "Employee" shall mean any individual who is a common-law employee of -------- the Company or of a Subsidiary. "Employee" shall not include an individual who is an Outside Director. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------- amended. (h) "Exercise Price" shall mean the amount for which one Share may be --------------- purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. (i) "Fair Market Value" shall mean (i) the closing price of a Share on the ------------------ principal exchange which the Shares are trading, on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (ii) if the Shares are not traded on an exchange but are quoted on the Nasdaq National Market or a successor quotation system, the closing price on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (iii) if the Shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of a Share, as determined by the Committee in good faith. Such determination shall be conclusive and binding on all persons. (j) "ISO" shall mean an employee incentive stock option described in Code --- section 422. (k) "Nonstatutory Option" shall mean an employee stock option that is not -------------------- an ISO. (l) "Option" shall mean an ISO or Nonstatutory Option granted under the ------ Plan and entitling the holder to purchase Shares. (m) "Optionee" shall mean an individual who holds an Option. -------- -2- (n) "Outside Director" shall mean a member of the Board of Directors who is ---------------- not a common-law employee of the Company or of a Subsidiary. (o) "Plan" shall mean this First Northern Bank of Dixon 1997 Stock Option ---- Plan, as amended from time to time. (p) "Service" shall mean service as an Employee. ------- (q) "Share" shall mean one share of Stock, as adjusted in accordance with ----- Section 8 (if applicable). (r) "Stock" shall mean the Common Stock of the Company. ----- (s) "Stock Option Agreement" shall mean the agreement between the Company ----------------------- and an Optionee which contains the terms, conditions and restrictions pertaining to his Option. (t) "Subsidiary" shall mean any corporation, if the Company and/or one or ---------- more other Subsidiaries own not less than fifty percent (50%) of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (u) "Total and Permanent Disability" shall mean that the Optionee is unable ------------------------------ to work. Total and Permanent Disability shall be determined by the Company in accordance with its Long Term Disability Plan. SECTION 3. ADMINISTRATION. ---------- --------------- (a) Committee Procedures. The Board of Directors shall designate one of the -------------------- members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (b) Committee Responsibilities. Subject to the provisions of the Plan, the -------------------------- Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (iv) To determine when Options are to be granted under the Plan; (v) To select the Optionees; -3- (vi) To determine the number of Shares to be made subject to each Option; (vii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, the vesting or duration of the Option (including accelerating the vesting of the Option), to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option; (viii) To amend any outstanding Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; (ix) To prescribe the consideration for the grant of each Option under the Plan and to determine the sufficiency of such consideration; (x) To determine the disposition of each Option under the Plan in accordance with any domestic relations order in the event of an Optionee's divorce or dissolution of marriage; (xi) To determine whether Options under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business; (xii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Stock Option Agreement; and (xiii) To take any other actions deemed necessary or advisable for the administration of the Plan. Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan or any Option to acquire Shares under the Plan. SECTION 4. ELIGIBILITY. ------------ (a) General Rule. Only Employees shall be eligible for designation as ------------- Optionees by the Committee. In addition, only individuals who are employed as common-law employees by the Company or a Subsidiary shall be eligible for the grant of ISOs. (b) Limitation On Grants. No Employee shall be granted Options to purchase -------------------- Shares during any fiscal year covering in excess of 25,000 Shares. -4- (c) Ten-Percent Shareholders. An Employee who owns more than ten percent ------------------------- (10%) of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Code section 422(c)(5). (d) Attribution Rules. For purposes of Subsection (c) above, in determining ----------------- stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for his brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries. (e) Outstanding Stock. For purposes of Subsection (c) above, "outstanding ------------------ stock" shall include all stock actually issued and outstanding immediately after the grant. "Outstanding stock" shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person. SECTION 5. STOCK SUBJECT TO PLAN. ---------- ---------------------- (a) Basic Limitation. Shares offered under the Plan shall be authorized but ---------------- unissued Shares. The aggregate number of Shares which may be issued under the Plan upon exercise of Options shall not exceed 250,000 Shares, subject to adjustment pursuant to Section 8. The number of Shares which are subject to Options outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. (b) Additional Shares. In the event that any outstanding Option for any ------------------ reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option shall again be available for the purposes of the Plan. SECTION 6. TERMS AND CONDITIONS OF OPTIONS. ---------- -------------------------------- (a) Stock Option Agreement. Each grant of an Option under the Plan shall be ---------------------- evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each Stock Option Agreement shall specify the number ---------------- of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 8. The Stock Option Agreement shall also specify whether the Option is an ISO or a Nonstatutory Option. (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise -------------- Price. The Exercise Price of an ISO shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(c). Subject to the preceding sentence, the Exercise Price under any Option shall be determined by -5- the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Sections 7(a) and (b). (d) Withholding Taxes. As a condition to the exercise of an Option, the ------------------ Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. An Optionee may satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Shares to the Company may be subject to restrictions imposed by the Committee. (e) Exercisability and Term. Options shall be exercisable within the times ----------------------- or upon the events determined by the Committee as set forth in the Stock Option Agreement. Options shall become fully exercisable as to all Shares subject to such Option in the event that a Change in Control takes place with respect to the Company. Subject to the preceding sentence, the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when the Option is to expire; provided, however that the term of any ISO shall not exceed ten (10) years. (f) Nontransferability. During an Optionee's lifetime, his or her Option(s) ------------------ shall be exercisable only by him or her and shall not be transferable, unless the Option agreement otherwise provides. In the event of an Optionee's death, his or her Option(s) shall not be transferable other than by will, beneficiary designation or by the laws of descent and distribution. (g) Exercise of Options Upon Termination of Service. Each Stock Option -------------------------------------------------- Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee's Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by beneficiary designation, bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. (h) No Rights as a Stockholder. An Optionee, or a transferee of an ----------------------------- Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 8. (i) Modification, Extension and Renewal of Options. Within the limitations ----------------------------------------------- of the Plan, the Committee may cancel, modify, extend or renew outstanding Options or may accept the cancellation of outstanding Options (to the extent not previously exercised) in return for the grant of new Options at the same or a different price. The foregoing notwithstanding, no modification -6- of an Option shall, without the consent of the Optionee, impair his rights or increase his obligations under such Option. (j) Restrictions on Transfer of Shares. Any Shares issued upon exercise of ---------------------------------- an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION 7. PAYMENT FOR SHARES. ---------- ------------------- (a) General Rule. The entire Exercise Price of Shares issued under the Plan ------------ shall be payable in lawful money of the United States of America at the time when such options are exercised, except as provided in Subsection (b) below. (b) Surrender of Stock. To the extent that a Stock Option Agreement so ------------------- provides, payment may be made all or in part with Shares which have already been owned by the Optionee or his representative for more than the maximum number of months required by the Committee and which are surrendered to the Company in good form for transfer. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. SECTION 8. ADJUSTMENT OF SHARES. ---------- --------------------- (a) General. In the event of a subdivision of the outstanding Stock, a ------- declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section 5, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option. (b) Reorganizations. In the event that the Company is a party to a merger --------------- or other reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. Such agreement may provide for the assumption of outstanding Options by the surviving corporation or its parent or for their continuation by the Company (if the Company is a surviving corporation); provided, however, that if assumption or continuation of the outstanding Options is not provided by such agreement then the Committee shall have the option of offering the payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the Exercise Price, in all cases without the Optionees' consent. (c) Reservation of Rights. Except as provided in this Section 8, an ----------------------- Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to -7- make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 9. LEGAL AND REGULATORY REQUIREMENTS. ---------- ---------------------------------- Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company's securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. SECTION 10. NO EMPLOYMENT RIGHTS. ----------- --------------------- No provision of the Plan, nor any Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person's Service at any time and for any reason. SECTION 11. DURATION AND AMENDMENTS. ----------- ------------------------ (a) Term of the Plan. The Plan, as set forth herein, shall become effective ---------------- as of the date set forth below, subject to the approval of the Company's stockholders. In the event that the stockholders fail to approve the Plan within twelve (12) months of its adoption by the Board of Directors, any Option grants already made shall be null and void, and no additional Option grants shall be made after such date. The Plan shall terminate automatically ten (10) years after its original adoption by the Board of Directors and may be terminated on any earlier date pursuant to Subsection (b) below. (b) Right to Amend or Terminate the Plan. The Board of Directors may amend ------------------------------------ the Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially altered, or impaired adversely, by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. (c) Effect of Amendment or Termination. No Shares shall be issued or sold ----------------------------------- under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. -8- SECTION 12. EXECUTION. ----------- ---------- To record the adoption of the Plan by the Board of Directors, the Company has caused its authorized officer to execute the same as of February 27, 1997. FIRST NORTHERN BANK OF DIXON By /s/ Owen J. Onsum --------------------------- Owen J. Onsum Its President -------------------------- -9- EX-99.6 10 1997 NONSTATUTORY STOCK OPTION PLAN AMENDED AND RESTATED FIRST NORTHERN BANK OF DIXON OUTSIDE DIRECTORS 1997 NONSTATUTORY STOCK OPTION PLAN TABLE OF CONTENTS Page 1. ESTABLISHMENT AND PURPOSE..........................................1 2. DEFINITIONS........................................................1 (a) Bank......................................................1 (b) Board of Directors........................................1 (c) Change in Control.........................................1 (d) Code......................................................2 (e) Committee.................................................2 (f) Exchange Act..............................................2 (g) Exercise Price............................................2 (h) Fair Market Value.........................................2 (i) Nonstatutory Option.......................................2 (j) Option....................................................2 (k) Optionee..................................................2 (l) Outside Director..........................................2 (m) Plan......................................................3 (n) Service...................................................3 (o) Share.....................................................3 (p) Stock.....................................................3 (q) Stock Option Agreement....................................3 (r) Subsidiary................................................3 (s) Total and Permanent Disability............................3 3. ADMINISTRATION.....................................................3 (a) Committee Procedures......................................3 (b) Committee Responsibilities................................3 4. ELIGIBILITY........................................................4 (a) General Rule..............................................4 (b) Automatic Grant of Options................................4 5. STOCK SUBJECT TO PLAN..............................................5 (a) Basic Limitation..........................................5 (b) Additional Shares.........................................5 6. TERMS AND CONDITIONS OF OPTIONS....................................6 (a) Stock Option Agreement....................................6 (b) Number of Shares..........................................6 (c) Exercise Price............................................6 (d) Withholding Taxes.........................................6 (e) Nontransferability........................................6 (f) Exercise of Options Upon Termination of Service...........6 (g) No Rights as a Stockholder................................6 (h) Restrictions on Transfer of Shares........................6 7. PAYMENT FOR SHARES.................................................7 -i- 8. ADJUSTMENT OF SHARES...............................................7 (a) General...................................................7 (b) Reorganizations...........................................7 (c) Reservation of Rights.....................................7 9. LEGAL AND REGULATORY REQUIREMENTS..................................7 10. DURATION AND AMENDMENTS............................................8 (a) Term of the Plan..........................................8 (b) Right to Amend or Terminate the Plan......................8 (c) Effect of Amendment or Termination........................8 11. EXECUTION..........................................................8 -ii- AMENDED AND RESTATED FIRST NORTHERN BANK OF DIXON OUTSIDE DIRECTORS 1997 NONSTATUTORY STOCK OPTION PLAN SECTION 1. ESTABLISHMENT AND PURPOSE. ---------- -------------------------- The Plan is being established to offer Outside Directors an opportunity to acquire a proprietary interest in the success of the Bank, or to increase such interest, by purchasing Shares of the Bank's Common Stock. The Plan provides for the grant of Nonstatutory Options to purchase Shares. SECTION 2. DEFINITIONS. ---------- ------------ (a) "Bank" shall mean First Northern Bank of Dixon, a California banking ---- corporation. (b) "Board of Directors" shall mean the Board of Directors of the Bank, as ------------------ constituted from time to time. (c) "Change in Control" shall mean the occurrence of any of the following ----------------- events: (i) Approval by the shareholders of the Bank of a merger or consolidation of the Bank with or into another entity or any other corporate reorganization, if either: (A) The Bank is not the continuing or surviving entity; or (B) More than 50% of the combined voting power of the Bank's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not shareholders of the Bank immediately prior to such merger, consolidation or other reorganization; (ii) A change in the composition of the Board of Directors, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Bank 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the directors who had been directors of the Bank 24 months prior to such change and who were still in office at the time of the election or nomination; or -1- (iii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Bank representing 25% or more of the combined voting power of the Bank's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Bank's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Bank. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" shall mean the committee designated by the Board of --------- Directors, which is authorized to administer the Plan under Section 3 hereof. The Committee shall have membership composition which enables the Plan to qualify under Rule 16b-3 with regard to the grant of Options or other rights under the Plan to persons who are subject to Section 16 of the Exchange Act. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (g) "Exercise Price" shall mean the amount for which one Share may be -------------- purchased upon exercise of an Option, as specified in the applicable Stock Option Agreement in accordance with the terms of this Plan. (h) "Fair Market Value" shall mean (i) the closing price of a Share on the ----------------- principal exchange on which the Shares are trading, on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (ii) if the Shares are not traded on an exchange but are quoted on the Nasdaq National Market or a successor quotation system, the closing price on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (iii) if the Shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of a Share, as determined by the Committee in good faith. Such determination shall be conclusive and binding on all persons. (i) "Nonstatutory Option" shall mean a stock option that is not described ------------------- in Section 422 of the Code. (j) "Option" shall mean a Nonstatutory Option granted under the Plan and ------ entitling the holder to purchase Shares. (k) "Optionee" shall mean an individual who holds an Option. -------- (l) "Outside Director" shall mean a member of the Board of Directors who is ---------------- not a common-law employee of the Bank or of a Subsidiary. -2- (m) "Plan" shall mean this Amended and Restated First Northern Bank of ---- Dixon Outside Directors 1997 Nonstatutory Stock Option Plan, as amended from time to time. (n) "Service" shall mean service on the Board of Directors whether or not ------- as an Outside Director. (o) "Share" shall mean one share of Stock, as adjusted in accordance with ----- Section 8 (if applicable). (p) "Stock" shall mean the Common Stock of the Bank. ----- (q) "Stock Option Agreement" shall mean the agreement between the Bank and ---------------------- an Optionee which contains the terms, conditions and restrictions pertaining to the Optionee's Option. (r) "Subsidiary" shall mean any corporation, if the Bank and/or one or more ---------- other Subsidiaries own not less than fifty percent (50%) of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (s) "Total and Permanent Disability" shall mean that the Optionee is unable ------------------------------ to serve on the Board of Directors due to the Optionee's disability. Total and Permanent Disability shall be determined by the Bank in accordance with its Long Term Disability Plan. SECTION 3. ADMINISTRATION. ---------- --------------- (a) Committee Procedures. The Board of Directors shall designate one of the -------------------- members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (b) Committee Responsibilities. Subject to the provisions of the Plan, the -------------------------- Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Bank, any instrument required to carry out the purposes of the Plan; (iv) To determine the eligibility of Optionees; -3- (v) Subject to Section 4(b), to prescribe the terms and conditions of each Option and to specify the provisions of the Stock Option Agreement relating to such Option; (vi) Subject to Section 4(b), to amend any outstanding Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Optionee who entered into such agreement; (vii) To determine the disposition of each Option under the Plan in accordance with any domestic relations order in the event of an Optionee's divorce or dissolution of marriage; (viii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Stock Option Agreement; and (ix) Subject to Section 4(b), to take any other actions deemed necessary or advisable for the administration of the Plan. Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate. All decisions, interpretations and other actions of the Committee shall be final and binding on all Optionees and all persons deriving their rights from an Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan or any Option to acquire Shares under the Plan. SECTION 4. ELIGIBILITY. ---------- ------------ (a) General Rule. Only Outside Directors shall be eligible to receive a ------------ grant of an Option under this Plan. Options may only be granted pursuant to the provisions of Section 4(b) of this Plan. Only Nonstatutory Options will be granted pursuant to this Plan. (b) Automatic Grant of Options. Each Outside Director shall receive a -------------------------- one-time grant of Options as described in this Section 4(b). (i) Each Outside Director who is initially elected, or reelected at the Bank's 1997 annual shareholders meeting shall automatically be granted an Option to purchase 3,000 Shares (subject to adjustment under Section 8). Thereafter, each individual who is initially elected or appointed as an Outside Director shall be granted an Option to purchase 3,000 Shares (subject to adjustment under Section 8). (ii) All Options may be exercised to the extent that Shares have been vested. All Shares shall vest as follows: Twenty percent (20%) shall be vested on the date of grant. Thereafter, the Shares will vest annually at a rate of 20 percent (20%) per year. All of the Shares shall be fully vested on the fourth anniversary of the date of grant. No additional Shares will vest after the Optionee's Service has terminated for any reason. -4- (iii) Notwithstanding anything to the contrary in Section 4(b)(ii), all Options granted to an Outside Director under Section 4(b)(i) shall become fully vested and exercisable upon a Change in Control. (iv) The Exercise Price under all Options granted to an Outside Director under this Section 4(b) shall be equal to one hundred percent (100%) of the Fair Market Value of a Share on the date of grant. (v) All Options granted to an Outside Director under this Section 4(b) shall terminate on the earlier of: (A) The fifth anniversary of the date of grant; (B) The date which is one-year after the termination of the Optionee's Service by reason of Total and Permanent Disability or death, provided that during the one-year period following termination of Service the Option shall be exercisable as to the vested portion thereof; (C) Immediately upon the termination of the Optionee's Service in the event of the conviction of the Optionee of a felony, or a finding by a court that the Optionee engaged in a fraudulent or dishonest act or a gross abuse of authority regarding the Bank; or (D) The date ninety (90) days after the termination of the Optionee's service as an Outside Director for any other reason, provided that during the 90-day period following termination of Service the Option shall be exercisable as to the vested portion thereof. SECTION 5. STOCK SUBJECT TO PLAN. ---------- ---------------------- (a) Basic Limitation. Shares offered under the Plan shall be authorized but ---------------- unissued Shares. The aggregate number of Shares which may be issued under the Plan upon exercise of Options shall not exceed 75,000 Shares, subject to adjustment pursuant to Section 8. The number of Shares available for the grant of Options to Outside Directors pursuant to Section 4(b) hereof shall equal the number of Shares to be issued upon the exercise of Options granted thereunder. The number of Shares which are subject to Options outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Bank, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. (b) Additional Shares. In the event that any outstanding Option for any ----------------- reason expires or is canceled or otherwise terminated, the Shares allocable to the unexercised portion of such Option shall again be available for the purposes of the Plan. -5- SECTION 6. TERMS AND CONDITIONS OF OPTIONS. ---------- -------------------------------- (a) Stock Option Agreement. Each grant of an Option under the Plan shall be ---------------------- evidenced by a Stock Option Agreement between the Optionee and the Bank. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. Subject to Section 4(b), the provisions of the various Stock Option Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each Stock Option Agreement shall specify the number ---------------- of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 8. (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise -------------- Price as determined in accordance with Section 4(b)(iv). The Exercise Price shall be payable in the form described in Section 7. (d) Withholding Taxes. As a condition to the exercise of an Option, the ----------------- Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. An Optionee may satisfy all or part of the Optionee's withholding or income tax obligations by having the Bank withhold all or a portion of any Shares that otherwise would be issued to the Optionee or by surrendering all or a portion of any Shares that the Optionee previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Shares to the Bank may be subject to restrictions imposed by the Committee. (e) Nontransferability. During an Optionee's lifetime, the Optionee's ------------------ Option(s) shall be exercisable only by the Optionee and shall not be transferable. In the event of an Optionee's death, the Optionee's Option(s) shall not be transferable other than by will, beneficiary designation or by the laws of descent and distribution. (f) Exercise of Options Upon Termination of Service. Each Stock Option ----------------------------------------------- Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee's Service with the Bank and its Subsidiaries as set forth in Section 4(b)(iii), and may specify the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by beneficiary designation, bequest or inheritance. (g) No Rights as a Stockholder. An Optionee, or a transferee of an -------------------------- Optionee, shall have no rights as a stockholder with respect to any Shares covered by the Optionee's Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 8. (h) Restrictions on Transfer of Shares. Any Shares issued upon exercise of ----------------------------------- an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal -6- and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION 7. PAYMENT FOR SHARES. ---------- ------------------- The entire Exercise Price shall be payable in lawful money of the United States of America at the time when Options are exercised. SECTION 8. ADJUSTMENT OF SHARES. ---------- --------------------- (a) General. In the event of a subdivision of the outstanding Stock, a ------- declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the value of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (i) the number of Shares available for future grants under Section 5, (ii) the number of Shares covered by each outstanding Option or (iii) the Exercise Price under each outstanding Option. (b) Reorganizations. In the event that the Bank is a party to a merger or --------------- other reorganization, outstanding Options shall be subject to the agreement of merger or reorganization. Such agreement may provide for the assumption of outstanding Options by the surviving corporation or its parent or for their continuation by the Bank (if the Bank is a surviving corporation); provided, however, that if assumption or continuation of the outstanding Options is not provided by such agreement then the Committee shall have the option of offering the payment of a cash settlement equal to the difference between the amount to be paid for one Share under such agreement and the Exercise Price, in all cases without the Optionees' consent. (c) Reservation of Rights. Except as provided in this Section 8, an --------------------- Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Bank of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Bank to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 9. LEGAL AND REGULATORY REQUIREMENTS. --------- ---------------------------------- Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Bank's securities may then be listed, and the Bank has obtained the approval or -7- favorable ruling from any governmental agency which the Bank determines is necessary or advisable. SECTION 10. DURATION AND AMENDMENTS. ----------- ------------------------ (a) Term of the Plan. The Plan, as set forth herein, shall become effective ---------------- as of the date set forth below, subject to the approval of the Bank's stockholders. In the event that the stockholders fail to approve the Plan within twelve (12) months of its adoption by the Board of Directors, any Option grants already made shall be null and void, and no additional Option grants shall be made after such date. The Plan shall terminate automatically ten (10) years after its original adoption by the Board of Directors and may be terminated on any earlier date pursuant to Section 10(b) below. (b) Right to Amend or Terminate the Plan. The Board of Directors may amend ------------------------------------ the Plan at any time and from time to time; provided, however, that any amendment to Sections 4 or 5 of the Plan shall be subject to the approval of the Bank's shareholders. Rights and obligations under any Option granted before amendment of the Plan shall not be materially altered, or impaired adversely, by such amendment, except with consent of the person to whom the Option was granted. Except as otherwise provided in this Section 10(b), an amendment of the Plan shall be subject to the approval of the Bank's stockholders only to the extent required by applicable laws, regulations or rules. (c) Effect of Amendment or Termination. No Shares shall be issued or sold ---------------------------------- under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. SECTION 11. EXECUTION. ----------- ---------- To record the adoption of the Plan by the Board of Directors, the Bank has caused its authorized officer to execute the same as of June 11, 1997. FIRST NORTHERN BANK OF DIXON By: /s/ Owen J. Onsum ------------------------------------ Its: President ----------------------------------- -8- EX-99.7 11 EMPLOYEE STOCK PURCHASE PLAN FIRST NORTHERN BANK OF DIXON 1997 EMPLOYEE STOCK PURCHASE PLAN TABLE OF CONTENTS Page Section 1. Establishment of the Plan...................................1 Section 2. Definitions.................................................1 Section 3. Duration; Shares Authorized.................................2 Section 4. Administration..............................................2 Section 5. Eligibility and Participation...............................3 Section 6. Participation Periods.......................................3 Section 7. Purchase Price..............................................3 Section 8. Employee Contributions......................................3 Section 9. Plan Accounts; Purchase of Shares...........................4 Section 10. Withdrawal From the Plan....................................5 Section 11. Effect of Termination of Employment or Death................5 Section 12. Rights Not Transferable.....................................5 Section 13. Recapitalization, Etc.......................................5 Section 14. Limitation on Stock Ownership...............................6 Section 15. No Rights as an Employee....................................6 Section 16. Rights as a Stockholder.....................................6 Section 17. Use of Funds................................................6 Section 18. Amendment or Termination of the Plan........................7 Section 19. Governing Law...............................................7 -i- FIRST NORTHERN BANK OF DIXON 1997 EMPLOYEE STOCK PURCHASE PLAN Section 1. Establishment of the Plan. ---------- -------------------------- The First Northern Bank of Dixon 1997 Employee Stock Purchase Plan (the "Plan") is hereby established to provide Eligible Employees with an opportunity to purchase the Company's common stock so that they may increase their proprietary interest in the success of the Company. The Plan, which provides for the purchase of stock through payroll withholding, is intended to qualify under Section 423 of the Code. Section 2. Definitions. ---------- ------------ (a) "Board of Directors" or "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Company" means First Northern Bank of Dixon, a California corporation. (d) "Compensation" means the base compensation paid to a Participant during a Participation Period in cash or in kind including overtime, commissions and shift differential. Incentive compensation, other bonuses and other forms of compensation for work outside the regular work schedule are excluded. (e) "Date of Participation" means the first day of a Participation Period. (f) "Eligible Employee" means any Employee of a Participating Company (i) who has been continually employed for at least ninety (90) days prior to the commencement of a Participation Period, and (ii) who is an Employee at the commencement of a Participation Period. In addition, an Employee who is an officer and who is a highly compensated employee within the meaning of section 414(q) of the Code may be excluded from participation in the Plan. (g) "Employee" means any common-law employee of a Participating Company. (h) "Fair Market Value" shall mean (i) the closing price of a share of Stock on the principal exchange which the shares are trading on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (ii) if the shares are not traded on an exchange but are quoted on the Nasdaq National Market or a successor quotation system, the closing price on the Nasdaq National Market or such successor quotation system on the first trading day immediately preceding the date on which the Fair Market Value is determined, or (iii) if the shares are not traded on an exchange or quoted on the Nasdaq National Market or a successor quotation system, the fair market value of a share as determined by the Plan Administrator in good faith. Such determination shall be conclusive and binding on all persons. (i) "Participant" means an Eligible Employee who elects to participate in the Plan, as provided in Section 5 hereof. -1- (j) "Participating Company" means the Company and such present or future Subsidiaries of the Company as the Board of Directors shall from time to time designate. (k) "Participation Period" means a period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 6. (l) "Plan Account" means the account established for each Participant pursuant to Section 9(a). (m) "Purchase Price" means the price at which Participants may purchase Stock under Section 5 of the Plan, as determined pursuant to Section 7. (n) "Stock" means the common stock of the Company. (o) "Subsidiary" means a subsidiary corporation as defined in Section 424 of the Code. Section 3. Duration; Shares Authorized. ---------- ---------------------------- The Plan shall terminate automatically ten (10) years after its original adoption by the Board of Directors and may be terminated on any earlier date pursuant to Section 18 below. The maximum aggregate number of shares which may be offered under the Plan shall be 250,000 shares of Stock, subject to adjustment as provided in Section 13 hereof. Section 4. Administration. ---------- --------------- (a) The Plan shall be administered by a Plan Administrator appointed by the Board of Directors. The interpretation and construction by the Plan Administrator of any provision of the Plan or of any right to purchase stock qualified hereunder shall be conclusive and binding on all persons. (b) No member of the Board or the Plan Administrator shall be liable for any action or determination made in good faith with respect to the Plan or the right to purchase Stock hereunder. The Plan Administrator shall be indemnified by the Company against the reasonable expenses, including attorney's fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which he or she may be a party by reason of any action taken or failure to act under or in connection with the Plan or any stock purchased thereunder, and against all amounts paid by him or her in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by him or her in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that the Plan Administrator is liable for negligence or misconduct in the performance of his or her duties; provided that within sixty (60) days after institution of any such action, suit or proceeding, the Plan Administrator shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. -2- (c) All costs and expenses incurred in administering the Plan shall be paid by the Company. The Board or the Plan Administrator may request advice for assistance or employ such other persons as are necessary for proper administration of the Plan. Section 5. Eligibility and Participation. ---------- ------------------------------ (a) Any person who qualifies or will qualify as an Eligible Employee on the Date of Participation with respect to a Participation Period may elect to participate in the Plan for such Participation Period. An Eligible Employee may elect to participate by executing the participation agreement prescribed for such purpose by the Plan Administrator. The participation agreement shall be filed with the Plan Administrator no later than the deadline stated on the participation agreement, and if none is stated, then no later than the first day of the Participation Period. The Eligible Employee shall designate on the participation agreement the amount, of his or her Compensation which he or she elects to have withheld for the purchase of Stock in the manner specified by the Plan Administrator; provided that the amount may not be greater than ten percent (10%) of the Participant's Compensation. (b) By enrolling in the Plan, a Participant shall be deemed to have elected to purchase the maximum number of whole shares of Stock which can be purchased with the amount of the Participant's Compensation which is withheld during the Participation Period. (c) Once enrolled, a Participant will continue to participate in the Plan for each succeeding Participation Period until he or she terminates participation or ceases to qualify as an Eligible Employee. A Participant who withdraws from the Plan in accordance with Section 10 may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Section 5(a). Section 6. Participation Periods. ---------- ---------------------- The Plan shall be implemented by one or more Participation Periods of not more than twenty-seven (27) months each. The Board of Directors, or a committee to which the Board has delegated its authority, shall determine the commencement date and duration of each Participation Period. Section 7. Purchase Price. ---------- --------------- The Purchase Price for each share of Stock shall be the lesser of (i) eighty-five percent (85%) of the Fair Market Value of such share on the last trading day before the Date of Participation or (ii) eighty-five percent (85%) of the Fair Market Value of such share on the last trading day during the Participation Period. Section 8. Employee Contributions. ---------- ----------------------- A Participant may purchase shares of Stock solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Section 5(a), shall commence with the first paycheck issued during the Participation Period and shall be deducted from each subsequent paycheck throughout the Participation Period. If a Participant desires to decrease the rate of payroll withholding during the Participation Period, he or she may do so, if permitted by -3- the Plan Administrator, one time during a Participation Period by filing a new participation agreement with the Plan Administrator. Such decrease will be effective as of the first day of the second payroll period which begins following the receipt of the new participation agreement. If a Participant desires to increase the rate of payroll withholding, he or she may do so effective for the next Participation Period by filing a new participation agreement with the Plan Administrator on or before the date specified by the Plan Administrator, and if none is stated, then no later than the first day of the Participation Period for which such change is to be effective. Section 9. Plan Accounts; Purchase of Shares. ---------- ---------------------------------- (a) The Company will maintain a Plan Account on its books in the name of each Participant. At the close of each pay period, the amount deducted from the Participant's Compensation will be credited to the Participant's Plan Account. (b) As of the last day of each Participation Period, the amount then in the Participant's Plan Account will be divided by the Purchase Price, and the number of whole shares which results (subject to the limitations described in Sections 5(b), 9(c) and 14) shall be purchased from the Company with the funds in the Participant's Plan Account. Share certificates representing the number of shares of Stock so purchased shall be delivered to the Plan Administrator pursuant to a participation agreement between each Participant and the Company and subject to the conditions described therein which may include a requirement that shares of Stock be held and not sold for certain time periods. (c) In the event that the aggregate number of shares which all Participants elect to purchase during a Participation Period shall exceed the number of shares remaining available for issuance under the Plan, then the number of shares to which each Participant shall become entitled shall be determined by multiplying the number of shares available for issuance by a fraction the numerator of which is the sum of the number of shares the Participant has elected to purchase pursuant to Section 5, and the denominator of which is the sum of the number of shares which all employees have elected to purchase pursuant to Section 5. Any cash amount remaining in the Participant's Plan Account under these circumstances shall be refunded to the Participant. (d) Any amount remaining in the Participant's Plan Account caused by a surplus due to fractional shares after deducting the amount of the Purchase Price for the number of whole shares issued to the Participant shall be carried over in the Participant's Plan Account for the succeeding Participation Period, without interest. Any amount remaining in the Participant's Plan Account caused by anything other than a surplus due to fractional shares shall be refunded to the Participant in cash, without interest. (e) As soon as practicable following the end of each Participation Period, the Company shall deliver to each Participant a Plan Account statement setting forth the amount of payroll deductions, the purchase price, the number of shares purchased and the remaining cash balance, if any. -4- Section 10. Withdrawal From the Plan. ----------- ------------------------- A Participant may elect to withdraw from participation under the Plan at any time up to the last day of a Participation Period by filing the prescribed form with the Plan Administrator. As soon as practicable after a withdrawal, payroll deductions shall cease and all amounts credited to the Participant's Plan Account will be refunded in cash, without interest. A Participant who has withdrawn from the Plan shall not be a Participant in future Participation Periods, unless he or she again enrolls in accordance with the provisions of Section 5. Section 11. Effect of Termination of Employment or Death. ----------- --------------------------------------------- (a) Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 10. A transfer from one Participating Company to another shall not be treated as a termination of employment. (b) A Participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's Account under the Plan in the event of such Participant's death subsequent to the purchase of shares but prior to delivery to him of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's Account under the Plan in the event of such Participant's death prior to the last day of a Participation Period. (c) Such designation of beneficiary may be changed by the Participant at any time by written notice. In the event of the death of a Participant in the absence of a valid designation of a beneficiary who is living at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant; or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant; or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. Section 12. Rights Not Transferable. ----------- ------------------------ The rights or interests of any Participant in the Plan, or in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or by any other manner other than as permitted by the Code or by will or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than as permitted by the Code or by will or the laws of descent and distribution, such act shall be treated as an automatic withdrawal under Section 10. Section 13. Recapitalization, Etc. ----------- ---------------------- (a) The aggregate number of shares of Stock offered under the Plan, the number and price of shares which any Participant has elected to purchase pursuant to Section 5 and the maximum number of shares which a Participant may elect to purchase under the Plan in any Participation Period shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from a subdivision or consolidation of shares or any other -5- capital adjustment, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt of consideration by the Company. (b) In the event of a dissolution or liquidation of the Company, or a merger or consolidation to which the Company is a constituent corporation, this Plan shall terminate, unless the plan of merger, consolidation or reorganization provides otherwise, and all amounts which each Participant has paid towards the Purchase Price of Stock hereunder shall be refunded, without interest. (c) The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. Section 14. Limitation on Stock Ownership. ----------- ------------------------------ Notwithstanding any provision herein to the contrary, no Participant shall be permitted to elect to participate in the Plan (i) if such Participant, immediately after his or her election to participate, would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company, or (ii) if under the terms of the Plan the rights of the Employee to purchase Stock under this Plan and all other qualified employee stock purchase plans of the Company or its Subsidiaries would accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of the Fair Market Value of such Stock (determined at the time such right is granted) for each calendar year for which such right is outstanding at any time. For purposes of this Section 14, ownership of stock shall be determined by the attribution rules of Section 424(d) of the Code, and Participants shall be considered to own any stock which they have a right to purchase under this or any other stock plan. Section 15. No Rights as an Employee. ----------- ------------------------- Nothing in the Plan shall be construed to give any person the right to remain in the employ of a Participating Company. Each Participating Company reserves the right to terminate the employment of any person at any time and for any reason. Section 16. Rights as a Stockholder. ----------- ------------------------ A Participant shall have no rights as a stockholder with respect to any shares he or she may have a right to purchase under the Plan until the date of issuance of a stock certificate pursuant to Section 9(b), subject to the stockholders approval of the adoption of the Plan. Section 17. Use of Funds. ----------- ------------- All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions in separate accounts. -6- Section 18. Amendment or Termination of the Plan. ----------- ------------------------------------- The Board of Directors shall have the right to amend, modify or terminate the Plan at any time without notice. An amendment of the Plan shall be subject to stockholder approval only to the extent required by applicable laws, regulations or rules. Section 19. Governing Law. ----------- -------------- The Plan shall be governed by, and construed and interpreted in accordance with, the laws of the State of California. To record the adoption of the Plan by the Board of Directors, effective as of February 27, 1997, and subject to stockholder approval, the Company has caused its authorized officer to execute the same on February 27, 1997. First Northern Bank of Dixon By /s/ Owen J. Onsum ----------------------------------- President -7- EX-99.8 12 INCENTIVE STOCK OPTION AGREEMENT FIRST NORTHERN BANK OF DIXON 1997 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT Annual Vesting Over Four Years First Northern Bank of Dixon, a California banking corporation (the "Bank"), hereby grants an Option to purchase Shares of its common stock to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Bank's 1997 Stock Option Plan (the "Plan"). Date of Option Grant: August 13, 1997 Name of Optionee: ------------------------------------------------------ Optionee's Social Security Number: _____-____-_____ Number of Shares of Common Stock Covered by Option: Price per Share: $ ----------------------------------------------------- Vesting Start Date: The later of (i) approval by the shareholders of the Bank of the amendments to the preemptive rights clause in the Bank's Articles of Incorporation and (ii) August 13, 1997. By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also enclosed. Optionee: --------------------------------------------------------------- (Signature) Bank: --------------------------------------------------------------- (Signature) Title: Attachment - ---------- FIRST NORTHERN BANK OF DIXON 1997 STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT Annual Vesting Over Four Years Incentive Stock Option This Option is intended to be an incentive stock Option under section 422 of the Code and will be interpreted accordingly. Vesting and Exercise This Option may be exercised to the extent that Shares have been vested. Beginning on the Vesting Start Date, you will be twenty percent (20%) vested in the Shares granted under this Option. Thereafter, the Shares under this Option will vest annually at a rate of 20 percent (20%) per year. All of the Shares shall be fully vested on the fourth anniversary of the Vesting Start Date as shown on the cover sheet. No additional Shares will vest after your Service has terminated for any reason. "Service" means your service as employee, consultant or advisor of the Bank or an affiliated company. Notwithstanding of the vesting schedule set forth above, in the event of a Change in Control of the Bank during the period you remain in Service, all of the Shares which are unvested as of the effective date of such Change in Control shall immediately become vested. For the purposes hereof, a "Change in Control" shall have the meaning set forth in Section 2(b) of the Plan. Term This Option will expire in any event at the close of business at Bank headquarters on the fifth anniversary of the Date of Grant, as shown on the cover sheet. (It will expire earlier if your Service terminates, as described below.) Regular Termination If your Service terminates for any reason except death, Total and Permanent Disability, or for cause then this Option will expire at the close of business at Bank headquarters on the 90th day after your termination date. During that 90-day period you may exercise the vested portion of this Option. Termination for If your Service terminates for cause, as determined Cause by the Committee, then this Option will expire upon your termination of Service. -2- Death In the event of your death while in Service, then this Option will expire at the close of business at Bank headquarters on the date which is one year after the date of death. During that one-year period, your estate or heirs may exercise the vested portion of this Option. Total and If your Service terminates because of your Permanent Disability Total and Permanent Disability, then this Option will expire at the close of business at Bank headquarters on the date which is one year after your termination date. During that one-year period you may exercise the vested portion of this Option. "Total and Permanent Disability" means that you are unable to work as determined in accordance with the Bank's Long Term Disability Plan. Leaves of Absence For purposes of this Option, your Service does not terminate when you go on a bona fide leave of absence that was approved by the Bank in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether this Option is entitled to ISO status, your Service will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract. Your Service terminates in any event when the approved leave ends unless you immediately return to active work. The Bank determines which leaves count for this purpose, and when your Service terminates for all purposes under the Plan. Restrictions The Bank will not permit you to exercise this Option on Exercise if the issuance of Shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this Option, you must notify the Bank by filing the proper "Notice of Exercise" form attached hereto. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Bank. If someone else wants to exercise this Option after your death, that person must prove to the Bank's satisfaction that he or she is entitled to do so. -3- Periods of Any other provision of this Agreement notwithstanding, Nonexercisability the Bank shall have the right to designate one or more periods of time, each of which shall not exceed 180 days in length, during which this Option shall not be exercisable if the Bank determines (in its sole discretion) that such limitation on exercise could in any way facilitate any issuance of securities by the Bank, facilitate the registration or qualification of any securities by the Bank under applicable law, or facilitate the perfection of any exemption from the registration or qualification requirements under any applicable law for the issuance or transfer of any securities. Such limitation on exercise shall not alter the vesting schedule set forth in this Agreement other than to limit the periods during which this Option shall be exercisable. Form of Payment When you submit your notice of exercise, you must include payment of the Option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: o Your personal check, a cashier's check or a money order. o Shares which have already been owned by you for any time period specified by the Committee and which are surrendered to the Bank. The value of the Shares, determined as of the effective date of the Option exercise, will be applied to the Option price. Withholding Taxes To the extent that any withholding or other taxes may be due as a result of the Option exercise or the sale of shares acquired upon exercise of this Option and the sale of the shares, you will not be allowed to exercise this Option unless you make acceptable arrangements to pay such withholding or other taxes. Restrictions on Resale By signing this Agreement, you agree not to sell any Option Shares at a time when applicable laws, regulations or Bank or underwriter trading policies prohibit a sale. In connection with any underwritten public offering by the Bank of its equity securities, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any Option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares without the prior written consent of the Bank or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Bank or such underwriters. In order to enforce the provisions of this paragraph, the Bank may -4- impose stop-transfer instructions with respect to the shares until the end of the applicable stand-off period. Transfer of Option Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will. Regardless of any marital property settlement agreement, the Bank is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Bank obligated to recognize such individual's interest in this Option in any other way. Retention Rights Neither this Option nor this Agreement give you the right to be retained by the Bank (or any subsidiaries) in any capacity. The Bank (and any subsidiaries) reserve the right to terminate your Service at any time and for any reason. Shareholder Rights You, or your estate or heirs, have no rights as a shareholder of the Bank until a certificate for the Option Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. Adjustments In the event of a stock split, a stock dividend or a similar change in the Bank stock, the number of Shares covered by this Option and the exercise price per share may be adjusted pursuant to the Plan. This Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Bank is subject to such corporate activity. Applicable Law This Agreement will be interpreted and enforced under the laws of the State of California. The Plan and Other The text of the Plan is incorporated in this Agreements Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Bank regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan. -5- NOTICE OF EXERCISE OF STOCK OPTION First Northern Bank of Dixon 195 N. First Street Dixon, CA 95620 Attn: Corporate Secretary Re: Exercise of Stock Option to Purchase Shares of Bank Stock --------------------------------------------------------- Dear Sir or Madam: Pursuant to the Stock Option Agreement dated August 13, 1997 (the "Stock Option Agreement"), between First Northern Bank of Dixon, a California banking corporation (the "Bank"), and the undersigned, I hereby elect to purchase _____________ shares of the common stock of the Bank (the "Shares"), at the price of $__________ per Share. My check in the amount of $______________ is enclosed. The Shares are to be issued in _____ certificate(s) and registered in the name(s) of: -------------------------- The undersigned understands there may be tax consequences as a result of the purchase or disposition of the Shares. To the extent that an amount is required to be withheld for any taxes that may be due as a result of this exercise, I will comply with the Bank's requirements with respect to the payment of such withholding. The undersigned represents that he has consulted with any tax consultants he deems advisable in connection with the purchase or disposition of the Shares and the Undersigned is not relying on the Bank for any tax advice. The undersigned acknowledges that he has received, read and understood the Stock Option Agreement and agrees to abide by and be bound by their terms and conditions. Dated: ________________, 19___ ---------------------------------- (Signature) ----------------------------------- (Please Print Name) Social Security No. ---------------- ------------------------------------ ------------------------------------ (Full Address) EX-99.9 13 NONSTATUTORY STOCK OPTION AGREEMENT FIRST NORTHERN BANK OF DIXON AMENDED AND RESTATED OUTSIDE DIRECTORS 1997 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Annual Vesting Over Four Years First Northern Bank of Dixon, a California banking corporation (the "Bank"), hereby grants an Option to purchase Shares of its common stock to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Bank's Amended and Restated Outside Directors 1997 Nonstatutory Stock Option Plan (the "Plan"). Date of Option Grant: April 24, 1997 Name of Optionee: ------------------------------------------------------- Optionee's Social Security Number: _____-____-_____ Number of Shares of Common Stock Covered by Option: 3,000 Price per Share: $24.50 Vesting Start Date: April 24, 1997 By signing this cover sheet, you agree to all of the terms and conditions described in the attached Agreement and in the Plan, a copy of which is also enclosed. Optionee: ----------------------------------------------------------------- (Signature) Bank: ------------------------------------------------------------------- (Signature) Title: ------------------------------------------------------ Attachment - ---------- FIRST NORTHERN BANK OF DIXON OUTSIDE DIRECTORS 1997 NONSTATUTORY STOCK OPTION PLAN NONSTATUTORY STOCK OPTION AGREEMENT Annual Vesting Over Four Years Nonstatutory Stock Option This Option is not intended to be an incentive stock option under Section 422 of the Code and will be interpreted accordingly. Vesting and Exercise This Option may be exercised to the extent that Shares have been vested. Beginning on the Vesting Start Date, you will be twenty percent (20%) vested in the Shares granted under this Option. Thereafter, the Shares under this Option will vest annually at a rate of 20 percent (20%) per year. All of the Shares shall be fully vested on the fourth anniversary of the Vesting Start Date as shown on the cover sheet. No additional Shares will vest after your Service has terminated for any reason. "Service" means your service as an outside director of the Bank or an affiliated entity. "Shares" means the shares of Common Stock covered by this Option as adjusted pursuant to Section 8 of the Plan. Notwithstanding the vesting schedule set forth above, in the event of a Change in Control during the period you remain in Service, all of the Shares which are unvested as of the effective date of such Change in Control shall immediately become vested. For the purposes hereof, "Change in Control" shall have the meaning set forth in Section 2(c) of the Plan. Term This Option will expire in any event at the close of business at Bank headquarters on the fifth anniversary of the Date of Grant, as shown on the cover sheet. (It will expire earlier if your Service terminates, as described below.) Regular Termination If your Service terminates for any reason except death or Total and Permanent Disability, then this Option will expire at the close of business at Bank headquarters on the 90th day after your termination date. During that 90-day period, you may exercise the vested portion of this Option. Other Terminations If your Service terminates following your of Service conviction of a felony, or a finding by a court that you engaged in a fraudulent or dishonest act or a gross abuse of authority regarding the Bank then this Option will expire upon your termination of Service. -2- Death In the event of your death while in Service, then this Option will expire at the close of business at Bank headquarters on the date which is one year after the date of death. During that one-year period, your estate or heirs may exercise the vested portion of this Option as of the termination of Service. Total and If your Service terminates because of your Permanent Total and Permanent Disability, then this Option Disability will expire at the close of business at Bank headquarters on the date which is one year after your termination date. During that one-year period, you may exercise the vested portion of this Option as of the termination of Service. "Total and Permanent Disability" means that you are unable to serve on the Board of Directors due to a disability which shall be determined in accordance with the Bank's Long Term Disability Plan. Restrictions on The Bank will not permit you to exercise this Exercise Option if the issuance of Shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this Option, you must notify the Bank by filing the proper "Notice of Exercise" form attached hereto. Your notice must specify how many Shares you wish to purchase. Your notice must also specify how your Shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by the Bank. If someone else wants to exercise this Option after your death, that person must prove to the Bank's satisfaction that he or she is entitled to do so. Periods of Any other provision of this Agreement Nonexercisability notwithstanding, the Bank shall have the right to designate one or more periods of time, each of which shall not exceed 180 days in length, during which this Option shall not be exercisable if the Bank determines (in its sole discretion) that such limitation on exercise could in any way facilitate any offering and/or issuance of securities by the Bank, facilitate the registration or qualification of any securities by the Bank under the applicable laws, or facilitate the perfection of any exemption from the registration or qualification requirements of any applicable securities laws for the issuance or transfer of any securities. Such limitation on exercise shall not alter the vesting schedule set forth in this Agreement other than to limit the periods during which this Option shall be exercisable. -3- Form of Payment When you submit your notice of exercise, you must include payment of the Option price for the Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: o Your personal check, a cashier's check or a money order. Withholding Taxes You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise. Restrictions on By signing this Agreement, you agree not to sell Resale any Shares at a time when applicable laws, regulations or Bank or underwriter trading policies prohibit a sale. In connection with any underwritten public offering by the Bank of its equity securities, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any Option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any Shares without the prior written consent of the Bank or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Bank or such underwriters. In order to enforce the provisions of this paragraph, the Bank may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. Transfer of Option Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will. Regardless of any marital property settlement agreement, the Bank is not obligated to honor a notice of exercise from your spouse or former spouse, nor is the Bank obligated to recognize such individual's interest in this Option in any other way. Shareholder Rights You, or your estate or heirs, have no rights as a shareholder of the Bank until a certificate for the Shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your share certificate is issued, except as described in the Plan. Adjustments In the event of a stock split, a stock dividend or a similar change in the Bank's Common Stock, the number of Shares covered by this -4- Option and the exercise price per share may be adjusted pursuant to the Plan. This Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Bank is subject to such corporate activity. Applicable Law This Agreement will be interpreted and enforced under the laws of the State of California. The Plan and Other The text of the Plan is incorporated in this Agreements Agreement by reference. Certain capitalized terms used in this Agreement and not otherwise defined herein are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Bank regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan. -5- NOTICE OF EXERCISE OF STOCK OPTION First Northern Bank of Dixon 195 N. First Street Dixon, CA 95620 Attn: Corporate Secretary Re: Exercise of Stock Option to Purchase Shares of Bank Common Stock ---------------------------------------------------------------- Dear Sir or Madam: Pursuant to the Stock Option Agreement dated ____________________, 199___ (the "Stock Option Agreement"), between First Northern Bank of Dixon, a California corporation (the "Bank"), and the undersigned, I hereby elect to purchase _____________ shares of the common stock of the Bank (the "Shares"), at the price of $__________ per Share. My check in the amount of $______________ is enclosed. The Shares are to be issued in _____ certificate(s) and registered in the name(s) of: -------------------------- The undersigned understands there may be tax consequences as a result of the purchase or disposition of the Shares. To the extent that an amount is required to be withheld for any taxes that may be due as a result of this exercise, I will comply with the Bank's requirements with respect to the payment of such withholding. The undersigned represents that he has consulted with any tax consultants he deems advisable in connection with the purchase or disposition of the Shares and the Undersigned is not relying on the Bank for any tax advice. The undersigned acknowledges that he has received, read and understood the Stock Option Agreement and agrees to abide by and be bound by its terms and conditions. Dated: ________________, 19___ ----------------------------------- (Signature) ----------------------------------- (Please Print Name) Social Security No. ---------------- ------------------------------------ ------------------------------------ (Full Address) EX-99.10 14 PARTICIPATION AGREEMENT FIRST NORTHERN BANK OF DIXON 1997 EMPLOYEE STOCK PURCHASE PLAN PARTICIPATION AGREEMENT _____ Original Application Enrollment Date: _________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________________________ hereby elects to participate in the First Northern Bank of Dixon 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Bank's Common Stock in accordance with this Participation Agreement and the Employee Stock Purchase Plan. 2. I understand that the initial Participation Period will commence on __________________ and end on __________________. 3. I hereby authorize payroll deductions, as follows, from each paycheck on each payday (not to exceed 10%) during the Participation Period in accordance with the Employee Stock Purchase Plan. $_________ per paycheck (not to exceed 10% of compensation) 4. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from a Participation Period, any accumulated payroll deductions will be used to automatically exercise my option. -1- 5. I have received a copy of the complete "First Northern Bank of Dixon 1997 Employee Stock Purchase Plan." I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. 6. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of: -----------------------------------------------------. 7. I understand that if I dispose of any shares received by me pursuant to the Employee Stock Purchase Plan within 2 years after the Enrollment Date (the first day of the Participation Period during which I purchased such shares), I will be treated for federal income tax purposes as having received (i) ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased over the price which I paid for the shares and (ii) capital gain (loss) at the time of such disposition in an amount equal to the difference between the fair market value of the shares on the date of disposition and their fair market value on the date such shares were purchased. I hereby agree to notify the Bank in writing within 30 days after the date of any such disposition and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Bank may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Bank any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of -2- such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Participation Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 8. I understand and agree that shares purchased pursuant to the Employee Stock Purchase Plan may not be sold or transferred by me (except for transfers resulting from my death) for a one-year period following the purchase of the shares and, that during this one-year period, the shares will be held for my account by the Plan Administrator. 9. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Participation Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 10. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print) - ------------------------------------------------------------------------------ (First) (Middle) (Last) ----- - ---------------------------- ----------------------------------------------- Relationship ----------------------------------------------- (Address) NAME: (Please print) - ------------------------------------------------------------------------------ (First) (Middle) (Last) ----- - ---------------------------- ----------------------------------------------- Relationship (Address) -3- Employee's Social Security Number: ________________________________________ Employee's Address: ------------------------------------------ ------------------------------------------ ---------------------------------------- I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE PARTICIPATION PERIODS UNLESS TERMINATED BY ME IN ACCORDANCE WITH THE EMPLOYEE STOCK PURCHASE PLAN. Dated: _________________ _________________________________ Signature of Employee -4- FIRST NORTHERN BANK OF DIXON 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the First Northern Bank of Dixon 1997 Employee Stock Purchase Plan (the "Plan") during the Participation Period which began on ________________, 19__ (the "Period Commencement") hereby notifies the Bank that he or she hereby withdraws from the Plan. He or she hereby directs the Bank to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Participation Period. The undersigned understands and agrees that his or her right to purchase shares for such Participation Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Participation Period and the undersigned shall be eligible to participate in succeeding Participation Periods only by delivering to the Bank a new Participation Agreement. Name and Address of Participant ------------------------------- ------------------------------- ------------------------------- Signature ------------------------------- Date: _________________________ -5- EX-99.11 15 PER SHARE EARNINGS STATEMENT OF COMPUTATION OF PER SHARE EARNINGS On January 20, 2000, the Board of Directors of the Bank declared a 6% stock dividend payable as of March 31, 2000. All income per share amounts have been adjusted to give retroactive effect to the stock dividend. Earnings Per Share (EPS) Basic and diluted earnings per share for the three month periods ending March 31, 2000 and March 31, 1999 were computed as follows: Three months ended March 31 2000 1999 ----------------------------------------------------------------------------- Basic earnings per share: Net income $ 1,122,440 $ 728,428 ----------------------------------------------------------------------------- Weighted average common shares outstanding 3,265,549 3,275,226 ----------------------------------------------------------------------------- Basic EPS $ 0.34 $ 0.22 ============================================================================= Diluted earnings per share: Net income $ 1,122,440 $ 728,428 ----------------------------------------------------------------------------- Denominator: Weighted average common shares outstanding 3,265,549 3,275,226 Incremental shares due to dilutive stock options 22,056 5,007 ----------------------------------------------------------------------------- 3,287,605 3,280,233 --------------------------------------------------------------------------- Diluted EPS $ 0.34 $ 0.22 ============================================================================= EX-99.12 16 PROXY STATEMENT FIRST NORTHERN BANK OF DIXON 195 North First Street, Dixon, California 95620 BANK HOLDING COMPANY PROPOSED--YOUR VOTE IS IMPORTANT March 27, 2000 Dear Shareholder: The annual meeting of shareholders of First Northern Bank of Dixon will be held this year at the Bank's Operations Center, located at 210 Stratford Avenue, Dixon, California, on Thursday, April 27, 2000, at 7:30 p.m. We look forward to your attendance. The following Proxy Statement/Offering Circular outlines the business to be conducted at the meeting, which, in addition to the election of directors and the ratification of KPMG LLP as the Bank's independent auditors, includes a proposal to create a "bank holding company." YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THESE PROPOSALS AND WE URGE YOU TO VOTE FOR THEM. The full description of the proposals, the reasons for them and their possible effects are outlined at length in the Proxy Statement/Offering Circular. We urge you to read it carefully so that you may vote your interests. The Board of Directors of First Northern Bank of Dixon has unanimously voted in favor of creating a "bank holding company" to be called First Northern Community Bancorp. Under this proposal, you would exchange your Bank shares for shares in the Holding Company. Thus, instead of owning the Bank directly, you would own shares in the Holding Company which would own the entire economic interest in the Bank. If the bank holding company reorganization is completed, for each share of Bank common stock that you own, you will receive one share of the Holding Company common stock. No surrender of your Bank share certificates will be required as they will be deemed to constitute shares of the Holding Company. The reorganization will also be the subject of a fairness hearing conducted by the Commissioner of Corporations of the State of California to be held at 2:00 p.m. on April 25, 2000, at 1390 Market Street, suite 810, San Francisco, California, as described in the accompanying Proxy Statement/Offering Circular. The notice of the fairness hearing is included along with the enclosed notice of annual meeting of shareholders and Proxy Statement/Offering Circular. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES. This new corporate structure will give the Bank greater financial and corporate flexibility to make acquisitions. In addition, the new structure will allow the Bank to participate in activities through the Holding Company, which are not permissible for the Bank to engage in directly. The Holding Company will be permitted to engage directly in non-bank activities, such as selling insurance and securities, providing financial consulting and investment services and providing data processing services to other financial institutions. After the reorganization, the nature of the business conducted by the Bank will not change. -1- Whether or not you plan to attend the meeting, please take the time to complete and mail your proxy to us. If you do not indicate on your proxy how you want to vote, your proxy will be counted as a vote in favor of the proposal. If you fail to return your proxy, you will in effect vote against the proposal. The proposal to create a holding company cannot be completed unless THE COMMISSIONER OF CORPORATIONS ISSUES A PERMIT AUTHORIZING ISSUANCE OF SECURITIES BY THE HOLDING COMPANY AND holders of a majority of the outstanding shares of the Bank vote for it. WE STRONGLY SUPPORT THE ORGANIZATION OF A BANK HOLDING COMPANY AND RECOMMEND THAT YOU VOTE IN FAVOR OF IT. Thank you for your continued support. Sincerely, Diane P. Hamlyn Owen J. Onsum Chairman of the Board President and Chief Executive Officer THE SECURITIES TO BE ISSUED IN THE REORGANIZATION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER CERTAIN STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS UNDER SUCH LAWS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE CALIFORNIA DEPARTMENT OF FINANCIAL INSTITUTIONS, NOR ANY STATE SECURITIES AUTHORITIES, OTHER THAN THE CALIFORNIA DEPARTMENT OF CORPORATIONS, HAVE APPROVED OR DISAPPROVED OF THE ISSUANCE OF THE SECURITIES TO BE ISSUED IN THE REORGANIZATION, NOR HAVE SUCH AGENCIES PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROXY STATEMENT/OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES TO BE ISSUED IN THE REORGANIZATION ARE NOT DEPOSITS OR ACCOUNTS, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES. -2- STATE OF CALIFORNIA ------------------- DEPARTMENT OF CORPORATIONS -------------------------- ) In the matter of the ) Application of ) NOTICE OF HEARING FIRST NORTHERN COMMUNITY BANCORP ) PURSUANT TO a California corporation ) SECTION 25142 ) OF THE CALIFORNIA For the Qualification by Permit of ) CORPORATIONS CODE its Securities Under Section 25121 ) of the Corporate Securities Law of 1968. ) File No. 506-1972 To: Shareholders of First Northern Bank of Dixon NOTICE OF FAIRNESS HEARING -------------------------- NOTICE IS HEREBY GIVEN that a hearing for a permit authorizing the issuance of securities by First Northern Community Bancorp, a California corporation (the "Holding Company"), pursuant to an Application for Qualification of Securities under section 25121 of the California Corporate Securities Law of 1968 filed March 6, 2000, will take place on April 25, 2000 at 2:00 p.m. in the Hearing Room of the Department of Corporations of the State of California at 1390 Market Street, Suite 810, San Francisco, California 94102-5303. Said hearing will be held before Mr. William Kenefick, Acting Commissioner of Corporations of the State of California, or any such Assistant Commissioner or Corporations Counsel as may be designated, pursuant to the authority of section 25142 of the California Corporations Code and will be in accordance with the provisions of Title 10, California Administrative Code, sections 250.17 through 250.25. FACTS GIVING RISE TO THE HEARING -------------------------------- First Northern Bank of Dixon (the "Bank"), a California state-chartered bank, proposes to reorganize into a bank holding company form and become a wholly-owned subsidiary of the Holding Company ("Reorganization"), pursuant to an Agreement and Plan of Reorganization among the Holding Company, the Bank and FNCB Merger Corp. dated as of March 21, 2000 (the "Agreement and Plan of Reorganization"). The following statement of facts has been supplied to the Department of Corporations by the Holding Company. Shareholders of the Bank would receive shares of common stock of the Holding Company in exchange for their shares of the common stock of the Bank. It will not be necessary for --- shareholders to surrender their Bank share certificates as such certificates, until exchanged, will represent shares of the Holding Company. It is proposed that this offering of common stock of the Holding Company in exchange for the common stock of the Bank will not be registered under the Securities Act of 1933, as amended (the "Act"), in reliance upon the exemption from registration set forth in section 3(a)(10) of the Act. Accordingly, the Holding Company has requested a permit from the California Commissioner of Corporations following a public hearing (which hearing is the subject of this Notice), conducted pursuant to section 25142 of the California Corporate Securities Laws of 1968. -1- For further information concerning the Exchange, reference is made to the Application for Qualification of Securities of the Holding Company and exhibits filed therewith at the San Francisco office of the Department of Corporations on March 6, 2000, File No. 506-1972 (the "Application"). The Proxy Statement/Offering Circular (attached to the Application as Exhibit B) contains a detailed explanation of the terms of the proposed Exchange, as well as financial statements of the Holding Company and the Bank. The information contained in the Proxy Statement/Offering Circular being sent to the Shareholders of the Bank is hereby incorporated herein by reference. THE HEARING ----------- Any interested person may be present at the hearing and may, but need not, be represented by counsel. Such person will be given an opportunity to be heard. Any interested person will be entitled to the issuance of subpoenas to compel the attendance of witnesses and the production of books, documents, and other items by applying to the Department of Corporations, 1390 Market Street, Suite 810, San Francisco, CA 94102-5303, Attn: Roger Borgen, Esq., Senior Corporations Counsel, if reasonably, properly and timely requested. If you are interested in said matter and decide to do so, you may appear in favor of, or in opposition to, the granting of such Permit. If you are unable to attend, correspondence regarding this hearing may be directed to the Department of Corporations, 1390 Market Street, Suite 810, San Francisco, CA, 94102-5303, Attn: Roger Borgen, Esq., Senior Corporations Counsel. The hearing will be based upon the Application and all papers and documents filed in connection therewith. The hearing will be for the purpose of enabling the Commissioner of Corporations to determine the fairness of the terms and conditions of the Exchange. Section 25142 of the California Corporations Code authorizes the Commissioner of Corporations to hold such a meeting when securities will be issued in exchange for other outstanding securities, to approve the terms and conditions of such issuance and exchange, and to determine whether such terms and conditions are fair, just and equitable. APPROVAL OF THE EXCHANGE BY THE COMMISSIONER OF CORPORATIONS WILL NOT SIGNIFY AN ENDORSEMENT OR RECOMMENDATION BY THE COMMISSIONER OF CORPORATIONS. The shareholders of the Bank will have the opportunity to vote to accept or reject the Reorganization at the annual meeting of shareholders to be held by the Bank on April 27, 2000. Dated: March 27, 2000 San Francisco, California. WILLIAM KENEFICK Acting Commissioner of Corporations By /s/ Roger Borgen -------------------------------- Roger Borgen, Esq. Senior Corporations Counsel -2- FIRST NORTHERN BANK OF DIXON 195 North First Street, Dixon, California 95620 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS April 27, 2000 To the Shareholders of First Northern Bank of Dixon: The Meeting of Shareholders of First Northern Bank of Dixon will be held at the First Northern Bank Operations Center, 210 Stratford Avenue, Dixon, California 95620, on Thursday, April 27, 2000 at 7:30 p.m. to: 1. Elect the following eleven (11) directors to serve until the next annual meeting of Shareholders and until their successors are elected and qualified: Lori J. Aldrete William H. Jones, Jr. Frank J. Andrews, Jr. Foy S. McNaughton John M. Carbahal Owen J. Onsum Gregory DuPratt David W. Schulze John F. Hamel Thomas S. Wallace Diane P. Hamlyn 2. Ratify the appointment by the Board of Directors of KPMG LLP to act as independent auditors of the Bank for the year ending December 31, 2000. 3. Consider and vote upon a proposal to organize a bank holding company for the Bank in a transaction in which the existing shareholders of the Bank would become the shareholders of the Holding Company. 4. Act upon such other matters as may properly come before such meeting or any adjournment or postponement thereof. All of the above matters are more fully described in the accompanying Proxy Statement. Shareholders of record at the close of business February 29, 2000, are entitled to notice of and to vote at the Meeting or any postponement or adjournment thereof. You are strongly encouraged to attend the Meeting and also to complete, sign, date and return as promptly as possible, the proxy submitted herewith in the return envelope provided for your use whether or not you plan to attend the meeting in person. The giving of such proxy will not affect your right to revoke such proxy or to vote in person, should you later decide to attend the Meeting. BY ORDER OF THE BOARD OF DIRECTORS Diane P. Hamlyn Owen J. Onsum Chairman of the Board President and Chief Executive Officer Dated: March 27, 2000 - ------------------------------------------------------------------------------- YOUR VOTE IS IMPORTANT YOU ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. - ------------------------------------------------------------------------------- -1- FIRST NORTHERN BANK OF DIXON 195 North First Street, Dixon California 95620 PROXY STATEMENT FIRST NORTHERN COMMUNITY BANCORP OFFERING CIRCULAR This Proxy Statement/Offering Circular is furnished to the shareholders of First Northern Bank of Dixon (the "Bank") in connection with the solicitation of proxies to be used in voting at the Meeting of Shareholders of the Bank to be held on April 27, 2000, at 210 Stratford Avenue, Dixon, California at 7:30 p.m., and at any adjournment or postponement thereof (the "Meeting"). This Proxy Statement/Offering Circular outlines the business to be conducted at the Meeting, which, in addition to the election of directors and the ratification of KPMG LLP as the Bank's independent auditors, includes a proposal to create a "bank holding company" named First Northern Community Bancorp (the "Holding Company"), a California corporation. Under the bank holding company proposal, each shareholder of common stock of the Bank would receive for each share of stock in the Bank one share of common stock in the Holding Company (the "Reorganization"). The full description of the proposals, the reasons for them and their possible effects are outlined at length in this Proxy Statement/Offering Circular. This Proxy Statement also constitutes an offering circular of the Holding Company with respect to up to 3,082,640 shares of common stock of the Holding Company, and the solicitation of shareholders of the Bank to ratify and approve the Reorganization constitutes an offering by the Holding Company of the shares of its common stock to be issued in connection with the Reorganization. This transaction is exempt from the registration requirements under the Securities Act of 1933, as amended (the "Securities Act"), by reason of the exemption set forth in Section 3(a)(10) thereof. No person has been authorized to give any information or to make any representations not contained in this Proxy Statement/Offering Circular, and, if given or made, such information or representations should not be relied upon as having been authorized. This Proxy Statement/Offering Circular does not constitute an offer to sell, or the solicitation of a proxy, to or from any person in any jurisdiction where it is unlawful to make such offer or solicitation of a proxy. Neither the delivery of this Proxy Statement/Offering Circular nor any distribution of the securities made under this Proxy Statement/Offering Circular shall, under any circumstances, create an implication that there has been no change in the affairs of the Bank or the Holding Company since the date of this Proxy Statement/Offering Circular. --------------------------- THE SECURITIES TO BE ISSUED IN THE REORGANIZATION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER CERTAIN STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS UNDER SUCH LAWS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE CALIFORNIA DEPARTMENT OF FINANCIAL INSTITUTIONS, NOR ANY STATE SECURITIES AUTHORITIES, OTHER THAN THE CALIFORNIA DEPARTMENT OF CORPORATIONS, HAVE APPROVED OR DISAPPROVED OF THE ISSUANCE OF THE SECURITIES TO BE ISSUED IN THE REORGANIZATION, NOR HAVE SUCH AGENCIES PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROXY STATEMENT/OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -2- THE SECURITIES TO BE ISSUED IN THE REORGANIZATION ARE NOT DEPOSITS OR ACCOUNTS, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES. --------------------------- The date of this Proxy Statement/Offering Circular is March 27, 2000. This Proxy Statement/Offering Circular and the enclosed Proxy are being mailed to the Bank's shareholders on or about March 27, 2000. -3- FIRST NORTHERN BANK OF DIXON Proxy Statement/Offering Circular TABLE OF CONTENTS Page AVAILABLE INFORMATION 7 INTRODUCTION 9 Voting Rights and Vote Required 9 Voting of Proxies; Quorum 10 Revocability of Proxy 10 PROPOSAL 1 - ELECTION OF DIRECTORS 10 Nominees 10 Committees of the Board of Directors of the Bank 12 Board of Directors Meetings 12 Compensation of Directors 13 EXECUTIVE COMPENSATION 14 Summary Compensation Table 14 Stock Options 14 Employment Agreements 16 Profit Sharing Plan 16 Stock Option Plan 17 Certain Transactions 17 Employee Stock Purchase Plan 17 Compensation Committee Interlocks and Insider Participation 18 Report of the Compensation Committee of the Board of Directors on Executive Compensation 18 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 20 Section 16(a) Beneficial Ownership Reporting Compliance 22 Stock Performance Graph 22 PROPOSAL 2 - RATIFICATION OF AUDITORS 22 PROPOSAL 3 - ORGANIZATION OF A BANK HOLDING COMPANY 23 Summary 23 Bank Holding Company 23 Shareholder Approval 24 What Should Shareholders Do? 24 Directors Approval 24 No Dissenters' Appraisal Rights 24 The Companies 25 The One-For-One Exchange Ratio and Market Value 25 Per Share Summary of the Bank and Pro Forma per Share Summary of the Holding Company 25 Management 26 Board of Directors 26 Holding Company Option and Stock Purchase Plans 26 -4- Differences between Holding Company Stock and Bank Stock 26 Anti-Takeover Provisions 26 Certain Federal Income and California Tax Consequences 27 Dividends 28 Risk Factors 28 The Holding Company's Financial Condition 28 Banking Institutions 28 Anti-Takeover Provisions 28 Bank Holding Company Reorganization 29 Reasons for the Proposal 29 Description of the Reorganization 29 Conversion of Shares and Exchange of stock Certificates 29 Regulatory Approvals 30 Affiliate Restrictions 30 Conditions of Consummation 30 Other Considerations 31 Expenses 31 Certain Federal Income and California Tax Consequences 32 No Appraisal Rights for Dissenting Shareholders 32 Accounting Treatment 33 Anti-Takeover Measures 33 The Purpose of the Anti-Takeover Provisions 33 Summary of Fair Price and Supermajority Vote Provisions 33 Consideration of Non-Monetary Factors 35 Director Qualification and Nomination Procedures 35 Cumulative Voting 36 Additional Considerations 36 Market Prices of Stock 37 The Holding Company 37 The Bank 37 Dividends 37 The Holding Company 37 The Bank 38 Capitalization 38 Financial Statements 39 History and Business of the Holding Company 39 General 39 Employees 39 Board of Directors 39 Remuneration of Directors and Officers 40 Indemnification 40 History and Business of the Bank 41 General 41 Competition 42 Employees 43 Property 43 Year 2000 43 Litigation 43 Board of Directors and Officers 43 Compensation of Executive Officers and Directors 43 Executive Officers' and Directors' Compensation 43 Committees and Meetings of the board of Directors 43 Certain Transactions 44 -5- Supervision and Regulation 44 Holding Company Regulation 44 Capital 44 Additional Regulation 45 Dividend Regulation 45 Government Policies and Legislation 46 Recently Enacted Legislation 46 Comparative Description of Common Stock 47 General 47 Authorized Capital 47 Voting Rights 48 Liquidation Rights 48 Preemptive Rights 48 Cumulative Voting 48 Indemnification 48 Dividend Rights 49 State Anti-Takeover Statute 49 Anti-Takeover Provisions 49 Reports 50 Legal Opinion 50 Shareholder Proposals 50 Other Matters 51 ANNEX I Agreement and Plan of Reorganization and Agreement of Merger 52 ANNEX II Articles of Incorporation of First Northern Community Bancorp 57 -6- AVAILABLE INFORMATION The Bank is subject to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Federal Deposit Insurance Corporation (the "FDIC"). Copies of such reports, proxy statements, the Bank's annual disclosure statement required by Part 350 of the FDIC's regulations and other information can be obtained without charge by contacting James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620, (707) 678-3041. The following documents which were previously filed or which will be filed with the FDIC pursuant to the Exchange Act and are incorporated herein by reference: The Bank's Annual Report on Form 10-K for the year ended December 31, 1999 (to be filed); the Bank's Annual Report on Form 10-K for the year ended December 31, 1998; and the Bank's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1999; all other reports filed with the FDIC under the Exchange Act after the date of this Proxy Statement/Offering Circular. The Holding Company is a newly formed corporation organized at the direction of the Bank's Board of Directors for the purpose of acquiring voting control of the Bank and thereby becoming a bank holding company. For further information with respect to the Reorganization, reference is made to the Agreement and Plan of Reorganization which is incorporated by reference herein and attached as Annex I. As a newly formed corporation, the Holding Company has not been subject to the requirements of the Exchange Act, and there is currently no public market for its common stock. However, pursuant to the Reorganization, the Bank's reporting obligations to the FDIC will cease, and the Holding Company will assume reporting responsibilities with the Securities and Exchange Commission under the Exchange Act, which are similar to the responsibilities previously performed by the Bank with respect to the FDIC. The Holding Company has filed with the California Department of Corporations an application (together with any exhibits, amendments or supplements thereto, the "Application") for a fairness hearing pursuant to Section 21542 of the California Corporations Code and for a permit to authorize the issuance of the shares of the common stock of the Holding Company to be issued by it in connection with the Reorganization described in this Proxy Statement/Offering Circular. This Proxy Statement/Offering Circular constitutes part of the Application covering the shares to be offered pursuant to the Reorganization by the Holding Company. This Proxy Statement/Offering Circular does not contain all the information set forth in the Application and the exhibits thereto, certain portions of which have been omitted pursuant to the rules and regulations of the California Department of Corporations. The additional information may be inspected at the Division of Securities Regulation of the California Department of Corporations, 1390 Market Street, Suite 810, San Francisco, California 94102-5303 and at any branch location of the Bank. Statements contained in this Proxy Statement/Offering Circular as to the contents of any contract or document referred to herein are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Application, each such statement being qualified in all respects by such reference. This Proxy Statement/Offering Circular incorporates documents by reference, certain of which are attached to this Proxy Statement/Offering Circular. The Holding Company documents not attached (other than exhibits to such documents unless such exhibits are specifically incorporated by reference) are available to any person, including any beneficial owner to whom this Proxy Statement/Offering Circular is delivered, without charge, upon request to: James S. Duke, Corporate Secretary, First Northern Community Bancorp, 195 North First Street, Dixon, California 95620, (707) 678-3041. The Bank documents not attached (other than exhibits to such documents, unless such documents are specifically incorporated by reference) are available to any person, including any beneficial owner to whom this Proxy Statement/Offering Circular is delivered, without charge, upon request to James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620, (707) 678-3041. The Application documents not attached (other than exhibits to such documents, unless such documents are specifically incorporated by reference) are available to any person, including any beneficial owner to whom this Proxy Statement/Offering Circular is delivered, without charge, upon -7- request to James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620, (707) 678-3041. In order to ensure timely delivery of the documents, any requests to either the Holding Company or the Bank should be made by April 20, 2000. No person has been authorized to give any information or to make any representation other than those contained in this Proxy Statement/Offering Circular in connection with the solicitation of proxies or the offering of the securities made hereby and, if given or made, such information or representation must not be relied upon as having been authorized by the Bank, the Holding Company or any other person. This Proxy Statement/Offering Circular does not constitute any offer to sell, or a solicitation of any offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to or from whom it is not lawful to make any such offer or solicitation in such jurisdiction. Neither the delivery of this Proxy Statement/Offering Circular nor any distribution of securities made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Bank or the Holding Company since the date hereof or that the information herein is correct as of any time subsequent to the date hereof. This Proxy Statement/Offering Circular contains various forward-looking statements, usually containing the words "estimate," "project," "expect," "objective," "goal," or similar expressions and includes assumptions concerning the Bank's operations, future results and prospects. These forward-looking statements are based upon current expectations and are subject to risk and uncertainties. In connection with the "safe-harbor" provisions of the private Securities Litigation Reform Act of 1995, the Bank and the Holding Company provide the following cautionary statement identifying important factors which could cause the actual results of events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) changes in regional and national economic conditions; (ii) significant changes in interest rates and prepayment speeds; (iii) credit risks of commercial, real estate, consumer, and other lending activities; (iv) changes in federal and state banking regulations; (v) the impacts of the year 2000 issue; and (vi) other external developments which could materially impact the Bank's operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Bank has no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. -8- INTRODUCTION This Proxy Statement is furnished to the shareholders of First Northern Bank of Dixon (the "Bank") in connection with the solicitation of proxies to be used in voting at the Meeting of shareholders to be held on April 27, 2000, at 210 Stratford Avenue, Dixon, California at 7:30 p.m., and at any adjournment or postponement thereof (the "Meeting"). All expenses incidental to the preparation and mailing, or otherwise making available to all shareholders of the notice, Proxy Statement and formal Proxy are to be paid by the Bank. The enclosed Proxy is solicited by the Board of Directors of the Bank. This Proxy Statement and the enclosed Proxy are being mailed to the Bank's shareholders on or about March 27, 2000. This Proxy Statement/Offering Circular outlines the business to be conducted at the Meeting, which, in addition to the election of directors and the ratification of KPMG LLP as the Bank's independent auditors and includes a proposal to create a "bank holding company" named First Northern Community Bancorp (the "Holding Company"), a California corporation. Under the bank holding company proposal, each shareholder of common stock of the Bank would receive for each share of Bank common stock, one share of common stock in the Holding Company (the "Reorganization"). The full description of the proposals, the reasons for them and their possible effects are outlined at length in this Proxy Statement/Offering Circular. Voting Rights and Vote Required Only shareholders of record at the close of business on February 29, 2000 (the "Record Date"), will be entitled to vote in person or by proxy. On that date, there were 3,082,640 shares of common stock outstanding and entitled to vote. Shareholders of common stock of the Bank are entitled to one vote for each share held, except that in the election of Directors, under California law, and the bylaws of the Bank, each shareholder may be eligible to exercise cumulative voting rights and may be entitled to as many votes as shall equal the number of shares of common stock held by such shareholder multiplied by the number of Directors to be elected, and such shareholder may cast all of such votes for a single nominee or may distribute them among two or more nominees. No shareholder, however, shall be entitled to cumulate votes (in other words, cast for any candidate a number of votes greater than the number of shares of common stock held by such shareholder multiplied by the number of Directors to be elected) unless the name(s) of the candidate(s) has (have) been placed in nomination prior to the voting in accordance with Article III, Section 21 of the Bank's bylaws (which requires that nominations made other than by the Board of Directors be made at least 30 and not more than 60 days before the meeting) and a shareholder has given notice to the Bank of an intention to cumulate votes prior to the voting according to Article II, Section 12 of the Bank's bylaws. If any shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination, in which event votes represented by Proxies delivered pursuant to this Proxy Statement/Offering Circular may be cumulated, in the discretion of the proxy holders, in accordance with the recommendation of the Board of Directors. Discretionary authority to cumulate votes in such event is, therefore, solicited in this Proxy Statement/Offering Circular. The vote required to approve each proposal is as follows: o In the election of directors, the eleven nominees receiving the highest number of votes will be elected. o Approval of the selection of the independent auditors will require the affirmative vote of a majority of the shares represented at the Meeting. o Approval of proposal 3 will require the affirmative vote of a majority of the outstanding shares. Abstentions and broker "non-votes" (shares as to which brokerage firms have not received timely voting instructions from their clients and therefore do not have the authority to vote at the Meeting) will not count as votes in favor of the election of directors or any of the other proposals. -9- Voting of Proxies; Quorum The shares represented by all properly executed proxies received in time for the Meeting will be voted in accordance with the shareholders' choices specified therein; provided, however, that where no choices have been specified, the shares will be voted "FOR" the election of the eleven nominees for Director recommended by the Board of Directors, "FOR" the ratification of the appointment of KPMG LLP as independent auditors, and "FOR" proposal 3; and, at the proxy holder's discretion, on such other matters, if any, which may properly come before the Meeting (including any proposal to adjourn the Meeting). A majority of the shares entitled to vote, represented either in person or by a properly executed Proxy, will constitute a quorum at the Meeting. Abstentions and broker "non-votes" are each included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum. A broker "non-vote" occurs when a nominee holding shares for a beneficial owner does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Abstentions will be included in tabulations of the votes cast on proposals presented to the shareholders and therefore will have the effect of a negative vote. Broker "non-votes" will not be counted for purposes of determining the number of votes cast for a proposal. Revocability of Proxy A Shareholder using the enclosed proxy may revoke the authority conferred by the proxy at any time before it is exercised by delivering written notice of revocation to the Secretary of the Corporation or a duly executed proxy bearing a later date, or by appearing and voting by ballot in person at the Meeting. In the event that signed proxies are returned without voting instructions, proxies will be voted in favor of the actions to be voted upon. PROPOSAL 1 ---------- ELECTION OF DIRECTORS At the Meeting it will be proposed to elect eleven directors of the Bank, each to hold office until the next annual meeting and until successors shall be elected and qualified. It is the intention of the proxy holders named in the enclosed Proxy to vote such Proxies (except those containing contrary instructions) for the eleven nominees named below. Pursuant to Article III, Section 21 of the bylaws of the Bank, director nominations, other than those made by the Board of Directors, shall be made by notification in writing delivered or mailed to the President of the Bank not less than 30 days or more than 60 days prior to any meeting of shareholders called for election of directors. The provision also requires that the notice contain detailed information necessary to determine if the nominee is qualified under Article III, Section 20 of the bylaws. Nominations not made in accordance with the procedure set forth in Section 21 of the Bank's bylaws may, in the discretion of the Chairman of the Meeting, be disregarded, and, upon his instruction, the inspectors of election shall disregard all votes cast for such nominee(s). A copy of Sections 20 and 21 of the Bank's bylaws may be obtained by sending a written request to James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California, 95620. The Board does not anticipate that any of the nominees will be unable to serve as a director of the Bank, but if that should occur before the Meeting, the proxy holders, in their discretion, upon the recommendation of the Bank's Board of Directors, reserve the right to substitute as nominee and vote for another person of their choice in the place and stead of any nominee unable so to serve. The proxy holders reserve the right to cumulate votes for the election of directors and cast all of such votes for any one or more of the nominees, to the exclusion of the others, and in such order of preference as the proxy holders may determine in their discretion, based upon the recommendation of the Board of Directors. Nominees The following table sets forth each of the nominees for election as a director, their age, and the period during which they have served as a director of the Bank. -10-
Name Age Position with the Bank Director Since - ---- --- ---------------------- -------------- Lori J. Aldrete 53 Director 1995 Frank J. Andrews, Jr. 51 Director 1993 John M. Carbahal 45 Director 1996 Gregory DuPratt 46 Director 1996 John F. Hamel 59 Director 1975 Diane P. Hamlyn 56 Chairman of the Board 1985 William H. Jones, Jr. 63 Director 1975 Foy S. McNaughton 49 Director 2000 Owen J. Onsum 55 President, CEO and Director 1996 David W. Schulze 55 Director 1978 Thomas S. Wallace 64 Director 1992
Lori J. Aldrete is Vice President/Corporate Communications for Catholic Healthcare West ("CHW"). Headquartered in San Francisco, CHW has 47 hospitals in California, Arizona and Nevada. The CHW healthcare system includes Mercy Healthcare Hospitals in Sacramento and Woodland Memorial Hospital. Ms. Aldrete has worked in healthcare marketing and communications since 1986 and has been a resident of Davis since 1979. Ms. Aldrete is a member of the Bank's Audit, Management and Marketing Committees. Frank J. Andrews, Jr. is President of Andrews, Lando & Associates, a real estate development firm established in 1990, and Manager of Gainsbourgh-Classics LLC since January 1999. Prior to that time, Mr. Andrews was President of Andrews Management Services for three years and Vice President of Amos & Andrews, Inc., for fifteen years, also real estate development companies. Andrews Management Services and Amos & Andrews, Inc. are also real estate development companies. Mr. Andrews is a member of the Bank's Loan and Management Committees. John M. Carbahal is a Certified Public Accountant and is a principal and shareholder of Carbahal & Company, Inc., an Accountancy Corporation. Mr. Carbahal is member of the Bank's Audit, Loan and Marketing Committees. Gregory DuPratt is Vice President/Sales Manager of Ron DuPratt Ford, an automobile dealership and family business located in Dixon. Mr. DuPratt is member of the Bank's Audit, Compensation, Marketing and Profit Sharing Committees. John F. Hamel served as the President and Chief Executive Officer of First Northern Bank of Dixon from 1975 to 1996. Mr. Hamel is presently managing family agricultural properties. Mr. Hamel is a member of the Bank's Loan and Profit Sharing Committees. Diane P. Hamlyn is the President and Founder of Davisville Travel, a full service travel agency. Davisville Travel was established in 1977. Ms. Hamlyn is a member of the Bank's Compensation, Loan and Management Committees. William H. Jones, Jr. is the owner/operator of a family row crop farming operation. Mr. Jones lives in Dixon, and has farmed in the Dixon area since 1962. Mr. Jones is a member of the Bank's Marketing Committee. Foy S. McNaughton is the President and Chief Executive Officer of McNaughton Newspapers--Davis Enterprise, Daily Republic, Mountain Democrat (Placerville), Winters Express and Life Newspapers (El Dorado Hills and Cameron Park) a position he has held since 1985. He has served as the Publisher of the Fairfield Daily Republic since 1995. Mr. McNaughton has been a resident of Davis since 1973. Owen J. Onsum has been President and Chief Executive Officer of First Northern Bank of Dixon January 1, 1997. He served as Executive Vice President of First Northern Bank of Dixon from 1982 to 1996. Mr. Onsum has worked for First Northern since 1972 and has lived in Dixon since 1971. Mr. Onsum is a member of the Bank's Loan, Management, Marketing and Profit Sharing Committees. -11- David W. Schulze is the owner/operator of a family row crop farming operation. Prior to assuming that position, Mr. Schulze was involved in property management and apartment ownership. Mr. Schulze is a member of the Bank's Compensation, Loan and Management Committees. Thomas S. Wallace is Vice President of Wallace-Kuhl Associates, Inc., a geotechnical engineering firm. From 1984 to 1989, Mr. Wallace was Managing Partner of this West Sacramento based firm. Mr. Wallace is a member of the Bank's Audit and Management Committees. None of the directors of the Bank were selected pursuant to arrangements or understandings other than with the directors and shareholders of the Bank acting within their capacity as such. There are no family relationships between any of the directors, and none of the directors serve as a director of any company which has a class of securities registered under, or subject to periodic reporting requirements of, the Securities Exchange Act of 1934, as amended, or any company registered as an investment company under the Investment Company Act of 1940. Committees of the Board of Directors of the Bank The Bank has a standing Audit Committee composed of Lori J. Aldrete, John M. Carbahal, Gregory DuPratt and Thomas S. Wallace. The Audit Committee reviews and oversees the internal audit results for the Bank. The Audit committee of the Bank held six meetings during 1999. The Bank has a standing Management Committee composed of Lori J. Aldrete, Frank J. Andrews, Diane P. Hamlyn, Owen J. Onsum, David W. Schulze and Thomas S. Wallace. The Management Committee held two meetings during 1999 for the purpose of considering the Bank's strategic and personnel issues and reviewing the annual budget. The Bank has a standing Loan Committee composed of Frank J. Andrews, John M. Carbahal, John F. Hamel, Diane P. Hamlyn, Owen J. Onsum and David W. Schulze. The Loan Committee held 12 meetings during 1999 for the purpose of approving loans and loan policy. The Bank has a standing Profit Sharing Committee composed of Gregory DuPratt, John F. Hamel and Owen J. Onsum. The Profit Sharing Committee held no meetings during 1999 for the purpose of considering plan administration and investments. The Bank has a standing Marketing Committee composed of Lori J. Aldrete, John M. Carbahal, Gregory DuPratt, William H. Jones, Jr. and Owen J. Onsum. The Marketing Committee held one meeting during 1999 for the purpose of considering the Bank's marketing plan. The Bank has a standing Compensation Committee composed of Gregory DuPratt, Diane P. Hamlyn and David W. Schulze. The Compensation Committee held two meetings during 1999 for the purpose of reviewing and recommending to the Bank's Board of Directors the Bank's compensation objectives and policies and administering the Bank's stock plans. The Bank has several other committees that meet on an as-needed basis. The Bank does not have a nominating committee. The Board of Directors performs this function. The procedures for nominating directors, other than by the Board of Directors itself, are set forth in this Proxy Statement. The Bank's nomination procedure is designed to give the Board of Directors advance notice of competing nominations, if any, and the qualifications of nominees, and may have the effect of precluding third-party nominations if not followed. Board of Directors Meetings In 1999, the Bank's Board of Directors held 12 regularly scheduled meetings. Each director attended at least 75% of the aggregate of: (1) the total number of meetings of the Board of Directors held during the period for which he or she has been a director; and (2) the total number of meetings of committees of the Board of Directors on which he or she served during the period for which he or she served. -12- Compensation of Directors Each outside director received $800 for each Board of Directors meeting attended, and $200 per committee meeting attended. The Bank paid a total of $111,800 in Directors' fees during 1999. In 1997, the Board of Directors and shareholders of the Bank approved the Bank's Outside Directors 1997 Nonstatutory Stock Option Plan (the "Outside Director's Plan"). Under the Outside Director's Plan, upon election or appointment to the Bank's Board of Directors, directors who are not officers or employees of the Bank receive an automatic, one-time grant of options to purchase 6,615 shares of the Bank's stock at an exercise price equal to the fair market value of the common stock on the date of grant. The options to purchase shares of the Bank's stock vest 20% on the date of grant and annually thereafter at the rate of 20% per year. As of December 31, 1999, there were options outstanding under the Outside Director's Plan to purchase an aggregate of 59,535 shares of the Bank's common stock at an exercise price of $11.11 per share. The market price of the Bank's stock at December 31, 1999 was $13.625 per share. The Bank also pays the premiums on a $25,000 term life insurance policy on the life of each outside director of the Bank. Each director's stated beneficiary receives the proceeds from the life insurance policy. Annual premiums for each policy range from $593.76 to $1,213.32. The Bank plans to continue the payment of such fees for regular meetings of the Board and of the Committees of the Board. No other arrangements exist for compensation of the Bank's directors. -13- EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth the aggregate remuneration for the services in all capacities paid by the Bank during 1997, 1998 and 1999 to the Chief Executive Officer and each of the three highest paid Executive Officers of the Bank whose total annual salary and bonus exceeded $100,000 ("Named Executive Officers").
Long-Term Annual Compensation Compensation ------------------- Awards ------ Securities Name and Fiscal Underlying All Other Principal Position Year Salary ($) Bonus ($) Other ($) Options(#)(3) Compensation (1) - ------------------ ------ ---------- ---------- --------- ------------- ------------- Owen J. Onsum 1999 $182,163 $151,338 12,390 $22,113 President, Chief 1998 $173,609 $ 17,037 21,000 $22,389 Executive Officer, and 1997 $157,058 $ 155 6,617 $ 8,335 Director Donald J. Fish 1999 $111,363 $ 37,084 6,300 $17,289 Senior Vice President, 1998 $106,060 $ 10,474 $ 2,780(2) 14,700 $16,038 Senior Credit Officer 1997 $101,030 $ 155 $13,691(2) 6,615 $ 2,480 Robert M. Walker 1999 $ 99,466 $ 33,068 6,300 $15,448 Senior Vice President, 1998 $ 95,713 $ 9,379 10,500 $14,575 Branch Administrator 1997 $ 92,936 $ 155 6,615 $ 5,824 Louise A. Walker 1999 $ 97,154 $ 32,352 6,300 $15,274 Senior Vice 1998 $ 85,878 $ 8,481 10,500 $13,411 President/Cashier 1997 $ 80,040 $ 155 6,615 $ 5,440 - -------------------------- (1) Consists of contributions allocated from the Bank's Profit Sharing Plan and Trust Agreement and payments of health insurance premiums. (2) Consists of reimbursement for Mr. Fish's relocation expenses. (3) Adjusted to reflect a two-for-one stock split on August 31, 1998 and a five percent stock dividend on February 27, 1998 and February 26, 1999.
Stock Options The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 1999 to the Bank's Named Executive Officers. No options granted to Named Executive Officers were exercised during fiscal 1999. -14-
Option Grants in Last Fiscal Year Number of Percent of Total Securities Options Granted to Grant Date Underlying Options Employees in Exercise or Base Expiration Present Granted (1) Fiscal Year (2) Price ($/share)(3) Date(4) Value(5) ------------ --------------- ----------------- ---------- ----------- Name Owen J. Onsum 12,390 37% $12.86 1/7/09 $82,531 Donald J. Fish 6,300 19% $12.86 1/7/09 $41,965 Robert M. Walker 6,300 19% $12.86 1/7/09 $41,965 Louise A. Walker 6,300 19% $12.86 1/7/09 $41,965 - ------------------------------ (1) Options are incentive stock options and vest over a five year period commencing on the date of grant at the rate of 20% per year and are adjusted to reflect a five percent stock dividend declared on February 26, 1999. (2) Based on options to purchase an aggregate of 33,390 shares of common stock granted to employees during the fiscal year ended December 31, 1999. (3) The exercise price per share of the options granted represents the fair market value of the underlying common stock on the date of grant as determined by the Board of Directors. (4) The options have a term of ten years, subject to earlier termination in certain events related to termination of employment. (5) The present value of the options was estimated at the date of grant using a variation of the Black-Scholes option pricing model, which includes the following assumptions: a weighted average risk-free interest rate of 6.39%, an expected volatility of 23 percent, a weighted average expected option life of the LTIP of 10 years and expected dividend yield of zero. The weighted average grant date present value of the options granted during 1999 was $6.66 per option. The exercise price of each option equals the fair market value of the Bank's common stock on the date of grant.
-15- The following table sets forth certain information regarding the value of options held by Named Executive Officers at the end of 1999.
Aggregated Option Exercises in Last Fiscal Year(1) and Fiscal Year-End Option Values Securities Underlying Unexercised Value of Unexercised Options at In-the Money Options at December 31, 1999(#) December 31, 1999($)(2) Name and Principal Position Exercisable Unexercisable Exercisable Unexercisable - --------------------------- ----------- ------------- ----------- ------------- Owen J. Onsum 14,847 25,158 $6,533 $11,479 President, Chief Executive Officer and Director Donald J. Fish 11,109 16,506 $5,311 $7,317 Senior Vice President, Senior Credit Officer Louise A. Walker 9,429 13,896 $5,118 $7,028 Senior Vice President/Chief Financial Officer/ Cashier Robert M. Walker 9,429 13,986 $5,118 $7,028 Senior Vice President, Branch Administrator - ------------------------------------------------------------------------------------------------------------------------ (1) No options were exercised in 1999 by the Named Executive Officers. (2) Calculated on the basis of the fair market value of the underlying securities at December 31, 1999 ($13.625 per share) less the applicable exercise price. The fair market value of the Bank's common stock at December 31, 1999 was determined on the basis of the last sale price reported on the OTC Bulletin Board on or prior to that date.
Employment Agreements The Bank and Donald J. Fish, Senior Vice President/Senior Credit officer are parties to an employment agreement dated January 1, 1997, which sets forth his compensation level, eligibility for annual and long-term incentive programs and benefits. Mr. Fish's employment is at will and may be terminated by the Bank at any time with or without cause or notice. However, pursuant to the agreement, the Bank will provide him with up to twelve months salary if his employment is terminated by the Bank without a statement of reason or by him for good cause and the termination is not within two years following a change of control of the Bank. If Mr. Fish's employment is terminated by him for good cause or by the Bank without a statement of reasons within two years following a change of control, the Bank shall pay up to 18 months salary and annual incentive benefits. However, Mr. Fish is obligated to reimburse the bank with any income earned during the 18 month period after his termination equal to the amount paid by the Bank. Profit Sharing Plan In 1955, the Bank established the First Northern Bank of Dixon Profit Sharing Plan and Trust Agreement (the "Profit Sharing Plan"). Employees of the Bank who have worked at the Bank at least 1,000 hours during a calendar year are eligible to participate in the Profit Sharing Plan. The Bank generally contributes on an annual basis to the Profit Sharing Plan Trustees an amount equal to the lesser of ten percent of the Bank's net income before taxes net of loan loss experience or fifteen percent of the total annual compensation of all Profit Sharing Plan participants. The Bank's -16- contribution is allocated to each Plan participant's account on the basis of the ratio of each participant's annual compensation to the total annual compensation of all participants. Contributions to a participant's account vest at the end of a period of five years. Distribution of vested amounts under the Profit Sharing Plan are made upon the termination of employment, retirement, disability or death of the participant. In 1997, the Bank added a 401(k) contribution feature to the Profit Sharing Plan allowing employees to make contributions. The Bank's contribution to the Profit Sharing Plan in 1999 was $653,915. Stock Option Plan In 1997, the Board of Directors and shareholders of the Bank approved the First Northern Bank of Dixon 1997 Stock Option Plan (the "1997 Stock Option Plan"). The 1997 Stock Option Plan provides for awards in the form of options, which may constitute incentive stock options ("ISOs") under Section 422(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The 1997 Stock Option Plan provides that ISOs may not be granted at less than 100% of fair market value of the Bank's common stock on the date of the grant, which means the recipient receives no benefit unless the Bank's common stock price increases over the option term. The purpose of the 1997 Stock Option Plan is promote the long-term success of the Bank and the creation of shareholder value by (i) encouraging key personnel to focus on critical long range objectives, (ii) increasing the ability of the Bank to attract and retain key personnel and (iii) linking key personnel directly to shareholder interests through increased stock ownership. A total of 551,250 shares of the Bank's common stock are available for grant under the 1997 Stock Option Plan. If an option granted under the 1997 Stock Option Plan expires, is cancelled, forfeited or terminates without having been fully exercised, the unpurchased shares which were subject to that option again become available for the grant of additional options under the 1997 Stock Option Plan. The 1997 Stock Option Plan is administered by the Executive Compensation Committee of the Board of Directors. Subject to the terms of the 1997 Stock Option Plan, the Executive Compensation Committee determines the number of options in the award as well as the vesting and all other conditions. As of December 31, 1999, there were options outstanding under the 1997 Stock Option Plan to purchase an aggregate of 137,130 shares of the Bank's common stock at exercise prices ranging from $12.70 to $13.51 per share or a weighted average exercise price per share of $13.11. Employee Stock Purchase Plan In 1997, the Board of Directors and shareholders of the Bank approved the 1997 First Northern Bank of Dixon Employee Stock Purchase Plan (the "1997 Employee Stock Purchase Plan") which enables eligible employees of the Bank to purchase shares of the Bank's common stock at a 15% discount in an amount up to 10% of each employee's annual compensation. Certain Transactions Some of the Bank's directors and executive officers, as well as their associates and companies in which they have a financial interest, are customers of, and have had banking transactions with, the Bank in the ordinary course of the Bank's business, and the Bank expects to have ordinary banking transactions with these persons or entities in the future. Except as set forth below, in the opinion of the Bank's management, the Bank made all loans and commitments to lend included in such transactions in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons or entities of similar creditworthiness, and these loans did not involve more than a normal risk of collectibility or present other unfavorable features. No director or officer of the Bank, or their associates, have had outstanding, since the beginning of 1999, aggregate extensions of credit from the Bank in excess of 10% of the Bank's total equity capital accounts. The aggregate extensions of credit by the Bank to all directors and executive officers and their respective associates as a group at any time since January 1, 1999, did not exceed 20% of the Bank's total equity capital accounts on that date. -17- Compensation Committee Interlocks and Insider Participation The Compensation Committee (the "Committee") of the Board of Directors consists of three directors, none of whom is an officer or employee of the Bank. Report of the Compensation Committee of the Board of Directors on Executive Compensation Membership and Role of the Compensation Committee The Committee reviews and recommends to the Bank's Board of Directors, the Bank's compensation objectives and policies and administers the Bank's stock plans. The Committee also reviews and recommends the actual compensation of the Bank's Chief Executive Officer. The Committee is assisted by the Bank's human resources personnel and by a compensation consulting firm which supplies the Bank statistical data and other compensation information to permit the Committee to compare the Bank's compensation policies against compensation levels and prerequisites of other banking companies of similar size in California. Compensation Philosophy The Bank seeks to design compensation programs which are fair and competitive and attract, motivate, and retain excellently performing employees throughout the Bank while maintaining a strong relationship between the overall performance of the Bank and the level of compensation. Furthermore, the Bank believes that compensation programs, especially those for top executives, should be designed in a manner that aligns employee interests with those of the shareholders. In view of these two beliefs, executive compensation programs at the Bank are designed to meet the following objectives: o Base salaries will be targeted at the 50th percentile of the Bank's selected peer group levels. o Bonus or incentive compensation will be targeted between the 50th and 75th percentile of the Bank's selected peer group levels and will be based on individual, unit and/or total Bank performance. At least 50% of executive bonuses will be tied directly to overall Bank results. o Stock options will be granted under the incentive stock option plan by the Committee when appropriate to further the Bank's compensation objectives. Compensation Components Base Salary. The salary of the Chief Executive Officer, is reviewed ----------- annually by the Committee with reference to several surveys of salaries paid to executives with similar responsibilities at comparable banks. The banking companies against which the Bank compares its compensation are not necessarily those included in the indices used to compare the shareholder return in the Stock Performance Chart. Further, the banking companies selected for such comparison may vary from year to year based upon market conditions and changes in both the Bank's and the comparison banking companies' businesses over time. The Bank believes that base salaries targeted at the 50th percentile of the selected peer group levels are necessary to attract and retain high caliber executives necessary for the successful conduct of the Bank's business. Annual Bonus. The Committee annually reviews and recommends an Incentive ------------ Compensation Bonus Plan. The Bank's Incentive Compensation Bonus Plan seeks to motivate executives to work effectively to achieve the Bank's financial performance objectives and to reward them when objectives are met. The Bank's Incentive Compensation Bonus Plan acknowledges bank-wide, individual and unit performance and will be targeted between the 50th and 75th percentile of the selected peer group levels. At least 50% of the executive's bonus will be tied directly to overall Bank results. Under the Bank's Incentive Compensation Bonus Plan all employees, including executive officers, are eligible to receive an annual cash bonus at the end of each year if performance targets set annually by the Management Committee are achieved. -18- Option and Stock Purchase Plans. Under the 1997 Stock Option Plan key ------------------------------- employees may be granted stock options by the Committee, in its discretion. The grants are intended to retain and motivate key employees and to provide a direct link with the interests of the shareholders of the Bank. The Committee, in making its determination as to grant levels, intends to take into consideration: (i) prior award levels, (ii) total awards received to date by individual employees, (iii) the total stock award to be made and the executive's percentage participation in that award, (iv) the employee's direct ownership of shares of the Bank's common stock, (v) the number of options vested and non-vested, and (vi) the options outstanding as a percentage of total shares outstanding. The 1997 Stock Option Plan limits the total number shares subject to options that may be granted to a participant in any year to not more than 25,000 shares. The 1997 Employee Stock Purchase Plan enables eligible employees, including officers, to purchase shares of the Bank's common stock at a fifteen percent discount in an amount up to ten percent of the employee's annual compensation. In 1999, the Bank's executive officers were granted stock options in the amounts set forth in the Summary Compensation Table. Benefits. During 1999, the Bank provided medical and other benefits to its -------- executive officers that are generally available to the Bank's other employees. The Bank is subject to Section 162(m) of the U.S. Internal Revenue Code which limits the deductibility of certain compensation payments made to Executive Officers. The Committee's current view is that Section 162(m) will not limit the Bank's ability to deduct any compensation paid to any Executive Officers. Respectfully submitted, Gregory DuPratt, Diane P. Hamlyn David W. Schulze -19- Security Ownership of Certain Beneficial Owners and Management To the knowledge of the Bank, as of the Record Date, no person or entity was the beneficial owner of more than five percent (5%) of the outstanding shares of the Bank's common stock. For the purpose of this disclosure and the disclosure of ownership shares by management, shares are considered to be "beneficially" owned if the person has or shares the power to vote or direct the voting of the shares, the power to dispose of or direct the disposition of the shares, or the right to acquire beneficial ownership (as so defined) within 60 days of February 29, 2000. The following table shows the number of shares of common stock and the percentage of the shares of common stock beneficially owned (as defined above) by each of the current directors, by each of the nominees for election to the office of director, by the Chief Executive Officer and the three other most highly compensated executive officers (whose annual compensation exceeded $100,000) and by all directors and executive officers of the Bank as a group as of February 29, 2000.
Number of Shares of Name and Address of common stock Beneficial Owner(1) Beneficially Owned(2) Percent of Class - ------------------- ---------------------- ---------------- Lori J. Aldrete(3) 8,975 * Frank J. Andrews, Jr.(4) 8,915 * John M. Carbahal(5) 11,822 * Gregory DuPratt(6) 9,263 * Donald J. Fish (7) 18,147 * John F. Hamel(8) 41,274 1.34 Diane P. Hamlyn(9) 26,466 * William H. Jones, Jr.(10) 43,055 1.40 Foy S. McNaughton(11) 1,773 * Owen J. Onsum(12) 83,504 2.71 David W. Schulze(13) 54,153 1.75 Louise A. Walker (14) 17,766 * Robert M. Walker (15) 17,135 * Thomas S. Wallace(16) 9,589 * All directors and executive officers as a group (14 persons)(17) 351,837 11.41 - -------------------------------------------------- * Indicates less than 1%. (1) The address for all persons is 195 North First Street, Dixon, California 95620. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Includes shares of common stock issued pursuant to a five percent stock dividend declared on February 26, 1999. Shares of common stock subject to options currently exercisable or exercisable within 60 days of February 29, 2000, and shares of common stock to be issued as a result of the declared six percent common stock dividend are deemed to be beneficially owned by the person holding such option for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated by footnotes and subject to community property laws, where applicable, the persons named above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. (3) Includes 2,854 shares held jointly with Ms. Aldrete's spouse, 216 shares held in an IRA for Ms. Aldrete and 5,610 shares issuable to Ms. Aldrete upon the exercise of options exercisable within 60 days of February 29, 2000. -20- (4) Includes 5,610 shares issuable to Mr. Andrews upon the exercise of options exercisable within 60 days of February 29, 2000. (5) Includes 4,051 shares held jointly with Mr. Carbahal's spouse, 562 shares held by Carbahal & Company, an accountancy corporation of which Mr. Carbahal is a principal and shareholder, 816 shares held by the Carbahal & Company Annual Accumulation, 391 shares held in an IRA for Mr. Carbahal, 391 shares held in an IRA for Mr. Carbahal's spouse and 5,610 shares issuable to Mr. Carbahal upon the exercise of options exercisable within 60 days of February 29, 2000. (6) Includes 531 shares held in an IRA for Mr. DuPratt, 2,804 shares held in an IRA for Mr. DuPratt's spouse and 5,610 issuable to Mr. DuPratt upon exercise of options exercisable within 60 days of February 29, 2000. (7) Includes 10 shares held by The Fish Family Trust of which Mr. Fish is a co-trustee and shares voting and investment power with respect to such shares and 18,137 shares issuable to Mr. Fish upon the exercise of options exercisable within 60 days of February 29, 2000. (8) Includes 25,281 shares held by the R/J Hamel Family Trust of which Mr. Hamel is a co-trustee and shares voting and investment power with respect to such shares, 1,008 shares held jointly with Mr. Hamel's spouse, 9,375 shares held in an IRA for Mr. Hamel and 5,610 shares issuable to Mr. Hamel upon the exercise of options exercisable within 60 days of February 29, 2000. (9) Includes 53 shares held by Ms. Hamlyn as custodian for Catherine S. Lindley, 46 shares held by Ms. Hamlyn as custodian for Matthew Skowrup, 46 shares held by Ms. Hamlyn as custodian for Tyler Skowrup, 28 shares held by Ms. Hamlyn as custodian for Stephen A. Lindley, 10,181 shares held separately in Ms. Hamlyn's spouse's name, 876 shares held jointly with Ms. Hamlyn's spouse, 2,392 shares held in an IRA for Ms. Hamlyn, 609 shares held separately in the name of Janet Diane Hamlyn, 2,799 shares held by the Davisville Travel Profit Sharing Plan of which Ms. Hamlyn is trustee and shares voting and investment power with respect to such shares, and 5,610 shares issuable to Ms. Hamlyn upon the exercise of options exercisable within 60 days of February 29, 2000. (10) Includes 2,459 shares held jointly with Mr. Jones' spouse, 13,803 shares held in an IRA for Mr. Jones and 5,610 shares issuable to Mr. Jones upon the exercise of options exercisable within 60 days of February 29, 2000. (11) Includes 1,402 shares issuable to Foy S. McNaughton upon the exercise of options exercisable within 60 days of February 29, 2000. (12) Includes 9,465 shares held jointly with Mr. Onsum's spouse, 1,239 shares held by Mr. Onsum as custodian for Matthew David Onsum, 1,239 shares held by Mr. Onsum as custodian for Brandon John Onsum, 45,373 shares held by the First Northern Bank of Dixon Profit Sharing Plan, of which Mr. Onsum is a trustee and shares voting and investment power with respect to such shares, and 26,187 shares issuable to Mr. Onsum upon the exercise of options exercisable within 60 days of February 29, 2000. (13) Includes 2,337 shares held separately in Mr. Schulze's spouse's name and 5,610 shares issuable to Mr. Schulze upon the exercise of options exercisable within 60 days of February 29, 2000. (14) Includes 2,514 shares held jointly with Ms. Walker's spouse and 15,252 shares issuable to Ms. Walker upon the exercise of options exercisable within 60 days of February 29, 2000. (15) Includes 816 shares held in an IRA for Mr. Walker and 15,040 shares issuable to Mr. Walker upon the exercise of options exercisable within 60 days of February 29, 2000. (16) Includes 738 shares held in an IRA for Mr. Wallace's spouse, 2,189 shares held in an IRA for Mr. Wallace and 5,610 shares issuable to Mr. Wallace upon the exercise of options exercisable within 60 days of February 29, 2000. (17) Includes 126,508 shares issuable upon the exercise of options exercisable within 60 days of February 29, 2000.
-21- Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act, as administered by the Federal Deposit Insurance Corporation (the "FDIC"), requires the Bank's directors and executive officers and persons who own more than ten percent of a registered class of the Bank's equity securities to file with the FDIC initial reports of ownership and reports of changes in ownership of common stock of the Bank. Executive officers, directors and greater than ten percent shareholders are required by the FDIC to furnish the Bank with copies of all Section 16(a) forms they file. Based upon review of such reports, the Bank believes that all reports required by Section 16(a) of the Exchange Act to be filed by its executive officers and directors during the last fiscal year were filed on time. Stock Performance Graph STOCK PERFORMANCE CHART (1) [LINE GRAPH] (1) Assumes $100 invested on December 31, 1994 in the Bank's Common Stock, the Russell 2000 composite stock index and SNL Securities' index of twelve Northern California bank stocks, with reinvestment of dividends. Source: SNL Securities. PROPOSAL 2 ---------- RATIFICATION OF AUDITORS At the Meeting a vote will be taken on a proposal to ratify the appointment of KPMG LLP, by the Board of Directors, to act as independent auditors of the Bank for the year ending December 31, 2000. KPMG LLP acted as independent accountants and auditors for the year ending December 31, 1999. It is anticipated that a representative of KPMG LLP will be present at the Meeting, will have the opportunity to make a statement if he or she desires and will be available to respond to appropriate questions. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF KPMG LLP AS THE BANK'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2000. -22- PROPOSAL 3 ---------- ORGANIZATION OF A BANK HOLDING COMPANY SUMMARY This Summary contains a brief description of the proposed Reorganization. This Summary is not a complete statement of all the information contained in this Proxy Statement/Offering Circular. We recommend that you read all of it carefully. Bank Holding Company You are being asked to vote on a proposal to organize the Holding Company, a California corporation which will own the Bank. We believe that the new corporate structure of the Bank will permit the Holding Company and the Bank greater financial and corporate flexibility in such areas as acquisitions, repurchase of shares from shareholders and debt financings. For example, it is generally the case that insured depository institutions such as the Bank may not acquire and own a controlling interest in another insured depository institution. In contrast, a bank holding company, subject to the necessary regulatory approvals, may control more than one insured depository institution. In the event that an opportunity for the acquisition of another bank were to develop, it might be desirable to maintain the separate existence of the other bank after the acquisition, rather than merging it into the Bank. Also, under the California Financial Code, a California state-chartered bank may not own the shares of a corporation which acts as an insurance company, insurance agent, or insurance broker (although banks themselves, under California law and federal law, may engage in insurance agency or brokerage activities) while, subject to certain conditions, a bank holding company and its non-bank subsidiaries may do so. Additionally, under the Gramm-Leach-Bliley Act of 1999 which became law on November 12, 1999, a new type of bank holding company, known as a financial holding company, has been authorized which will be permitted to engage in all activities permitted to bank holding companies as well as securities, merchant banking and insurance activities which were previously prohibited to bank holding companies. See "Supervision and Regulation--Recently Enacted Legislation," below. While the Bank and the Holding Company have no present plans to acquire other financial institutions or engage in insurance or securities activities either directly or through achievement of status as a financial holding company, we believe that the increased flexibility which will result from adopting the holding company form will permit the Holding Company and the Bank to better respond to opportunities for growth in the future. The holding company form also will afford greater flexibility for the repurchase of outstanding equity securities. Under California law, any acquisition by a California state-chartered bank of its outstanding common shares (subject to certain exceptions) must be approved in advance by the Commissioner of Financial Institutions. Under the regulations of the Federal Reserve Board applicable to bank holding companies, a bank holding company, during any 12 month period, may, without prior notice to or approval of the Federal Reserve Board, purchase or redeem its outstanding equity securities so long as the gross consideration paid for such securities during such 12 month period is less than 10% of the holding company's consolidated worth. Moreover, a well-capitalized bank holding company is not required to obtain prior approval of the Federal Reserve Board for the purchase or redemption of its equity securities if both before and immediately after the purchase, the bank holding company is well-capitalized, is well-managed and is not the subject of any unresolved supervisory issues. As previously announced, the Bank has an ongoing repurchase program whereby the Bank may repurchase not more than 10% of its outstanding common stock. It is expected that the Holding Company will continue this program following the Reorganization. Under California law, California state-chartered banks may issue capital notes and debentures only if such securities are subordinate to the claims of all creditors and depositors. Also, the terms of the securities must provide that no payment of principal may be made unless following such payment the aggregate of shareholders' equity and capital notes and debentures thereafter outstanding are the equal of such aggregate at the date of original issue of such debt securities, unless otherwise authorized by the Commissioner of Financial Institutions. Such restrictions would not be applicable to debt securities of the Holding Company thus affording increased flexibility for future financing to support the growth of the Bank and the Holding Company. -23- We believe that the majority of the banks in the United States are organized in the holding company form and we recommend that the Bank likewise should adopt this corporate structure. In order to effect the Reorganization into a bank holding company, the Holding Company has formed FNCB Merger Corp. ("Merger Co."), a subsidiary corporation into which the Bank will be merged. Merger Co. has been organized solely for the purpose of the Reorganization; it has conducted and will conduct no business prior to the merger; upon the merger, it will disappear into the Bank which will be the resultant company in the merger. The use of a "merger subsidiary" such as Merger Co. in a "reverse triangular" merger to accomplish the Reorganization is a common approach for corporate reorganizations such as the Reorganization. Immediately prior to the Reorganization, the Holding Company will own all of the stock of Merger Co. Following the Reorganization, the Holding Company will own all of the outstanding shares of common stock of the Bank and Merger Co. as so merged, and the Bank will continue to do business under the name of First Northern Bank of Dixon. After the Reorganization, the shares of Merger Co. will no longer be outstanding. The capital stock of the Bank will be the same as the capital structure of the Bank immediately prior to the Reorganization. All shareholders of the Bank will become shareholders of the Holding Company. Shareholder Approval The Reorganization must be approved by the holders of at least a majority of the outstanding shares of common stock of the Bank. As of February 29, 2000, the record date, there were 3,082,640 shares of common stock outstanding and entitled to vote. Therefore, the affirmative vote of at least 1,541,321 shares is required to approve the Reorganization. What Should Shareholders Do? If you want to vote in favor of the Reorganization, mail your signed proxy card in the enclosed envelope as soon as possible so that your shares can be voted at the shareholder's meeting. THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS VOTING IN FAVOR -------- OF THE REORGANIZATION. A failure to send in your proxy or an abstention from voting will have the same effect as a negative vote because the proposal requires the approval of a majority of the outstanding shares. Directors Approval The Board of Directors of the Bank has unanimously approved the Reorganization. No Dissenters' Appraisal Rights Shareholders are not entitled to dissenters' rights under Chapter 13 of the California General Corporation Law in connection with the Reorganization. Risk Factors There are risks associated with the combined business of the Holding Company and the Bank as a result of the Reorganization of the Bank's corporate structure. See "Risk Factors," below. -24- The Companies The three companies participating in the Reorganization are the Holding Company, the Bank and Merger Co. The Holding Company The Holding Company is a California corporation that was formed by the Bank on February 8, 2000. The Holding Company has not engaged in any business since its incorporation. After the Reorganization, the Holding Company will become a registered bank holding company and its principal asset will be its stockholdings in the Bank. The Bank The Bank is a California state-chartered bank. The Bank engages in the commercial banking business in the El Dorado, Sacramento, Solano and Yolo Counties of California. Merger Co. Merger Co. is a newly-formed California corporation organized solely for the purpose of this transaction. Merger Co. will not conduct any business prior to the Reorganization. The Holding Company owns all of the capital stock of Merger Co. The separate existence of Merger Co. will cease after the Reorganization. The One-For-One Exchange Ratio and Market Value If the proposed Reorganization is approved, shareholders of the Bank will receive for each of their Bank shares, stock in the Holding Company on a one-for-one basis. No surrender of Bank share certificates will be required as such certificates will represent shares of the Holding Company's common stock until surrendered for exchange. Shares of the Holding Company have not been publicly traded, as it is a new company. It has not engaged in any prior business activity. Thus, there is no published information as to the market price of Holding Company stock. The stock of the Bank is not listed for quotation on any exchange, although trades of the stock are reported on the OTC Bulletin Board under the symbol "FDIX." After the Reorganization, it is expected that trades in the Holding Company stock will be reported on the OTC Bulletin Board. After the Reorganization, no market will exist for Bank stock because the Holding Company will be the Bank's only shareholder. Per Share Summary of the Bank and Pro Forma per Share Summary of the Holding Company Presented below is certain per share financial information of the Bank. Certain pro forma per share information is provided for the Holding Company.
Per Share Data Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- The Bank Net earnings (1) $ 1.24 $ 0.41 $ 0.53 $ (0.84) $ 0.57 Cash dividend declared $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Book value (at period end) $ 10.37 $ 10.80 $ 9.60 $ 9.29 $ 10.97 Pro Forma--The Holding Company Net earnings (1) $ 1.24 $ 0.41 $ 0.53 $ (0.84) $ 0.57 Cash dividends declared $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Book value (at period end) $ 10.37 $ 10.80 $ 9.60 $ 9.29 $ 10.97 - ------------------ -25- (1) Earnings per share are based on the weighted average shares outstanding during the reported period. Prior years' earnings per share have been restated for the two-for-one stock split in 1998, the 5% stock dividend in 1999, the 5% stock dividend in 1998 and the 4% stock dividend in 1997.
Management The directors and officers of the Bank will continue to be directors and officers of the Bank following the Reorganization. After the Reorganization, the present directors of the Holding Company will continue to be directors of the Holding Company. See "History and Business of the Holding Company - Board of Directors," below. Thereafter, the shareholders of the Holding Company will elect the directors of the Holding Company from time to time. Board of Directors The Holding Company's bylaws provide that the Board of Directors shall consist of not less than seven nor more than 13 members, the exact number of which may be fixed from time to time. The initial number of directors has been fixed at eleven, which is the same as the number of directors of the Bank. Holding Company Option and Stock Purchase Plans Pursuant to the Bank's 1997 Stock Option Plan, Outside Director's Plan and Employee Stock Purchase Plan, eligible officers, directors and employees of the Bank may receive options to purchase or purchase shares of Bank common stock or other securities or benefits. Upon consummation of the Reorganization, all obligations of the Bank under the Bank's plans will become obligations of the Holding Company on the same terms and conditions, with the exception that securities issued pursuant to the Bank's plans or derived from the value of Bank common stock will become Holding Company common stock. For information regarding the number of shares of stock of the Bank granted under such plans, see "Executive Compensation - Stock Option Plan," "Election of Directors - Compensation of Directors" and "Executive Compensation - Profit Sharing Plan" above. Differences between Holding Company Stock and Bank Stock Shareholders of the Holding Company will have rights comparable to those rights which they now possess as shareholders of the Bank, except as described below. The shareholders of the Bank currently have the right to cumulate their shares in the election of directors. After the Reorganization, shareholders of the Holding Company will continue to have the right under California law to vote cumulatively in the elections of directors. Cumulative voting means that a shareholder may cast the number of shares he or she owns times the number of directors to be elected in favor of one nominee or allocate such votes among the nominees as he or she determines. Article Fifth of the Bank's Articles of Incorporation provides that common stock offered for cash must first be offered for subscription to the outstanding shareholders of the Bank on a pro rata basis. This preemptive rights provision will be carried over into the Holding Company's Articles of Incorporation. See "Comparative Descriptions of Common Stock - Preemptive Rights," below. The differing provisions of the Articles of Incorporation and bylaws of the Holding Company and the Articles of Incorporation and bylaws of the Bank will also affect the rights of shareholders. For a more complete discussion regarding these matters, see "Anti-Takeover Measures" and "Comparative Description of Common Stock," below. Anti-Takeover Provisions The Bank's and the Holding Company's Articles of Incorporation and bylaws include provisions which may be described as "anti-takeover provisions" because they have an anti-takeover effect and could discourage takeover attempts which have not been approved by the Board of Directors. -26- Pursuant to the Article Seventh of the Articles of Incorporation of the Bank, a "Reorganization" (as defined at Section 181 of the California General Corporation Law) requires the approval of 70% of the outstanding shares of common stock unless such Reorganization has been approved by 70% of the Board of Directors. The Holding Company's Articles of Incorporation contain "supermajority vote" provisions. If the Reorganization is approved, such provisions will require the affirmative vote of the holders of at least 66 2/3% of the shares of the Holding Company to approve certain business combinations, unless the transaction is approved by 66 2/3% of the "Disinterested Directors" (as described below under "Anti-Takeover Measures - Summary of Fair Price and Supermajority Vote Provisions"). Certain other conditions must also be met which result in a "fair price" being paid to all shareholders. We believe that these provisions in the Holding Company's Articles of Incorporation will aid in assuring that shareholders are treated fairly in any offer for their shares. The Holding Company's Articles of Incorporation require the Board of Directors, when evaluating a transaction involving a business combination between the Holding Company and another party, or that might result in a change of control of the Holding Company to consider certain factors in evaluating the proposal. These factors include the social and economic effects such transaction may have on the Holding Company's employees, shareholders, customers and suppliers other constituents of the corporation and its subsidiaries and on the communities in which the Holding Company operates or is located, including, without limitation, the availability of credit and other banking services to the communities served by the corporation, whether the transaction might violate applicable law and the long-term value of the Holding Company as an independent entity. Under both the Bank's and Holding Company's bylaws, special meetings of the shareholders may be called by the Chairman of the Board, or by the President, or by shareholders holding shares representing at least 10% of the voting power. The Bank's bylaws provide that no person shall be a member of the Board of Directors unless such person meets certain qualification requirements. The Holding Company's bylaws contain comparable qualification requirements. The Bank's bylaws provide that director nominations, other than those made by the Board of Directors, shall be made by notification in writing delivered or mailed to the President of the Bank not less than 30 days or more than 60 days prior to any meeting of shareholders called for the election of directors. The provision also requires detailed information about the nominee, including information necessary to determine if the nominee is qualified under the bylaws. The Holding Company's bylaws provide for comparable notification procedures. We believe that it is appropriate to include such anti-takeover provisions during the conversion to a holding company form of ownership. The inclusion of such provisions is not in response to any attempted takeover of the Bank. The Bank has not been the target of an attempted takeover in the past. The presence of these anti-takeover provisions may have the effect of discouraging outside offers for the shares of the Holding Company. These provisions may also give management more control than it would otherwise have over the acceptance or rejection of such offers. Such provisions may protect the incumbent Board of Directors and management by discouraging takeover attempts which are not supported by the Board, but which may be supported by the majority of shareholders. Nonetheless, these anti-takeover provisions do not diminish the fiduciary obligations of the Board of Directors or management to the shareholders. Certain Federal Income and California Tax Consequences It will be a condition to the completion of the Reorganization that legal counsel, Pillsbury Madison & Sutro LLP, San Francisco, opine that no gain or loss will be recognized for federal income tax or California bank and corporation tax or personal income tax purposes by the Bank, the Holding Company or the Bank's shareholders as a result of the Reorganization. See "Bank Holding Company Reorganization--Certain Federal Income and California Tax Consequences," below. Such counsel has advised the Bank and the Holding Company that it fully expects to be able to deliver that opinion. -27- Each shareholder should rely upon his or her own tax advisor with respect to the federal, state, local and foreign tax consequences of the Reorganization. Dividends In the opinion of the Bank's management, for the foreseeable future, there is no reason to expect that a decrease in the Holding Company's dividend rate relative to that of the Bank will occur, although there can be no assurance as to the future rate of dividends on the Holding Company's common stock. RISK FACTORS The purpose of the proposal is to give the Bank greater financial and corporate flexibility in such areas as acquisitions, non-banking activities and debt or other financings, and to permit it to participate in non-bank activities, which are not permissible for the Bank to engage in directly. The nature of the business conducted by the Bank will not change. Certain risks associated with the combined business of the Holding Company and the Bank as a result of the Reorganization of the Bank's corporate structure, are presented below. The Holding Company's Financial Condition The proposed Reorganization calls for you to receive Holding Company stock in exchange for your Bank stock. The Holding Company has no history of financial performance because it is a newly-formed California corporation. The Holding Company's financial condition following the Reorganization will depend on the operation and profitability of the Bank. The Holding Company's profitability may be affected by other factors such as: o businesses started or acquired by the Holding Company other than the Bank; and o laws and regulations applicable to the Holding Company. Although the Holding Company intends to operate the Bank in substantially the same manner that it has been operated to date, changes to the operations of the Bank and new businesses may affect the financial performance and condition of the Holding Company as a whole and the return to shareholders of the Holding Company. Banking Institutions The financial services industry and banking in particular has undergone a complex deregulation process. The interest rate limitations on what banks may pay to depositors have been phased out. Interstate banking laws which allow financial institutions to cross state lines have been enacted nationally. Competition to provide traditional banking services has increased among banks and other companies. The Holding Company and the Bank will continue to be affected by these changes in the future. The conduct of the Bank's business as a subsidiary of the Holding Company may increase its ability to compete in this newly deregulated environment, but there can be no assurance that this will be the case. Anti-Takeover Provisions The Holding Company's Articles of Incorporation and bylaws contain provisions intended to prevent hostile takeovers. The anti-takeover provisions include: supermajority vote and fair price provisions; a provision requiring the consideration of nonmonetary factors (such as social effects) in certain merger or other transactions; provisions requiring that shareholders give advance notice with respect to nomination of candidates for election as directors and certain proposals they may wish to present for a shareholder vote; requirements as to qualifications of directors; and other items. -28- These provisions and additional provisions of California law may: o discourage outside offers for the shares of the Holding Company; o give management more control over the acceptance or rejection of business combination offers; and o protect incumbent Directors by discouraging takeover attempts which are not supported by the Board. The presence of these anti-takeover provisions in the Holding Company's Articles of Incorporation and bylaws does not diminish the fiduciary obligations of the Board of Directors or management to the shareholders. BANK HOLDING COMPANY REORGANIZATION THE BOARD OF DIRECTORS OF THE BANK HAS UNANIMOUSLY APPROVED A PLAN OF REORGANIZATION UNDER WHICH THE BUSINESS OF THE BANK WOULD BE CONDUCTED AS A WHOLLY-OWNED SUBSIDIARY OF THE HOLDING COMPANY AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE REORGANIZATION. Reasons for the Proposal A bank holding company form of organization will increase the corporate and financial flexibility of the businesses operated by the Bank through the combined business of the Bank and the Holding Company. Examples are: o increased structural alternatives for acquisitions; o the ability to augment Bank capital by means of Holding Company debt or other securities; and o the ability to engage in certain non-banking activities. A bank holding company can engage directly or through non-banking subsidiaries in certain non-bank-related activities in which the Bank cannot presently engage. The Reorganization would broaden the scope of services which could be offered to the public. The Holding Company has not made any determination as to which of these types of activities it may engage in after consummation of the proposed transaction. The Holding Company could also acquire control of one of more other banking organizations which it could operate as separate subsidiaries of the Holding Company, although no determination has been made that the Holding Company will do so. Description of the Reorganization The Holding Company will subscribe for and will hold all of the 100 authorized shares of common stock of the Merger Co., which has been formed solely for the purpose of this transaction. Merger Co. will merge with and into the Bank under the name and charter of the Bank, pursuant to the terms of the Agreement and Plan of Reorganization (to which there is attached an Agreement of Merger). See Annex I of this Proxy Statement/Offering Circular. Upon consummation of the transaction, the Bank will be a wholly-owned subsidiary of the Holding Company. After the Reorganization, the business of the Bank will be conducted by the Bank under the name "First Northern Bank of Dixon." All of the outstanding shares of stock of the Bank will be owned by the Holding Company. The Bank will have the same directors, officers, interests and properties as those of the Bank immediately prior to the Reorganization. The Bank will continue to be subject to regulation by the FDIC, and as a subsidiary of the Holding Company, will be subject to regulation by the Board of Governors of the Federal Reserve System. Conversion of Shares and Exchange of Stock Certificates Upon consummation of the Reorganization, each outstanding share of the Bank stock will be converted into one share of the Holding Company stock. Each holder of Bank stock certificates upon surrender of such certificates for -29- cancellation will be entitled to receive certificates representing the same number of shares of Holding Company common stock. Until so surrendered, Bank stock certificates will be deemed for all purposes to evidence the same number of shares of the Holding Company stock. Stock certificates representing shares of the Holding Company's common stock will be generally available to be distributed to shareholders of the Bank by approximately July 7, 2000. The distribution of stock certificates to you will be dependent upon the date of receipt of your Bank stock certificate for exchange (which you will not be required to do). Shareholders of the Bank will continue to be entitled to sell or transfer their Bank stock through the date of consummation of the transaction. Further, you may sell Holding Company stock after the effective date of the Reorganization but before receipt of certificates representing Holding Company stock. Completion of such sales will only require presentation of your Bank stock certificate by the transferee. Regulatory Approvals Federal and California law and regulations provide that certain acquisition transactions, such as the Reorganization, may not be consummated unless approved in advance by applicable regulatory authorities. The Agreement and Plan of Reorganization provides that the Holding Company, the Bank, and Merger Co. shall proceed expeditiously and cooperate fully in the procurement of any consents and approvals and in the taking of any other action and the satisfaction of all requirements, prescribed by law or otherwise, necessary for consummation of the Reorganization, including the preparation and submission of applications required to be filed with the Commissioner of Financial Institutions and the Federal Reserve Board. Receipt of all requisite regulatory approvals and consents is a condition precedent to the consummation of the Reorganization. An application for prior approval of the Holding Company to acquire the Bank was filed with the Federal Reserve Board on February 4, 2000, and an application for approval to acquire the Bank was filed with the Commissioner of Financial Institutions on February 7, 2000. There can be no assurances that the required approvals will be obtained, or as to conditions or timing of such approvals. Although neither the Holding Company nor the Bank is aware of any reason why the requisite approvals of and consents to the Reorganization would not be granted, there can be no assurance such approvals and consents will be obtained or that, if obtained, such approvals and consents will not include conditions which would be of a type that would relieve the Holding Company, the Bank, or Merger Co. from their obligation to consummate the Reorganization. Affiliate Restrictions The shares of Holding Company stock will be exempt from registration under the Securities Act of 1933, by reason of Section 3(a)(10) thereof. In accordance with the provisions of such section, the Holding Company has filed its Application for a fairness hearing before the Commissioner of the California Department of Corporations. However, the resale of such shares by the directors, principal officers and principal shareholders may be restricted by the 1933 Act and by SEC rules if such directors, principal officers and principal shareholders are deemed to be "affiliates" as that term is defined by the 1933 Act and SEC rules. Persons considered to be in control of an issuer are considered as "affiliates" and may include officers, directors and shareholders who own a significant percentage of the outstanding stock. Holding Company stock received after the transaction by "affiliates" the Holding Company will be "control stock," which can be sold only if they are registered or transferred in a transaction exempt from registration under the 1933 Act, such as pursuant to SEC Rules 144 and 145, or pursuant to a private placement. SEC Rules 144 and 145 generally require that before an affiliate can sell control stock: o there must be on file with the SEC public information filed by the issuer; o the affiliate must sell his stock in a unsolicited broker's transaction or directly to a market maker; and -30- o during any three-month period, the amount of the securities that can be sold other than in non-public transactions is limited to the greater of 1% of the outstanding stock of the issuer or the average weekly trading volume during the last four calendar weeks. It is advisable for those shareholders who may become "affiliates" of the Holding Company to confer with their legal counsel prior to the sale of any Holding Company stock. Conditions of Consummation California law provides that a bank holding company reorganization such as the Reorganization requires the approval of a reorganization agreement by the Boards of Directors and by shareholders holding a majority of the outstanding common stock of each of the subject bank and the corporation merging with such bank. The obligation of the Bank and the Holding Company to consummate the Reorganization is conditioned further upon the following: o the absence of any action, suit, proceeding or claim, made or threatened, related to the proposed Reorganization; o any development which makes consummation of the Reorganization inadvisable in the opinion of either Board of Directors; o the receipt of a favorable opinion of legal counsel with respect to the tax consequences of the Reorganization; o the receipt of all necessary regulatory approvals; o the number of shares of common stock of the Bank voting against the Reorganization makes consummation of the Reorganization unreasonable; and o the performance of all covenants and agreements. Other Considerations The Holding Company is a business corporation formed under California law. It will have greater flexibility than the Bank in certain respects, including: o the incurrence of debt for leveraged growth; o the redemption of stock; and o the ownership and operation of related financially-oriented businesses. The Holding Company will be a registered bank holding company under the Federal Bank Holding Company Act of 1956, as amended, and will be subject to supervision and regulation of the Federal Reserve Board thereunder. Expenses The Reorganization will cost approximately $100,000. The expenses are related to: o legal fees; o accounting fees; o application fees; -31- o printing costs; and o other expenses. Certain Federal Income and California Tax Consequences Neither the Bank nor the Holding Company is required to complete the Reorganization, and their respective Boards of Directors do not intend to complete the Reorganization, unless both the Bank and the Holding Company receive an opinion (the "Tax Opinion") of legal counsel, Pillsbury Madison & Sutro LLP, to the effect that the Reorganization will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Internal Revenue Code and that, accordingly, for federal income tax and California bank and corporation tax and personal income tax purposes: o no gain or loss will be recognized by the Holding Company, the Bank or Merger Co. as a result of the Reorganization, o no gain or loss will be recognized by Bank shareholders upon conversion of their Bank stock into Holding Company stock, o a Bank shareholder's tax basis for the Holding Company stock will be the same as the tax basis of the Bank stock surrendered by the shareholder and o a Bank shareholder's holding period for the Holding Company stock will include the holding period of the Bank stock surrendered by the shareholder, provided that the Bank stock is held as a capital asset on the date of consummation of the Reorganization. An opinion of counsel represents only such counsel's best legal judgment and is not binding on the Internal Revenue Service, the California Franchise Tax Board or the courts. The Tax Opinion will rely on certain representations of the Bank's and the Holding Company's management which are customary in transactions comparable to the Reorganization. In addition, the Tax Opinion will be based upon laws, judicial decisions and administrative regulations, rulings and practice, and other applicable authority, all as in effect on the date of the Reorganization and all of which could be subject to change, either on a prospective or retroactive basis. New developments in any such administrative matters or court decisions, legislative changes, or the inaccuracy or incompleteness of any of the representations of management could have an adverse effect on the legal or tax consequences described in the Tax Opinion and counsel has not undertaken to accept any responsibility for updating or revising the Tax Opinion in consequence of any such new developments or changes. Finally, the Tax Opinion deals only with the Federal Income Tax and California Bank and Corporation Tax and personal income tax consequences of the Reorganization. ACCORDINGLY, SHAREHOLDERS ARE STRONGLY URGED TO CONSULT WITH AND MUST RELY UPON THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE REORGANIZATION IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES. No Appraisal Rights for Dissenting Shareholders Pursuant to the provisions of California law, shareholders of the Bank will not have dissenters' rights in the Reorganization. Shareholders of a California chartered bank are entitled to dissenters' rights to the same extent as shareholders of a California corporation. California law generally grants shareholders dissenters' rights in transactions that are required to be approved by shareholders. However, under California law, in a transaction such as the Reorganization, where a vote of shareholders is only required because the shares to be received in the transaction have different rights, preferences, privileges or restrictions, no dissenters' rights are available. -32- Accounting Treatment The merger of the Bank and Merger Co. will be accounted for in a method similar to a pooling of interests. ANTI-TAKEOVER MEASURES The Purpose of the Anti-Takeover Provisions The Bank's Articles of Incorporation and bylaws have contained certain provisions which might be regarded as so-called "anti-takeover" provisions. See "Comparative Description of Common Stock - Anti-takeover Provisions," below. The Articles of Incorporation and bylaws of the Holding Company will continue some, but not all of these provisions and also contain additional anti-takeover provisions such as fair price and enhanced supermajority vote provisions. Such provisions may be described as "anti-takeover provisions" because they have an anti-takeover effect and may discourage takeover attempts which have not been approved by the Board of Directors. We included these provisions because certain of them are in the Bank's existing Articles of Incorporation and bylaws and because certain tactics have become relatively common in corporate takeover practice. Your Board of Directors believes such tactics can be highly disruptive and can result in dissimilar and unfair treatment of shareholders. We are not aware of any current efforts to obtain control of the Bank or to effect substantial accumulations of its stock. The following discussion is a general summary of the material provisions of the Holding Company's Articles of Incorporation and bylaws and certain other regulatory provisions, which may be deemed to have an "anti-takeover" effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in the Holding Company's Articles of Incorporation and bylaws, reference should be made to the document in question. A copy of the Holding Company's Articles of Incorporation is attached hereto as Annex II, and a copy of the bylaws has been filed with the Application submitted - -------- to the California Department of Corporations and may be obtained by sending a written request to Mr. James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620. Summary of Fair Price and Supermajority Vote Provisions Article 6 of the Holding Company's Articles of Incorporation contains a "Supermajority Voting and Fair Price" provision, both to encourage potential acquirers to negotiate with the Holding Company and to protect shareholders from being unfairly treated in mergers or other business combinations with persons who own a substantial amount of the Holding Company's stock. The Supermajority Voting and Fair Price provision applies to mergers and certain other types of business combinations with persons holding 10% or more of the shares held by voting stock of the Holding Company (an "Interested Shareholder"). In general, the Supermajority Voting and Fair Price provision requires, in a merger or certain other business combinations, first that 66 2/3% of the outstanding shares, including those held by the Interested Shareholder, must be voted for the business combination, second that all shareholders who are independent of the Interested Shareholder receive at least a specified amount for his or her shares acquired during the preceding two years and third that certain other requirements are met. The specifics of these requirements are more fully discussed below. The Supermajority Voting and Fair Price provisions are designed to encourage potential acquirors to negotiate at arm's length with the Board of Directors. In the absence of such negotiations, these provisions seek to ensure that any multi-step attempt to take over the Holding Company will be made on terms offering similar treatment to all shareholders. In the past, there have been takeovers of publicly held companies accomplished by the purchase of blocks of stock in open market purchases or otherwise at a price above prevailing market prices, followed by a second step, merger or other transaction in which the shares acquired are paid less than the value paid in the first step. The Bank has a large number of shareholders who each have held a relatively small number of Bank shares for a long period of time. We believe that opportunistic bidders may generally be in a better position to take advantage of the more lucrative first step transaction, while shareholders who have held their shares for a long period of time will often, as -33- a practical matter, be compelled to accept the less favorable consideration payable in the second step business combination. The potential for future use of the two-step acquisition have convinced us that these provisions are desirable in order to preserve for the shareholders the benefits which will accrue to the Holding Company and its subsidiary, the Bank, including its increased ability to compete in the significantly deregulated banking industry. This Supermajority Voting and Fair Price provision will not apply to an otherwise covered business combination in certain circumstances. First, if the business combination is approved by 66 2/3% of the "Disinterested Directors" of the Holding Company, the Supermajority Voting and Fair Price rules do not apply. For purposes of the Supermajority Voting and Fair Price provision, a Disinterested Director is defined as a member of the Board of Directors who is not affiliated with the Interested Shareholder, and who was a member of the Board of Directors prior to the time the Interested Shareholder became an Interested Shareholder and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. Second, the same is true if any banking subsidiary of the Holding Company has received a notice of termination of insurance from the Federal Deposit Insurance Corporation or an order to correct a capital impairment from the Commissioner of the California Department of Financial Institutions, possession of any banking subsidiary of the Holding Company has been taken by the Commissioner, a conservator has been appointed for any banking subsidiary of the Holding Company or the Holding Company or, a similar proceeding has been commenced following a substantial deterioration in the Holding Company's condition. Where the Supermajority Voting and Fair Price provisions do not apply, a simple majority of the outstanding shares is required to approve the business combination. Where the Supermajority Voting and Fair Price rules apply, the requirements in addition to the 66 2/3% approval of the outstanding shares include: (a) the consideration to be received in the business combination is in cash or in the same form as the Interested Shareholder has paid for the shares acquired by such Interested Shareholder; (b) the per share consideration to be received by holders of outstanding stock in the business combination (other than the Interested Shareholder) is at least equal to the highest of (i) the highest per share price paid by such Interested Shareholder in acquiring the Holding Company's stock of the same class in the two years prior to the announcement of the business combination, or in the transaction in which it became an Interested Shareholder, if within two years of the date of first public announcement of the proposal, or (ii) the fair market value per share on the announcement date or on the date on which the Interested Shareholder became an Interested Shareholder if within two years of the first public announcement of the proposal; and (c) after becoming an Interested Shareholder and prior to the consummation of such business combination (i) such Interested Shareholder must not have become the beneficial owner of any additional shares of the voting stock of the Holding Company, except as part of the transaction which results in such shareholder becoming an Interested Shareholder, within the two year period prior to consummation of the business combination, (ii) such Interested Shareholder must not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax advantages provided by the Holding Company or any subsidiary of the Holding Company, and (iii) except as approved by a 66 2/3% majority of the Directors who are Disinterested Directors, there shall have been (A) no reduction in the annual rate of dividends paid on common stock, and there shall have been (B) an increase in the annual rate of dividends necessary to reflect certain reclassification and recapitalization. The Holding Company's Articles of Incorporation provides that the Supermajority Voting and Fair Price provisions cannot be amended or repealed unless such a change is approved by not less than 66 2/3% of the total voting power of the outstanding shares of the Holding Company. The Supermajority Voting and Fair Price provision will not prevent a merger or similar transaction following a tender offer in which all shareholders receive substantially the same price for their shares and which 66 2/3% of the shares have been voted for the merger or which 66 2/3% of the Disinterested Directors have approved and which the holders of a majority of the outstanding shares approve. Except for the restrictions on the specified business combinations, the Supermajority Voting and Fair Price provision will not prevent a holder of a controlling interest from exercising control over the Holding Company or prevent such a holder from increasing his or her share ownership. The -34- existence of the Supermajority Voting and Fair Price provision may, however, tend to encourage persons seeking control of the Holding Company to negotiate terms of a proposed merger or similar transactions with the Holding Company's Board of Directors. The Board of Directors recognizes that not all two-tiered tender offers or other two-step transactions are intended to pressure shareholders into hasty decisions or to discriminate among shareholders. However, taking all factors into consideration, the Board believes that it is appropriate to take action to reduce the possibility to two-tiered transactions which are unfair. While the Board believes the Supermajority Voting and Fair Price provision is in the best interest of the Holding Company's shareholders, there are several possible negative considerations. The effect of the Supermajority Voting and Fair Price provision may be to deter a future takeover attempt which the Board has not approved, but which a majority of the shareholders may deem to be in their best interests or in which shareholders may receive a premium for their shares over the then market value. The adoption of the Supermajority Voting and Fair Price provision also may make it more difficult to obtain shareholder approval of transactions covered by the provision, such as mergers or other corporate combinations with persons who are Interested Shareholders, even if approved by the Directors and favored by a majority of the shareholders. Consideration of Nonmonetary Factors Article 7 of the Holding Company's Articles of Incorporation requires the Board of Directors, when evaluating a merger proposal, to consider the social and economic effects of the transaction on employees, shareholders, customers and suppliers in the communities in which the Holding Company operates, in addition to monetary factors. The Boards of Directors of the Holding Company and the Bank believe that the inclusion of such provisions in the Holding Company's Articles of Incorporation is appropriate in light of the importance of the Bank to the communities which it serves. In some circumstances, the nonmonetary factors provision could influence the Board of Directors to oppose a tender offer or other attempted acquisition of control of the Holding Company that some shareholders might find financially attractive. This provision may also have the effect of making Board approval of an acquisition more difficult to secure and, consequently may have the effect of delaying or discouraging a proposed takeover. In some cases, opposition to such a proposal might have the effect of maintaining the tenure of incumbent management. Another effect of Article 7 may be to dissuade shareholders who might be displeased with the Board of Directors' response to a tender offer from engaging the Holding Company in costly and time consuming litigation. Such litigation might involve an allegation by a shareholder that the Board of Directors breached an obligation to the shareholders by not limiting its evaluation of a tender offer solely to the value of the tender offer consideration in relation to the then market price of the Holding Company's stock. Nonetheless, the provisions of Article 7 of the Holding Company's Articles of Incorporation do not diminish the fiduciary obligations of the Board of Directors or management to the shareholders. Director Qualification and Nomination Procedures The Holding Company's bylaws provide that no person shall be a member of the Board of Directors unless such person has been for at least two years immediately prior to his or her election a resident in a county in which a banking subsidiary of the Holding Company maintains an office except when the election of such person is approved by the affirmative vote of at least two-thirds of the members of the Board of Directors of the Holding Company then in office. In addition, such person must not be, among other things, the holder of more than 1% of the outstanding shares of any other banking corporation, affiliate or subsidiary thereof, bank holding company, industrial loan company, savings bank or association or finance company other than of the Holding Company or any affiliate or subsidiary of the Holding Company, or a director, officer, employee, agent, nominee or attorney of any such entity or who has or is the nominee of -35- anyone who has any contract, arrangement or understanding with any such entity other than the Holding Company or any affiliate or subsidiary of the Holding Company. The Holding Company's bylaws provide that director nominations, other than those made by the Board of Directors, shall be made by notification in writing delivered or mailed to the President of the Holding Company not less than 30 days or more than 60 days prior to any meeting of shareholders called for election of directors. The provision also requires that the notice contain detailed information about the nominee, including information necessary to determine if the nominee is qualified under the bylaws. Cumulative Voting Cumulative voting means that a shareholder may cast the number of shares he or she owns times the number of directors to be elected in favor of one nominee or allocate such votes among the nominees as he or she determines. Shareholders of the Holding Company will continue to have the right to vote cumulatively in the elections of directors for the foreseeable future. Until and unless the Holding Company's stock becomes designated as qualified for trading on the NASDAQ National Market System and the Holding Company has at least 800 record holders of its shares as of the record date of its most recent annual meeting of shareholders, Section 708 of the California General Corporation Law ("CGCL") will continue to apply and cumulative voting will continue to be required. The Board of Directors and management have no intention in the foreseeable future to qualify the Holding Company's stock for listing on the NASDAQ National Market System nor to take any action which would otherwise result in the Holding Company no longer being subject to Section 708 of the CGCL. Therefore, cumulative voting is expected to remain in effect in the foreseeable future. Additional Considerations Federal law requires prior approval by the Board of Governors of the Federal Reserve System before any company acquires control of a bank holding company. In addition, pursuant to the California Financial Code, no person or entity may directly or indirectly, acquire a controlling interest in a California state-chartered bank without the prior written approval of the California Department of Financial Institutions. Independent of any provision of the Holding Company's Articles of Incorporation or bylaws, the requirement for such regulatory approval may delay efforts to obtain control over the Holding Company. The Holding Company has 8,000,000 shares of authorized common stock of which, after consummation of the proposed Reorganization, there will be 3,082,640 shares issued and outstanding. Therefore the Holding Company will have 4,917,360 shares of its authorized common stock available for future issuance by the Board of Directors for any proper corporate purpose, subject to the preemptive rights provided to the holders of the common stock of the Holding Company by the Holding Company's Articles of Incorporation. See "Comparative Descriptions of Common Stock - Preemptive Rights," below. These shares could be issued into "friendly" hands by the Board of Directors in the event of an attempt to gain control of the Holding Company. Because the Holding Company's authorized but unissued shares could be issued and used in this manner, they represent another potential anti-takeover device. In addition, as of December 31, 1999, the Bank had options outstanding to purchase an aggregate of 196,665 shares of its stock and 519,960 shares are reserved for granting further options. The Holding Company's Articles of Incorporation and bylaws currently contain no other provisions that were intended to be or could fairly be considered as anti-takeover in nature or effect. The Board of Directors has no present intention to amend the Articles of Incorporation to add any further anti-takeover provisions. -36- MARKET PRICES OF STOCK The Holding Company First Northern Community Bancorp was incorporated in California on February 8, 2000. No shares of the Holding Company have been issued since the date of its incorporation to the present time. Therefore, no market exists at this time for the Holding Company's stock. As a result of the Reorganization, Bank shareholders will receive for their Bank stock shares of Holding Company stock. It is anticipated that trades of the Holding Company's common stock will be reported on the OTC Bulletin Board. The Bank The Bank had approximately 868 shareholders of record as of February 29, 2000. The Bank's common stock is not listed on any exchange, nor is it included on NASDAQ. However, trades may be reported on the OTC Bulletin Board under the symbol "FDIX." The Bank is aware that Hoefer & Arnett, Inc., Pacific Crest Securities, Paine Webber, Inc. and Sutro & Co. make a market in the Bank's common stock. Management is aware that there are also private transactions in the Bank's common stock, although the data set forth below may not reflect all such transactions. The following table summarizes the range of sales prices of the Bank's common stock for each quarter during the last two fiscal years and is based on information provided by Hoefer & Arnett, Inc. The quotations reflect the price that would be received by the seller without mark-ups, mark-downs or commissions and may not have represented actual transactions: High Low ---- --- 1999 ---- Fourth Quarter $14.00 $13.50 Third Quarter $14.50 $13.25 Second Quarter $14.00 $12.75 First Quarter $13.50 $11.75 1998 ---- Fourth Quarter* $15.00 $13.00 Third Quarter $30.50 $26.00 Second Quarter $29.38 $27.63 First Quarter $30.00 $27.68 -------------------- *On July 30, 1998, the Board of Directors declared a two-for-one stock split of the Bank's common stock in which each share of the Bank's stock was converted into two shares. The two-for-one stock split was effective on August 31, 1998. DIVIDENDS The Holding Company Since the date of its incorporation, the Holding Company has paid no dividends. After consummation of the Reorganization, the amount and timing of any future dividends will be determined by its Board of Directors and will substantially depend upon the earnings and financial condition of its principal subsidiary, the Bank. The ability of the Holding Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary, the Bank. -37- Because the Bank is a California state-chartered bank, its ability to pay dividends or make distributions to its shareholders is subject to restrictions set forth in the California Financial Code. The California Financial Code restricts the amount available for cash dividends by state-chartered banks to the lesser of retained earnings or the bank's net income for its last three fiscal years (less any distributions to shareholders made during such period). In the event the Bank has no available funds for dividends as described above, then any dividends contemplated would require approval from the Commissioner of Financial Institutions. The Holding Company is a California corporation. Under the CGCL, the Holding Company will be restricted in its ability to declare and pay dividends. The Holding Company may make a distribution to its shareholders if one of the following standards is met: (i) the retained earnings of the corporation immediately prior to the distribution exceeds the amount of the proposed distribution; or (ii) the assets of the corporation exceed 1-1/4 times its liabilities and the current assets of the corporation exceed its current liabilities, but if the average pre-tax net earnings of the corporation before interest expense for the two years preceding the distribution was less than the average interest expense of the corporation for those years, the current assets of the corporation must exceed 1-1/4 times its current liabilities. Management believes that, for the foreseeable future, the ability of the Holding Company to pay cash dividends will effectively remain the same as the Bank. The Bank The Bank has not paid a cash dividend in the past five years and does not expect to pay a cash dividend in the near future. The Bank has paid a 5% stock dividend to shareholders in 1999, a 5% stock dividend in 1998 and a 4% stock dividend in 1997. The Holding Company anticipates continuing to pay stock dividends in the future. In the opinion of the Bank's management, for the foreseeable future, there is no reason to expect a decrease in the Holding Company's stock dividend rate relative to the Bank's stock dividend rate, although no assurance can be given as to the occurrence of events in the future which may adversely affect the rate of stock dividends by the Bank or the Holding Company. CAPITALIZATION The following table sets forth the capitalization of the Bank as of December 31, 1999 and the pro forma capitalization of the Holding Company as of December 31, 1999, assuming that the Reorganization had been consummated at such date and the Holding Company had redeemed and canceled the shares of Merger Co. issued to the Holding Company.
Bank Merger Co. Adjustments Holding Company (Actual) (Actual)(1) (Pro Forma) (Pro Forma) -------- ----------- ------------- --------------- Common Stock $ 23,322,001 $ 100 $ (100) $ 23,322,001 Preferred Stock ------ ---- Additional Paid-in Capital 976,850 ---- ---- 976,850 Accumulated Other Comprehensive Income (1,739,299) (1,739,299) Retained Earnings 9,513,151 9,513,151 ------------ ------------- ------------- ------------- Total Shareholders' Equity $ 32,072,703 $ 100 $ (100) $ 32,072,703 ============= ======== =========== ============ - ------------------ (1) Represents the capitalization of Merger Co. of $100.
-38- FINANCIAL STATEMENTS The Bank's audited Balance Sheets as of December 31, 1999 and 1998, the related audited Statements of Earnings, Changes in Shareholders' Equity and Cash Flows for each of the three years ended December 31, 1999 are included in the Bank's Annual Report, a copy of which is being sent to the Bank's shareholders concurrently with this Proxy Statement/Offering Circular. Financial statements of the Bank are not included herein as they are not deemed material to the exercise of prudent judgment by shareholders with respect to the matters to be acted upon at the Meeting. If any shareholder so desires, he or she may obtain an additional copy of such financial statements upon written request to Mr. James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 50, Financial Statement Requirements in Filings Involving the Formation of a Bank Holding Company, the Bank's audited consolidated balance sheets as of December 31, 1999 and 1998 and related audited consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 1999, prepared in conformity with generally accepted accounting principles, and report of independent public accountants, are included as part of the Bank's 1999 Annual Report to Shareholders, a copy of which is being concurrently furnished to shareholders. Additional copies of the Bank's 1999 Annual Report to Shareholders are available to each person to whom this Proxy Statement/Offering Circular has been delivered, upon written request of any such person, directed to Mr. James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620, (707) 678-3041. No historical financial information is available for the Holding Company since it is a newly formed California corporation. HISTORY AND BUSINESS OF THE HOLDING COMPANY General The Holding Company was incorporated under the laws of the State of California on February 8, 2000, for the purpose of becoming the holding company of the Bank. Immediately prior to consummation of the Reorganization, the Holding Company will own all of the stock of Merger Co. Thereafter, Merger Co. will merge with the Bank. Shareholders of the Bank will become shareholders of the Holding Company. The Holding Company will become the sole shareholder of the Bank. The Bank will carry on the business of the Bank under the name "First Northern Bank of Dixon ." The executive offices of the Holding Company are located at 195 North First Street, Dixon, California 95620. A copy of the Holding Company's Articles of Incorporation is attached hereto as Annex II. -------- Employees The Holding Company has no employees other than its officers, each of whom is also an employee and officer of the Bank and who serve in their capacity as officers of the Holding Company without additional compensation. Upon consummation of the Reorganization, the Holding Company, whose sole business function initially will be to hold 100% of the outstanding stock of the Bank, does not anticipate any immediate change in the number of or status of its employee officers. The status of the Bank's employees is not expected to be affected by the Reorganization. Board of Directors The Directors of the Holding Company are Lori J. Aldrete, Frank J. Andrews, Jr., John M. Carbahal, Gregory DuPratt, John F. Hamel, Diane P. Hamlyn, William H. Jones, Jr., Foy S. McNaughton, Owen J. Onsum, David W. Schulze and Thomas S. Wallace, each of whom also serve as Directors of the Bank. Directors of the Holding Company are elected to one-year terms. Under the provisions of the Holding Company's bylaws, the number of authorized directors may not be less than seven nor more than 13 with the exact number to be determined by resolution adopted -39- from time to time by the Board of Directors. Upon consummation of the Reorganization, the Directors of the Holding Company will beneficially own the following percentages of Holding Company stock: Directors Percentage of Common Stock --------- -------------------------- Lori J. Aldrete .29 Frank J. Andrews, Jr. .29 John M. Carbahal .38 Gregory DuPratt .30 John F. Hamel 1.34 Diane P. Hamlyn .86 William H. Jones, Jr. 1.40 Foy S. McNaughton .06 Owen J. Onsum 2.71 David W. Schulze 1.75 Thomas W. Wallace .31 All directors as a group (11 persons) 9.69 Remuneration of Directors and Officers The Holding Company has paid no remuneration to its officers and directors since its incorporation. It is not anticipated that the Holding Company's officers and directors will initially be paid any additional compensation by the Holding Company other than that currently paid to them by the Bank. Indemnification The Holding Company's Articles of Incorporation and bylaws provide for indemnification of officers, directors, employees and agents to the fullest extent permitted by California law. California law generally allows indemnification in matters not involving actions by or in the right of the corporation, to an agent of the corporation if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation, and in the case of a criminal matter, had no reasonable cause to believe the conduct of such person was unlawful. California law, with respect to matters involving actions by or in the right of a corporation, allows indemnification of an agent of the corporation, if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and its shareholders; provided that there shall be no indemnification for: (i) amounts paid in settling or otherwise disposing of a pending action without court approval; (ii) expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval; (iii) matters in which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which the proceeding is or was pending shall determine that such person is entitled to be indemnified; or (iv) certain other matters specified in the CGCL. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers or persons controlling the Holding Company pursuant to provisions in the Holding Company's Articles of Incorporation and bylaws, the Holding Company has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act, and is therefore unenforceable. The Reorganization of the Bank into a subsidiary of the Holding Company is not expected to have any effect on the ability of the Bank or the Holding Company to obtain officers and directors indemnification insurance, or the rates at which such insurance is available. The provisions regarding indemnification may not be applicable under certain federal banking laws and regulations. -40- HISTORY AND BUSINESS OF THE BANK General The Bank was established in 1910 under State Charter as Northern Solano Bank, and opened for business on February 1 of that year. On January 2, 1912, the First National Bank of Dixon was established under a Federal Charter, and until 1955, the two entities operated side by side under the same roof and with the same management. In an effort to increase efficiency of operation, reduce operating expense, and improve lending capacity, the two banks were consolidated on April 8, 1955. In order to reduce reserve requirements and operate with higher lending limits, on January 1, 1980, the Federal Charter was relinquished in favor of a California State charter, and the Bank's name was changed to First Northern Bank of Dixon. First Northern Bank of Dixon engages in the general commercial banking business in El Dorado, Solano and Yolo Counties, and parts of Sacramento County, California. The Bank's Administrative Offices are located in Dixon. Also located in Dixon are the Data Processing/Central Operations Department and the Central Loan Department. The Bank has seven full service branches located in the Solano County cities of Dixon, Fairfield and Vacaville. The remaining four Branches are located in the Yolo County cities of Winters, Davis, West Sacramento and Woodland. In addition, the Bank has a Real Estate Department in Davis, which deals solely in residential mortgages and construction loans, a Real Estate Loan Office in El Dorado Hills, El Dorado County, and an SBA Loan Office in Sacramento. The Bank is in the commercial banking business, which includes accepting demand, interest bearing transaction, savings, and time deposits, and making commercial, consumer, and real estate related loans. It also offers installment note collection, issues cashier's checks and money orders, sells travelers' checks, rents safe deposit boxes and provides other customary banking services. The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC") and each depositor's account is insured up to $100,000. The Bank also offers a complete range of alternative investment products and services. The Bank offers these services through Select Capital Corporation, an independent broker/dealer and a member of NASD and SIPC; and Select Advisors, Inc., a registered investment advisor. All investments and/or financial services offered by the representatives of Select Capital Corporation and Select Advisors, Inc. are not insured by the FDIC. The Bank offers limited international banking services and is considering offering trust services on an affiliated basis. The operating policy of the Bank since inception has emphasized serving the banking needs of individuals and small-to medium-sized businesses. In Dixon, this has included businesses involved in crop and livestock production. The economy of the Dixon area was primarily dependent upon agricultural related sources of income and most employment opportunities were also related to agriculture. Agriculture continued to be a significant factor in the Bank's business after the opening of the first branch office in Winters in 1970. A significant step was taken in 1976 to reduce the Bank's dependence on agriculture with the opening of the Davis Branch. The Davis economy is supported significantly by the University of California, Davis. In 1981, a depository branch was opened in South Davis, and was consolidated into the main Davis branch in 1986. In 1983, the West Sacramento branch was opened. The West Sacramento economy is largely based on transportation and distribution related businesses. This addition to the Bank's market area has further reduced the Bank's dependence on agriculture. -41- In order to accommodate the demand of the Bank's customers for long-term residential real estate loans, a Real Estate Loan Office was opened in 1983. This office is centrally located in Davis, and has enabled the Bank to access the secondary real estate market. The Vacaville branch was opened in 1985. Vacaville is a rapidly growing community with a diverse economic base including state prison (Department of Corrections), food processing, distribution, shopping centers (Factory Outlet Stores), medical, and other varied industries. In 1994, the Fairfield branch was opened. Fairfield has also been a rapidly growing community bounced by Vacaville on the east. Its diverse economic base includes military (Travis AFV), food processing (Anheuser-Busch plant), retail (Solano Mall), manufacturing medical, and agriculture. Fairfield is the county seat for Solano County. A Real Estate Production Office was opened in El Dorado Hills, in April of 1996, to serve the growing mortgage loan demand in the foothills area north of Sacramento. A Small Business Administration (SBA) Loan Department was opened in April of 1997 in Sacramento to serve the small business and industrial loan demand throughout the Bank's entire market area. In June of 1997, the Bank's seventh branch was opened in Woodland, the County Seat of Yolo County. Woodland is an expanding and diversified 10.5 square mile city with an economy dominated by agribusiness, retail services, and an expanding industrial sector. Through this period of change and diversification, the Bank's policy, which emphasizes serving the banking needs of individuals and small-to medium-sized businesses, has not changed. The Bank takes real estate, crop proceeds, securities, savings and time deposits, automobiles, and equipment as collateral for loans. Most of the Bank's deposits are attracted from the market of northern and central Solano and southern Yolo counties. The Bank is not dependent on any single person or entity for its deposits. The loss of any one or more of the Bank's depositors would not have a material adverse effect on the business of the Bank. Competition In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies and even retail establishments have offered new investment vehicles which also compete with banks for deposit business. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. In order to compete with major financial institutions and other competitors in its primary service areas, the Bank relies upon the experience of its executive and senior officers in serving business clients, and upon its specialized services, local promotional activities and the personal contacts made by its officers, directors, and employees. For customers whose loan demand exceeds the Bank's legal lending limit, the Bank may arrange for such loans on a participation basis with correspondent banks. The seasonal swings discussed earlier have, in the past, had some impact on the Bank's liquidity. The management of investment maturities, sale of loan participations, federal fund borrowings, qualification for funds under the Federal Reserve Bank's seasonal credit program, and the ability to sell mortgages in the secondary market have allowed the Bank to satisfactorily manage its liquidity. The enactment of the Interstate Banking and Branching Act in 1994, as well as the California Interstate Banking and Branching Act of 1995, will likely increase competition within California. Regulatory reform, as well as other changes in federal and California law will also affect competition. While the impact of these changes, and of other -42- proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. Employees As of February 29, 2000, the Bank had approximately 195 employees, consisting of 77 officers, 45 full-time employees and 73 part-time employees. The Bank believes that its employee relations are satisfactory. Property The Bank operates 12 offices in the El Dorado, Sacramento, Solano and Yolo Counties of California. The Bank owns five of these offices. The Bank's other facilities are leased. Year 2000 Prior to December 31, 1999, the Bank initiated and completed a comprehensive Year 2000 audit program, which consisted of a five step plan to inventory and correct any systems that were not Year 2000 compliant. The Bank engages the services of third-party software vendors and service providers for substantially all of its electronic data processing. Thus, the focus of the Bank was to monitor the Year 2000 compliance of its primary software providers. Bank regulatory agencies continuously surveyed the Bank's progression and results of the Bank's Year 2000 compliance efforts. To date, the Bank has not, nor to the Bank's knowledge, have its third-party software vendors or service providers experienced any material Year 2000-related problems. The Bank will continuously monitor its own and its third-party software vendors' and service providers' Year 2000 compliance. Litigation There is no material pending litigation to which the Holding Company, the Bank or Merger Co. is a party, other than routine litigation incidental to the business of the Bank. Further, there is no material legal proceeding in which any director, executive officer, principal shareholder, or affiliate of the Holding Company, the Bank or Merger Co. or any associate of any such director, executive officer, or principal shareholder is a party and has a material interest adverse to the Holding Company, the Bank or Merger Co. None of the routine litigation in which the Bank is involved is expected to have a material adverse impact upon the financial position or results of operations of the Holding Company, the Bank or Merger Co. Board of Directors and Officers The Bank's Board of Directors is presently composed of eleven members, each of whom stand for election each year. For additional information concerning directors and executive officers, see "Election of Directors," above. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS Executive Officers' and Directors' Compensation Information concerning the annual and long-term compensation for executive officers and directors is set forth above under "Election of Directors--Executive Compensation." Committees and Meetings of the Board of Directors Information concerning the committees and the meetings of the Board of Directors during 1999 is set forth above under "Election of Directors--Committees of the Board of Directors of the Bank" and "Election of Directors--Board of Directors Meetings." -43- CERTAIN TRANSACTIONS Some of the Bank's directors and executive officers, as well as their associates and companies in which they have a financial interest, are customers of, and have had banking transactions with, the Bank in the ordinary course of the Bank's business, and the Bank expects to have ordinary banking transactions with these persons or entities in the future. Except as set forth below, in the opinion of the Bank's management, the Bank made all loans and commitments to lend included in such transactions in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons or entities of similar creditworthiness, and these loans did not involve more than a normal risk of collectibility or present other unfavorable features. No director or officer of the Bank, or their associates, have had outstanding, since the beginning of 1999, aggregate extensions of credit from the Bank in excess of 10% of the Bank's total equity capital accounts. The aggregate extensions of credit by the Bank to all directors and executive officers and their respective associates as a group at any time since January 1, 1999, did not exceed 20% of the Bank's total equity capital accounts on that date. SUPERVISION AND REGULATION The following is a summary of certain statutes and regulations affecting the Holding Company and the Bank. This summary is qualified in its entirety by such statutes and regulations. Holding Company Regulation The Holding Company will be a registered bank holding company under the Bank Holding Company Act of 1956 (the "Bank Holding Company Act") as amended, and as such will be subject to regulation by the Federal Reserve Board. A bank holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries. A bank holding company and its subsidiary banks are also subject to examination by the Federal Reserve Board. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring substantially all the assets of any bank or bank holding company or ownership or control of any voting shares of any bank or bank holding company, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank or bank holding company. In approving acquisitions by bank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers whether the performance of any such activity by a subsidiary of the holding company reasonably can be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as overconcentration of resources, decrease of competition, conflicts of interest, or unsound banking practices. Bank holding companies are restricted in, and subject to, limitations regarding transactions with subsidiaries and other affiliates. Capital The Federal Reserve Board and FDIC require banks and holding companies to maintain minimum capital ratios. The Federal Reserve Board and the FDIC have adopted substantially similar risk-based capital guidelines. These ratios involve a mathematical process of assigning various risk weights to different classes of assets, then evaluating the sum of the risk-weighted balance sheet structure against the capital base of the Bank and the Holding Company. The rules set the minimum guidelines for the ratio of Total Capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) at 8% and the ratio of Tier 1 Capital to risk-weighted assets (including certain -44- off-balance sheet activities) at 4%. To be well capitalized, the minimum ratio for Total Capital is 10% and the minimum ratio for Tier 1 Capital is 6%. At least half of the total capital is to be composed of common equity, retained earnings, and a limited amount of perpetual preferred stock less certain goodwill items ("Tier 1 Capital"). The remainder may consist of a limited amount of subordinated debt, other preferred stock, or a limited amount of loan loss reserves. At December 31, 1999, on a pro forma basis as if the transaction had been consummated on such date, the Holding Company's consolidated risk-adjusted Tier 1 Capital and Total Capital, as defined by the regulatory agencies based on the fully phased in 1992 guidelines, were 13.6% and 14.9% of risk-weighted assets, respectively, well above the minimum and well-capitalized standards mandated by the regulatory agencies. In addition, the federal banking regulatory agencies have adopted leverage capital guidelines for banks and bank holding companies. Under these guidelines, banks and bank holding companies must maintain a minimum ratio of 3% Tier 1 Capital (as defined for purposes of the risk-based capital guidelines) to total assets. However, most banking organizations are expected to maintain capital ratios well in excess of the minimum levels and generally must keep such Tier 1 ratio at or above 5%. To be well capitalized, the minimum Tier 1 ratio must be 6%. As of December 31, 1999, on a pro forma basis as if the transaction had been consummated on such date, the Holding Company's leverage ratio was 8.7%, well above the regulatory minimum and well-capitalized standards. Regulatory authorities may increase such minimum requirements for all banks and bank holding companies or for specified banks or bank holding companies. Increases in the minimum required ratios could adversely affect the Bank and the Holding Company, including their ability to pay dividends. Additional Regulation The Bank is also subject to federal regulation as to such matters as required reserves, limitation as to the nature and amount of its loans and investments, regulatory approval of any Reorganization or Reorganization, issuance or retirement by the Bank of its own securities, limitations upon the payment of dividends and other aspects of banking operations. In addition, the activities and operations of the Bank are subject to a number of additional detailed, complex and sometimes overlapping laws and regulations. These include: o state consumer credit laws; o laws relating to fiduciaries; o the Federal Truth-in-Lending Act and Regulation Z; o the Federal Equal Credit Opportunity Act and Regulation B; o the Fair Credit Reporting Act; o the Truth in Savings Act; o the Community Reinvestment Act; o anti-redlining legislation; and o antitrust laws. Dividend Regulation The ability of the Holding Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary, the Bank. The Bank will be subject to various statutory and regulatory restrictions on its ability to pay dividends to the Holding Company. Under such restrictions, the amount available for payment of dividends to the Holding Company by the Bank totaled $8,813,497 at December 31, 1999. In addition, the California Department of Financial Institutions and the FDIC -45- have the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The FDIC and the Commissioner also have authority to prohibit the Bank from engaging in activities that, in the FDIC's or the Commissioner's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC or the Commissioner could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. The ability of a California corporation to declare and pay dividends is restricted by the CGCL. As a California corporation, the Holding Company will be restricted in its ability to declare and pay dividends. The Holding Company may make a distribution to its shareholders if one of the following standards is met: (i) the retained earnings of the corporation immediately prior to the distribution exceeds the amount of the proposed distribution; or (ii) the assets of the corporation exceed 1-1/4 times its liabilities and the current assets of the corporation exceed its current liabilities, but if the average pre-tax net earnings of the corporation before interest expense for the two years preceding the distribution was less than the average interest expense of the corporation for those years, the current assets of the corporation must exceed 1-1/4 times its current liabilities. Government Policies and Legislation The policies of regulatory authorities, including the Federal Reserve Board and FDIC, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. An important function of the Federal Reserve System is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government. The United States Congress has periodically considered and adopted legislation which has resulted in further deregulation of both banks and other financial institutions, including mutual funds, securities brokerage firms and investment banking firms. No assurance can be given as to whether any additional legislation will be adopted or as to the effect such legislation would have on the business of the Bank or the Holding Company. In addition to the relaxation or elimination of geographic restrictions on banks and bank holding companies, a number of regulatory and legislative initiatives have the potential for eliminating many of the product line barriers presently separating the services offered by commercial banks from those offered by non-banking institutions. Recently Enacted Legislation On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley Act (the "GLB Act"), which becomes effective on March 11, 2000. The GLB Act repeals provisions of the Glass-Steagall Act, which prohibits commercial banks and securities firms from affiliating with each other and engaging in each other's businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The Bank Holding Company Act is also amended by the GLB Act, to allow new "financial holding companies" to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLB Act amends section 4 of the Bank Holding Company Act in order to provide for a framework for the engagement in new financial activities. A bank holding company may elect to become a financial holding company if all of its subsidiary depository institutions are well-capitalized and well-managed. If these requirements are met, a bank holding company may file a certification to that effect with the Federal Reserve Board and declare that it chooses to become a financial holding company. After the certification and declaration is filed, the financial holding company may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or -46- incidental to such financial activity. Bank holding companies may engage in financial activities without prior notice to the Federal Reserve Board if those activities qualify under the new list in section 4(k) of the Bank Holding Company Act. However, notice must be given to the Federal Reserve Board within thirty days after a financial holding company has commenced one or more of the financial activities. Under the GLB Act, FDIC-insured state banks, subject to various requirements (and national banks) are permitted to engage through "financial subsidiaries" in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the state bank must also be well-capitalized and well-managed and receive at least a "satisfactory" rating in its most recent Community Reinvestment Act examination. The Holding Company cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for all bank holding companies. COMPARATIVE DESCRIPTION OF COMMON STOCK General The Holding Company is a California corporation and, accordingly, is governed by the CGCL and its Articles of Incorporation and bylaws. The Bank is a California corporation and, accordingly, has been and will be, through the Effective Date of the Merger, also governed by the CGCL and by its Articles of Incorporation and bylaws. The holders of Bank common stock will, upon the completion of the Reorganization, become shareholders of the Holding Company, and their rights as such will be governed by the CGCL and the Holding Company's Articles of Incorporation and bylaws. The following is a general comparison of the rights of the shareholders of the Bank under the Bank's Articles of Incorporation and bylaws, on the one hand, and the rights of Holding Company shareholders (the holders of the Holding Company common stock after the Merger) under the Holding Company's Articles of Incorporation, on the other. This discussion is only a summary of certain provisions and does not purport to be a complete description of such similarities and differences, and is qualified in its entirety by reference to the CGCL, the California Financial Code, the common law thereunder, and the full text of the Holding Company's Articles of Incorporation, the Holding Company's bylaws, the Bank's Articles of Incorporation and the Bank's bylaws. Authorized Capital The authorized capital stock of the Holding Company consists of 8,000,000 shares of common stock, with no par value per share. The authorized capital stock of the Bank consists of 8,000,000 shares of common stock, no stated par value per share, 3,082,640 of which were outstanding as of February 29, 2000. Assuming the consummation of the holding company Reorganization, the Holding Company will issue 3,082,640 shares of its common stock to existing shareholders of the Bank on the basis of one share of Holding Company common stock for each share of common stock of the Bank. The Holding Company will have a capital structure of 8,000,000 authorized shares of no par value common stock of which 3,082,640 shares would be outstanding upon consummation of the Reorganization. The balance of the Holding Company's authorized capital stock will be available to be issued when and as the Board of Directors of the Holding Company determines it advisable to do so. Such shares of capital stock could be issued for the purpose of raising additional capital, in connection with acquisitions of other businesses, or for other appropriate purposes. The Board of Directors of the Holding Company has the authority to issue shares of common stock to the extent of the number of authorized unissued shares without obtaining the approval of existing holders of common stock, subject to the preemptive rights provided to the holders of the common stock of the Holding Company by the Holding Company's Articles of Incorporation. See "Comparative Descriptions of Common Stock - Preemptive Rights," below. -47- The issuance of additional shares of Holding Company common stock could adversely affect the voting power of holders of common stock. There are no present plans, understandings, arrangements or agreements to issue any additional shares of Holding Company common stock other than pursuant to the stock option plans and employee stock purchase plan to be assumed by the Holding Company. Voting Rights Each share of common stock of the Holding Company and the Bank entitles the holder thereof to one vote on all matters, except in the election of directors. Shareholders of the Bank have, and shareholders of the Holding Company will have, cumulative voting rights as to the election of directors. See "Comparative Description of Common Stock --Cumulative Voting," below. Nominations for election to the Board of Directors, made other than by the Board of Directors, must be made in accordance with the procedures set forth in the Holding Company's bylaws, which are the same as the procedures set forth in Article III, Section 21 of the Bank's bylaws. In addition, directors must satisfy certain qualifications set forth in the Holding Company's bylaws, which are essentially the same as the qualifications set forth in Article III, Section 20 of the Bank's bylaws. See "Anti-Takeover Measures--Director Qualification and Nomination Procedures," above. Liquidation Rights In the event of liquidation, holders of common stock of the Holding Company and the Bank are entitled to similar rights as to assets distributable to shareholders on a pro rata basis. Preemptive Rights Pursuant to Article Fifth of the Bank's Articles of Incorporation, each holder of common stock of the Bank have preemptive rights to subscribe for or to purchase such holder's proportionate share of additional securities issued by the Bank, except for securities issued pursuant to the Bank's stock option, stock purchase or other stock plans or in connection with the acquisition by the Bank of another entity or business segment of any such entity by merger, purchase of substantially all the assets or other type of acquisition transaction. Under a provision of the Holding Company's Articles of Incorporation, holders of common stock of the Holding Company will have comparable preemptive rights to subscribe for or to purchase additional securities which may be issued by the Holding Company. Cumulative Voting Each share of common stock of the Bank entitles the holder thereof to one vote on all matters except for the election of directors where shareholders are entitled to vote cumulatively if a shareholder gives notice of an intention to cumulate votes prior to the voting. Each share of common stock of the Holding Company entitles the holder thereof to one vote on all matters except for the election of directors where shareholders are entitled to vote cumulatively if a shareholder gives notice of an intention to cumulate votes prior to the voting. A shareholder voting cumulatively may cast votes equal to the number of shares he or she owns times the number of Directors to be elected in favor of one nominee or allocate such votes among the nominees as he or she determines. However, pursuant to Section 708 of the CGCL, once the Holding Company's stock becomes designated as qualified for trading on the NASDAQ National Market System and the Holding Company has at least 800 shareholders as of the record date of its most recent annual meeting of shareholders, then Section 708 of the CGCL will no longer be applicable. The Board of Directors of the Holding Company has no plans to cause the common stock of the Holding Company to be traded on the NASDAQ National Market System. Indemnification The Holding Company's Articles of Incorporation and bylaws provide for indemnification of officers, directors, employees and agents to the fullest extent permitted by California law and provide for the elimination of liability of directors for monetary damages to the fullest extent permissible under California law and provide further for indemnification (by by-law, agreement or otherwise) of agents to the fullest extent permissible under California law. -48- Under certain circumstances, the provisions regarding indemnification may not be applicable under certain federal banking and securities laws and regulations. Dividend Rights Dividends may be paid on common stock of the Holding Company as are declared by the Board of Directors out of funds legally available therefor. The Holding Company is required to comply with California law with respect to, among other things, distributions to shareholders. Dividends may be paid on common stock of the Bank as are declared by the Board of Directors out of funds legally available therefor. Dividends paid by the Bank on its common stock must be declared from the lesser of retained earnings or the Bank's net income for its last three fiscal years (less any distributions made to shareholders during such period). In the event a bank has no retained earnings or net income for its last three fiscal years, cash dividends may be paid in an amount not exceeding the net income for such bank's last preceding fiscal year only after obtaining the prior approval of the Commissioner of Financial Institutions. The Commissioner of Financial Institutions may order the bank to refrain from making a proposed distribution if the making of the distribution by the bank would be unsafe or unsound. State Anti-Takeover Statute Under the CGCL, if a party that makes a tender offer or proposes to acquire a corporation by a reorganization or certain sales of assets is controlled by such corporation or an officer or director of such corporation, or if a director or executive officer of such corporation has a material financial interest in such party (each an "Interested Party Proposal"), (i) an affirmative opinion in writing as to the fairness of the consideration to the shareholders of such corporation must be delivered to shareholders of such corporation and (ii) such shareholders must be (a) informed of certain later tender offers or written proposals for a reorganization or sale of assets made by other persons and (b) afforded a reasonable opportunity to withdraw any vote, consent or proxy previously given or shares previously tendered in connection with the Interested Party Proposal. Anti-takeover Provisions A vote of the holders of at least a majority of the outstanding shares of common stock of the Bank is required to effectuate a voluntary liquidation of the Bank, reorganization of the Bank, merger or reorganization of the Bank with another bank, or the increase or decrease of the Bank's authorized or outstanding capital stock, except as provided in Article Seventh of the Bank's Articles of Incorporation. Similarly, a majority vote of the outstanding stock is required for such transactions of the Holding Company, unless a higher or lower voting requirement is established in the Holding Company's Articles of Incorporation. Pursuant to the Articles of Incorporation of the Bank, a majority vote of the issued and outstanding shares is sufficient to amend the Articles of the Incorporation of the Bank, other than Article Seventh. In accordance with Article Seventh of the Bank's Articles of Incorporation a "Reorganization" requires the approval of 70% of the outstanding shares of common stock unless such Reorganization has been approved by 70% of the Board of Directors. In accordance with Article 6 of the Holding Company's Articles of Incorporation, a "Business Combination" (which includes any merger, consolidation, sale, lease or other disposition of greater than 10% of the assets of the Holding Company; issuance or sale of any securities of the Holding Company; and adoption of a plan of liquidation) requires the approval of 66 2/3% of the outstanding shares of common stock including those held by the Interested Shareholder and the satisfaction of certain other conditions, including a "Fair Price," unless such Business Combination has been approved by 66 2/3% of the "Disinterested Directors." In addition, an amendment of Article 6 of the Holding Company's Articles of Incorporation must be approved by the affirmative vote of 66 2/3% of the outstanding shares of common stock, and if there is an Interested Shareholder, by a majority of the Disinterested Shareholders. Because the executive officers and directors of the Holding Company will own approximately 11.41% of the shares of the Holding Company (assuming consummation of the proposed Reorganization and assuming there are no dissenting shareholders to the transaction), a Business Combination with an Interested Shareholder may be difficult to approve without the consent of the Disinterested Directors and management. -49- If a California corporation amends its articles of incorporation to include a supermajoirty voting provision, pursuant to Section 710 of the CGCL the supermajority voting provision must be renewed every two years by the affirmative vote of the percentage of the outstanding shares required by the supermajority voting provision in order to remain effective. Because the supermajority voting provisions of the Holding Company's Articles of Incorporation are contained in the original articles of incorporation, the two year renewal requirement of Section 710 is not applicable to the Holding Company's supermajority voting provisions. Section 710 of the CGCL is also not applicable to the supermajority voting provisions in the Bank's articles of incorporation because they existed in Bank's articles of incorporation prior to the adoption of Section 710. In addition, the Holding Company's Articles of Incorporation requires the Board of Directors, when evaluating a merger proposal, to consider the social and economic effects of the transaction on employees, shareholders, customers and suppliers in the communities in which the Bank operates, in addition to monetary factors. REPORTS The Bank currently files periodic reports with the FDIC pursuant to the Securities Exchange Act of 1934, as amended, as a "reporting company." Subsequent to the consummation of the transaction, the Holding Company as "successor" to the Bank will file similar reports with the SEC. The Holding Company will deliver to the shareholders of the Holding Company an annual report containing audited financial information as required under the Exchange Act. While the Holding Company will file quarterly reports with the SEC, copies of which may be obtained from the SEC, the Holding Company is not obligated and does not currently intend to provide copies of such quarterly reports to shareholders. LEGAL OPINION Certain legal matters in connection with the issuance of common stock of the Holding Company in the Reorganization will be passed upon by Pillsbury Madison & Sutro LLP, San Francisco, California. SHAREHOLDER PROPOSALS Under the rules of the regulatory authorities, if a shareholder wants to include a proposal in the Bank's proxy statement and form of proxy for presentation at the 2001 annual meeting of shareholders, the proposal must be received by the Bank at its principal executive offices by November 25, 2000. Under the Bank's bylaws, as permitted by the regulatory authorities, certain procedures are provided which a shareholder must follow to nominate persons for election as directors or to introduce an item of business at an annual meeting of shareholders. Nomination of directors must be made by notification in writing delivered or mailed to the President of the Bank at the Bank's principal executive offices not less that 30 days or more than 60 days prior to any meeting of shareholders called for elections of directors and must contain certain information about the director nominee. The Bank's annual meeting of shareholders is generally held on the fourth Thursday of April. If the Bank's 2001 annual meeting of shareholders is held on schedule, the Bank must receive notice of any nomination no earlier than February 25, 2001, and no later than March 27, 2001. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedures. Notice of any business item proposed to be brought before an annual meeting by a shareholder must be received by the Secretary of the Bank not less than 70 days or more than 90 days prior to the first anniversary of the preceding year's annual meeting. The Bank must receive notice of any proposed business item no earlier than January 27, 2001, and no later than February 16, 2001. If the Bank does not receive timely notice, the Bank's bylaws preclude consideration of the business item at the annual meeting. With respect to notice of a proposed item of business, the bylaws provide that the notice must include a brief description of the business desired to be brought before the meeting, -50- the reasons for conducting such business at the meeting and certain information regarding the shareholder giving the notice. A copy of the Bank's bylaws may be obtained upon written request to the Secretary of the Bank at the Bank's principal executive offices. In the event the Reorganization is approved and effected, the Bank will cease to be publicly held and the shareholders of the Bank will become shareholders of the Holding Company. Because (i) the bylaws of the Holding Company contain provisions governing shareholder proposals that are substantially identical to those contained in the Bank's bylaws and (ii) it is anticipated that the Holding Company's 2001 annual meeting would also be held on the fourth Thursday of April each year, the foregoing dates and deadlines for shareholder proposals are expected to be applicable to the Holding Company's 2001 annual meeting of shareholders. OTHER MATTERS The management of the Bank is not aware of any other matters to be presented for consideration at the Meeting or any adjournments or postponements thereof. If any other matters should properly come before the Meeting, it is intended that the persons named in the enclosed Proxy will vote the shares represented thereby in accordance with their best business judgment, pursuant to the discretionary authority granted therein. Upon the written request of any Shareholder, the Management will provide without charge, a copy of the Bank's Annual Report on Form 10-K. All requests should be addressed to Mr. James S. Duke, Corporate Secretary, First Northern Bank of Dixon, 195 North First Street, Dixon, California 95620. By Order of the Board of Directors /s/ Owen J. Onsum Owen J. Onsum President and Chief Executive Officer -51- ANNEX I AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is entered into as of March 21, 2000, by and among FIRST NORTHERN BANK OF DIXON (the "Bank"), FNCB Merger Corp. ("Merger Co."), and FIRST NORTHERN COMMUNITY Bancorp (the "Holding Company"). RECITALS AND UNDERTAKINGS A. The Bank is a California state-chartered bank with its principal office in the City of Dixon, State of California. Merger Co. is a corporation duly organized and existing under the laws of the State of California. The Holding Company is a corporation duly organized and existing under the laws of the State of California with its principal office in the City of Dixon, State of California. B. As of the date hereof, the Bank has 8,000,000 shares of common stock without par value authorized and 3,064,147 shares of common stock issued and outstanding. C. As of the date hereof, Merger Co. has 100 shares of common stock without par value authorized. Immediately prior to the Effective Time (as such term is defined below), all 100 shares of such common stock will be issued and outstanding, all of which shares will be owned by the Holding Company. D. As of the date hereof, the Holding Company has 8,000,000 shares of common stock without par value authorized. E. The Boards of Directors of the Bank, the Holding Company and Merger Co., respectively, have unanimously approved this Agreement and the Agreement of Merger attached hereto as Annex A (the "Merger Agreement ") and authorized the execution and delivery of each thereof. F. The Holding Company, as sole stockholder of Merger Co., has approved this Agreement and authorized its execution. AGREEMENT Section 1. General -------- 1.1 The Merger. At the Effective Time, Merger Co. shall be merged with and ---------- into the Bank, with the Bank being the surviving corporation (the "Merger"). The Bank shall thereafter be a subsidiary of the Holding Company, and its name shall continue to be "First Northern Bank of Dixon." 1.2 Effective Time. The merger described herein shall become effective at -------------- the time when an executed copy of the Merger Agreement is filed with the Secretary of State of the State of California in accordance with Section 1103 of the California General Corporation Law (the "Effective Time"). 1.3 Articles of Incorporation and Bylaws. At the Effective Time, the ------------------------------------ Articles of Incorporation of the Bank, as in effect immediately prior to the Effective Time, shall remain the Articles of Incorporation of the Bank until amended; the Bylaws of the Bank, as in effect immediately prior to the Effective Time, shall remain the Bylaws of the Bank until amended; the certificate of authority of the Bank issued by the Commissioner of Financial Institutions of the State of California shall remain the certificate of authority of the Bank, and the Bank's deposit insurance coverage by the Federal Deposit Insurance Corporation shall remain the deposit insurance of the Bank. -52- 1.4 Directors and Officers. At the Effective Time, the directors and --------------------- officers of the Bank immediately prior to the Effective Time shall remain the directors and officers of the Bank. The directors of the Bank shall serve until the next annual meeting of shareholders of the Bank or until such time as their successors are elected and have been qualified. 1.5 Effect of the Merger. -------------------- (a) Assets and Rights. At the Effective Time and thereafter, all rights, ----------------- privileges, franchises and property of Merger Co. and all debts and liabilities due or to become due to Merger Co., including choses in action and every interest or asset of conceivable value or benefit, shall be deemed fully and finally and without any right of reversion vested in the Bank without further act or deed; and the Bank shall have and hold the same in its own right as fully as the same was possessed and held by Merger Co. (b) Liabilities. At the Effective Time and thereafter, all debts, ----------- liabilities and obligations due or to become due of, and all claims and demands for any cause existing against, Merger Co. shall be and become the debts, liabilities or obligations of, or the claims or demands against, the Bank in the same manner as if the Bank had itself incurred or become liable for them. (c) Creditors' Rights and Liens. At the Effective Time and thereafter, all --------------------------- rights or creditors of Merger Co. and all liens upon the property of Merger Co. shall be preserved unimpaired, and shall be limited to the property affected by such liens immediately prior to the Effective Time. (d) Pending Actions. At the Effective Time and thereafter, any action or --------------- proceeding pending by or against Merger Co. shall not be deemed to have abated or been discontinued, but may be pursued to judgment with full right to appeal or review. Any such action or proceeding may be pursued as if the merger described herein had not occurred, or with the Bank substituted in place of Merger Co. as the case may be. 1.6 Further Assurances. Merger Co. agrees that at any time, or from time to ------------------ time, as and when requested by the Bank, or by its successors or assigns, it will execute and deliver, or cause to be executed and delivered, in its name by its last acting officers, or by the corresponding officers of the Bank, all such conveyances, assignments, transfers, deeds and other instruments, and will take or cause to be taken such further or other action as the Bank, or its successors or assigns, may deem necessary or desirable in order to carry out the vesting, perfecting, confirming, assignment, devolution or other transfer of the interests, property, privileges, powers, immunities, franchises and other rights transferred to the Bank in this Section 1, or otherwise to carry out the intent and purposes of this Agreement and the Merger Agreement. Section 2. Stock ----- 2.1 Stock of Merger Co. At the Effective Time, each share of common stock ------------------- of Merger Co. issued and outstanding immediately prior to the Effective date shall, by virtue of the Merger, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of the Bank. 2.2 Stock of the Bank. At the Effective Time, each share of common stock of ----------------- the Bank issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of the Holding Company, in accordance with the provisions of Section 2.3 hereto (the "Exchange"). 2.3 Exchange of Stock by the Bank Shareholders. At the Effective Time or as ------------------------------------------ soon as practicable thereafter, the following actions shall be taken to effectuate the exchange and conversion specified in Section 2.2 hereof: (a) The shareholders of the Bank of record immediately prior to the Effective Time shall be allocated and entitled to receive for each share of common stock of the Bank then held by them respectively one share of common stock of the Holding Company. (b) Subject to the provisions of Section 2.3(c) hereof, the Holding Company shall issue to the shareholders of the Bank the shares of common stock of the Holding Company which said shareholders are entitled to receive. -53- (c) After the Effective Time, outstanding certificates representing shares of common stock of the Bank (except certificates issued to the Holding Company in connection with the merger described herein) shall represent shares of the common stock of the Holding Company, and such certificates may, but need not, be exchanged by the holders thereof for new certificates for the appropriate number of shares of the Holding Company. 2.4 Outstanding Options. After the Effective Time, and by virtue of the ------------------- Merger, the options to purchase shares of capital stock of the Bank which have been granted by the Bank pursuant to the Bank's Outside Directors' 1997 Non-Statutory Stock Option Plan and the First Northern Bank of Dixon 1997 Stock Option Plan which shall be in effect immediately prior to the Merger shall be deemed to be options granted by the Holding Company to purchase shares of common stock of the Holding Company having the same exercise price and exercise periods, and being for the same number of shares of common stock of the Holding Company as was the number of shares of capital stock of the Bank covered by the corresponding option granted by the Bank and subject to and in accordance with the terms, conditions and provisions of such options, the Holding Company shall, from time to time, issue shares of its common stock upon the exercise of such options. Section 3. Approvals --------- 3.1 Stockholder Approval. This Agreement and the Merger Agreement shall be -------------------- submitted to the shareholders of the Bank for ratification and confirmation to the extent required by, and in accordance with, applicable provisions of law. 3.2 Regulatory Approvals. Each of the parties hereto shall proceed -------------------- expeditiously and cooperate fully in procuring all other consents and approvals, and in satisfying all other requirements, prescribed by law or otherwise, necessary or desirable for the merger described herein to be consummated, including without limitation the consents and approvals referred to in Section 4.1(b) and 4.1(d) hereof. Section 4. Conditions Precedent, Termination and Payment of Expenses --------------------------------------------------------- 4.1 Conditions Precedent to the Merger. Consummation of the Merger is ---------------------------------- subject to and conditioned upon the following: (a) Ratification and confirmation of this Agreement and the Merger Agreement by the shareholders of the Bank in accordance with applicable provisions of law; (b) Procuring all other consents and approvals and satisfying all other requirements, prescribed by law or otherwise, which are necessary for the Merger to be consummated, including without limitation: (i) approval from the Federal Deposit Insurance Corporation, the Commissioner of Financial Institutions of the State of California, and the Board of Governors of the Federal Reserve System; and (ii) approval of the California Commissioner of Corporations under the California Corporate Securities Law of 1968, and securities administrators of other applicable jurisdictions, with respect to the securities of the Holding Company issuable upon consummation of the Merger; (c) Receipt and continued effectiveness at the Effective Time (unless waived by each of the parties hereto) of an opinion of counsel and/or accountants to the effect that neither the Merger nor the Exchange nor any of the other transactions contemplated hereby or by the Merger Agreement will result in any taxable gain or loss for the parties hereto or the shareholders of the Bank; (d) Procuring all consents or approvals, governmental or otherwise, which in the opinion of counsel for the Bank are or may be necessary to permit or to enable the Bank to conduct, upon and after the Merger, all or any part of the businesses and other activities that the Bank engages in immediately prior to the Merger, in the same manner and to the same extent that the Bank engaged in such businesses and other activities immediately prior to the Merger; and (e) Performance by each of the parties hereto of all of their respective obligations under this Agreement and the Merger Agreement which are to be performed prior to the consummation of the Merger. -54- 4.2 Termination of the Merger. In the event that any condition specified in ------------------------- Section 4.1 hereof cannot be fulfilled, or prior to the Effective Time the Board of Directors of any of the parties hereto reaches any of the following determinations: (a) The number of shares of common stock of the Bank voting against the Merger described herein makes consummation of the Merger inadvisable; or (b) Any action, suit, proceeding or claim relating to the Merger, whether initiated or threatened, makes consummation of the Merger inadvisable; or (c) Consummation of the Merger is inadvisable for any other reason; then this Agreement shall terminate. Upon termination, this Agreement shall be void and of no further effect, and there shall be no liability by reason of this Agreement or the termination hereof on the part of any of the parties hereto or their respective directors, officers, employees, agents or shareholders. 4.3 Expenses of the Merger. All expenses incurred by the Bank, Merger Co. ---------------------- and the Holding Company in connection with the Merger, including without limitation filing fees, printing costs, mailing costs, accountant's fees and legal fees, shall be borne by the Bank. -55- This Agreement amends and supplants that certain Agreement and Plan of Reorganization of even date herewith executed by Owen J. Onsum and Louise A. Walker in their capacities as officers of Bank, Merger Co. and Holding Company, respectively. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. Bank: FIRST NORTHERN BANK OF DIXON By: ---------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: ---------------------------------- Name: James S. Duke Its: Corporate Secretary Merger Co.: FNCB MERGER CORP. By: ---------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: ---------------------------------- Name: James S. Duke Its: Corporate Secretary Holding Company: FIRST NORTHERN COMMUNITY BANCORP By: ---------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: ---------------------------------- Name: James S. Duke Its: Corporate Secretary -56- AGREEMENT OF MERGER THIS AGREEMENT OF MERGER, dated as of March 21, 2000 (this "Merger Agreement"), is made and entered into by and between FIRST NORTHERN BANK OF DIXON (the "Bank"), FNCB MERGER CORP. ("Merger Co."), and FIRST NORTHERN COMMUNITY BANCORP (the "Holding Company"). RECITALS AND UNDERTAKINGS A. The Bank is a California state-chartered bank with its principal office in the City of Dixon, State of California. Merger Co. is a corporation duly organized and existing under the laws of the State of California. The Holding Company is a corporation duly organized and existing under the laws of the State of California with its principal office in the City of Dixon, State of California. B. As of the date hereof, the Bank has 8,000,000 shares of common stock without par value authorized and 3,064,147 shares of common stock issued and outstanding. C. As of the date hereof, Merger Co. has 100 shares of common stock without par value authorized. Immediately prior to the Effective Date (as such term is defined below), all 100 shares of such common stock will be issued and outstanding, all of which shares will be owned by the Holding Company. D. As of the date hereof, the Holding Company has 8,000,000 shares of common stock without par value authorized. E. The Boards of Directors of the Bank, the Holding Company and Merger Co., respectively, have unanimously approved an Agreement and Plan of Reorganization dated of even date herewith (the "Agreement"), providing, among other things, for the execution and filing of this Merger Agreement. F. The Holding Company, as sole shareholder of Merger Co., has approved the Agreement and this Merger Agreement and authorized their execution. NOW, THEREFORE, in consideration of the promises and mutual agreements contained in this Merger Agreement, the parties to this Merger Agreement hereby agree that Merger Co. shall be merged with and into the Bank (the "Merger") in accordance with the provisions of the laws of the State of California upon the terms and subject to the conditions set forth as follows: 1. Merge. 1.1 Effective Date. Upon the filing with the California Secretary of State of a -------------- duly executed counterpart of this Merger Agreement with the officers' certificates prescribed by Section 1103 of the California General Corporation Law attached thereto, the Merger shall become effective. -57- 1.2 Effect of the Merger. On the Effective Date, Merger Co. shall be merged with -------------------- and into the Bank and the separate corporate existence of Merger Co. shall cease. The Bank shall be the surviving corporation (the "Surviving Corporation") in the Merger. It shall thereupon succeed, without other transfer, to all rights and properties of, and shall be subject to all the debts and liabilities of, Merger Co. and the separate existence of the Bank as a California corporation, with all its purposes, objects, rights, powers, privileges and franchises shall continue unaffected and unimpaired by the Merger. 2. Corporate Governance Matters. ----------------------------- 2.1 Articles of Incorporation and By-Laws. From and after the Effective Date and ------------------------------------- until thereafter amended as provided by law: (a) the Articles of Incorporation of the Bank as in effect immediately prior to the Effective Date shall be and continue to be the Articles of Incorporation of the Surviving Corporation; and (b) the Bylaws of the Bank as in effect immediately prior to the Effective Date shall be and continue to be the Bylaws of the Surviving Corporation. 2.2 Directors and Officers. On the Effective Date: (a) the directors of the ---------------------- Surviving Corporation shall be those persons who are the directors of the Bank immediately prior to the Effective Date; and (b) the officers of the Surviving Corporation shall be those persons who are the officers of the Bank at the Effective Date. 3. Stock. ------ 3.1 Stock of Merger Co. At the Effective Date, each share of common stock of ------------------- Merger Co. issued and outstanding immediately prior to the Effective Date shall, by virtue of the Merger, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of the Bank. 3.2 Stock of the Bank. At the Effective Date, each share of common stock of the ----------------- Bank issued and outstanding immediately prior to the Effective Date shall, by virtue of the Merger, be deemed to be exchanged for and converted into one share of fully paid and nonassessable common stock of the Holding Company, in accordance with the provisions of Section 3.3 hereto. 3.3 Exchange of Stock by the Bank Shareholders. At the Effective Date or as soon ------------------------------------------ as practicable thereafter, the following actions shall be taken to effectuate the exchange and conversion specified in Section 3.2 hereof: (a) The shareholders of the Bank of record immediately prior to the Effective Date shall be allocated and entitled to receive for each share of common stock of the Bank then held by them respectively one share of common stock of the Holding Company. (b) Subject to the provisions of Section 3.3(c) hereof, the Holding Company shall issue to the shareholders of the Bank the shares of common stock of the Holding Company which said shareholders are entitled to receive. -58- (c) After the Effective Time, outstanding certificates representing shares of common stock of the Bank (except certificates issued to the Holding Company in connection with the Merger) shall represent shares of common stock of the Holding Company, and such certificates may, but need not, be exchanged by the holders thereof for new certificates for the appropriate number of shares of the Holding Company. 3.4 Outstanding Options. After the Effective Time, and by virtue of the Merger, ------------------- the options to purchase shares of capital stock of the Bank which have been granted by the Bank pursuant to the Bank's Outside Directors' 1997 Non-Statutory Stock Option Plan and the First Northern Bank of Dixon 1997 Stock Option Plan which shall be in effect immediately prior to the Merger shall be deemed to be options granted by the Holding Company to purchase shares of common stock of the Holding Company having the same exercise price and exercise periods, and being for the same number of shares of common stock of the Holding Company as was the number of shares of capital stock of the Bank covered by the corresponding option granted by the Bank and subject to and in accordance with the terms, conditions and provisions of such options, the Holding Company shall, from time to time, issue shares of its common stock upon the exercise of such options. 4. Termination or Amendment. ------------------------ 4.1 This Merger Agreement shall terminate forthwith in the event that the Agreement shall be terminated as therein provided. 4.2 This Merger Agreement may not be amended, except by an instrument in writing signed on behalf of each of the parties hereto. 4.3 This Merger Agreement may be signed in any number of counterparts, each of which shall be deemed an original, and all of which shall be deemed but one and the same instrument. 5. Miscellaneous. ------------- 5.1 The Agreement is and will be maintained on file at the principal place of business of the Surviving Corporation. The address of the principal place of business of the Surviving Corporation is 195 North First Street, Dixon, California 95620. 5.2 A copy of the Agreement will be furnished by the Surviving Corporation, on request and without cost to any shareholder of Merger Co. or the Bank. 5.3 The Agreement between the parties to the Merger has been executed by the parties in accordance with the requirements of Section 1102 of the California General Corporation Law. 5.4 This Agreement amends and supplants that certain Agreement of Merger of even date herewith executed by Owen J. Onsum and Louise A. Walker in their capacities as officers of Bank, Merger Co. and Holding Company, respectively. -59- IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as of the date first written above. Bank: FIRST NORTHERN BANK OF DIXON By: /s/ Owen J. Onsum ----------------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: /s/ James D. Duke ----------------------------------------- Name: James S. Duke Its Corporate Secretary Merger Co.: FNCB MERGER CORP. By: /s/ Owen J. Onsum ----------------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: /s/ James S. Duke ----------------------------------------- Name: James S. Duke Its Corporate Secretary Holding Company: FIRST NORTHERN COMMUNITY BANCORP By: /s/ Owen J. Onsum ----------------------------------------- Name: Owen J. Onsum Its President and Chief Executive Officer By: /s/ James S. Duke ----------------------------------------- Name: James S. Duke Its Corporate Secretary -60- ANNEX II ARTICLES OF INCORPORATION OF FIRST NORTHERN COMMUNITY BANCORP ARTICLE 1 The name of the corporation is First Northern Community Bancorp. ARTICLE 2 The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE 3 The name in the State of California of the corporation's initial agent for service of process is: CT Corporation System ARTICLE 4 The corporation is authorized to issue one class of shares to be designated Common Stock ("Common Stock"). Such shares shall be without par value. The total number of shares of Common Stock the corporation shall have authority to issue is eight million (8,000,000). ARTICLE 5 Except as specified hereinbelow, each holder of Common Stock of the corporation shall have full preemptive rights, as defined by law, to subscribe for or purchase such holder's proportionate share of any Common Stock that may be offered for sale or sold at any time by the corporation. The Board of Directors shall have the power to prescribe a reasonable period of time within which the preemptive rights to subscribe to the new shares of Common Stock must be exercised. The foregoing right shall not apply to the sale or issuance by the corporation of additional shares of Common Stock (i) in connection with the acquisition by the corporation of another entity or business segment of any such entity by merger, purchase of all or substantially all the assets or other type of acquisition transaction; (ii) pursuant to any stock option, stock purchase or other stock plan, agreement or arrangement previously approved by the corporation's shareholders; (iii) in a public offering provided that the terms of the offering include a requirement that if the offering is over-subscribed, shares will be allocated on a pro rata basis based on actual paid subscriptions received by the corporation. ARTICLE 6 6.1 In addition to any affirmative vote required by law or these Articles of Incorporation, and except as otherwise expressly provided in Section 6.2 of this Article 6, any "Business Combination" (as hereinafter defined), which shall be consummated at a time when there shall exist an "Interested Shareholder" (as hereinafter defined), shall require the affirmative vote of the holders of at least sixty-six and two thirds percent (66 2/3%) of the then outstanding shares of Common Stock of this corporation entitled to vote. Such affirmative vote shall be required -61- notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law or otherwise. In addition to the higher vote requirement, except as otherwise expressly provided in Section 6.2 of this Article 6, prior to effecting any such Business Combination all of the following conditions shall have been met: 6.1.1 The aggregate amount of the cash and the "Fair Market Value" (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of the Common Stock in such Business Combination shall be at least equal to the higher of the following: 6.1.1.1 (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of the Common Stock acquired by it (a) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (b) in the transaction in which it became an Interested Shareholder, if within two years of the Announcement Date, whichever is higher; and 6.1.1.2 the Fair Market Value per share of the Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder the ("Determination Date"), if within two years of the Announcement Date, whichever is higher. 6.1.2 The consideration to be received by holders of the Common Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of the Common Stock. The price determined in accordance with Section 6.1.1 shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. 6.1.3 After such shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination and except to the extent that the corporation may be prohibited by law from making a distribution to shareholders: (1) there shall have been (a) no reduction in the annual rate of dividends paid on the Common Stock of this corporation (except as necessary to reflect any subdivision of the Common Stock), except as approved by at least sixty-six and two-thirds percent (66 2/3%) of the "Disinterested Directors" (as hereinafter defined), and (b) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number or outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by at least sixty-six and two-thirds percent (66 2/3%) of the Disinterested Directors; and (3) such Interested Shareholder shall have not become the beneficial owner of any additional shares of stock of this corporation except as part of the transaction which results in such shareholder becoming an Interested Shareholder within the two-year period prior to such consummation. 6.1.4 After such shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by this corporation or any "Subsidiary" (as hereinafter defined), whether in anticipation of or in connection with such Business Combination or otherwise. 6.1.5 A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all holders of the Common Stock of this corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 6.2 The provisions of Section 6.1 of this Article 6 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other -62- provision of these Articles of Incorporation, if the Business Combination shall have been approved by at least sixty-six and two-thirds percent (66 2/3%) of the Disinterested Directors; or, if either 6.2.1 there is pending any proceeding or other action by the Federal Deposit Insurance Corporation pursuant to ss. 1818(a) or ss. 1823(c) of Title 12 of the United States Code in connection with any of the banking subsidiaries of the corporation; or 6.2.2 there is outstanding any order of the Commissioner of Financial Institutions of the State of California pursuant to California Financial Code ss.ss. 3100-3132 or ss.ss. 3180-3187 against any banking subsidiary of the corporation, or any other provision of similar purpose as hereinafter adopted and as the same may be amended at a future time. 6.3 For the purposes of this Article 6 the following definitions apply: 6.3.1 A "person" means any individual, firm, corporation or other entity. 6.3.2 "Interested Shareholder" means any person (other than this corporation or any Subsidiary) who or which: 6.3.2.1 is the beneficial owner, directly or indirectly, of ten percent (10%) or more of the issued and outstanding stock of this corporation; or 6.3.2.2 is an "Affiliate" of this corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of ten percent (10%) or more of the issued and outstanding stock of this corporation; or 6.3.2.3 is an assignee of or has otherwise succeeded to any shares of stock of this Corporation which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 6.3.3 A person shall be a "beneficial owner" of stock of this corporation: 6.3.3.1 which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or 6.3.3.2 which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or 6.3.3.3 which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of stock of this corporation. 6.3.4 "Business Combination" shall include: 6.3.4.1 any merger or consolidation of the corporation or any Subsidiary with (i) any Interested Shareholder or (ii) any other corporation or other business entity (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Shareholder; or 6.3.4.2 any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of -63- the corporation or any Subsidiary having an aggregate Fair Market Value of ten percent (10%) or more of the total value of the assets of the corporation reflected in the most recent balance sheet of the corporation; or 6.3.4.3 the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of twenty percent (20%) of shareholders' equity or more; or 6.3.4.4 the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; except that this provision shall not limit the right of the shareholders to elect voluntarily to wind up or dissolve the corporation by the vote of shareholders holding shares of stock representing fifty percent (50%) or more of the stock then entitled to vote in the election of directors; or 6.3.4.5 any reclassification of the corporation's securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate beneficial ownership of any Interested Shareholder or any Affiliate of any Interested Shareholder in the outstanding shares of any class of equity or convertible securities of the corporation or any Subsidiary. 6.3.5 "Affiliate," and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 2000. 6.3.6 "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Shareholder and was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 6.3.7 "Fair Market Value" means as to the stock of this corporation the fair market value on the date in question of a share of such stock as determined by the Board of Directors in good faith; and in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. 6.3.8 "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by this corporation; provided, however, that for purposes of the definition of Interested Shareholder, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned directly or indirectly by this corporation. In the event of any Business Combination in which this corporation survives, the phrase "other consideration to be received" as used in Section 6.1 of this Article 6 shall include the shares of stock of this corporation retained by the holders of such shares. 6.4 A majority of the directors shall have the power and duty to determine for the purposes of this Article 6, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of shares of stock of this corporation beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, or (D) whether the assets which are the subject of any Business Combination constitute substantially all assets of this corporation. A majority of the directors shall have the further power to interpret all of the terms and provisions of this Article 6. -64- 6.5 Nothing contained in this Article 6 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. 6.6 Notwithstanding any other provisions of these Articles of Incorporation or the By-laws (and notwithstanding the fact that a lesser percentage may be specified by law, these Articles of Incorporation or the By-laws) the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding stock of this corporation shall be required to amend, repeal or adopt any provisions inconsistent with this Article 6. ARTICLE 7 The Board of Directors, when evaluating any offer of another party to (a) make a tender or exchange offer for any Equity Security (as defined hereinafter) of the corporation, (b) merge or consolidate the corporation with another corporation, or (c) purchase, lease, or otherwise acquire all or substantially all of the property of the corporation, shall in connection with the exercise of its judgment in determining what is in the best interests of the corporation and its shareholders consider all of the following factors and any other factors it deems relevant: (i) the social and economic effects on the employees, shareholders, customers, suppliers, and other constituents of the corporation and its subsidiaries and on the communities in which the corporation or its subsidiaries operate or are located, including, without limitation, the availability of credit and other banking services to the communities served by the corporation; (ii) whether the proposed transaction might violate federal or state laws; and (iii) not only the consideration being offered in the proposed transaction in relation to the then current market price for or book value of the outstanding Common Stock of the corporation, but also to the market price for or book value of the Common Stock of the corporation over a period of years and the corporation's future value as an independent entity. For purposes of this Article 7, "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on January 1, 2000. ARTICLE 8 The liability of directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. The corporation is authorized to provide indemnification of agents (as defined in section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, to the fullest extent permissible under California law. Any amendment, repeal or modification of any provision of this Article 8 shall not adversely affect any right or protection of an agent of the corporation existing at the time of such amendment, repeal or modification. Dated: February 3, 2000. /S/ Owen J. Onsum ---------------------------------------- Owen J. Onsum, Incorporator -65- LOGO FIRST NORTHERN BANK OF DIXON The undersigned hereby appoint(s) Dorothy F. Wallace and Ernest J. Weyand, and either of them, each with full power of substitution as Proxy of the undersigned, to attend the Annual Meeting of the Shareholders of First Northern Bank of Dixon to be held at the First Northern Bank Operations Center, 210 Stratford Avenue, Dixon, California, at 7:30 p.m., on April 27, 2000 and any adjournment thereof, and to vote the number of shares the undersigned would be entitled to vote if personally present as indicated below: The Proxy is solicited by the Board of Directors and unless otherwise specified will be voted FOR all nominees, and FOR Proposals 2 and 3. --- --- 1. To elect the following eleven (11) persons to the Board of Directors to serve until the 2001 Annual Meeting of Shareholders and until their successors shall be elected and qualified: Lori J. Andrete Gregory DuPratt William H. Jones, Jr. David W. Schulze Frank J. Andrews, Jr. John F. Hamel Foy S. McNaughton Thomas S. Wallace John M. Carbahal Diane P. Hamlyn Owen J. Onsum /_/ VOTE FOR ALL NOMINEES LISTED ABOVE, /_/ VOTE WITHHELD except for the nominee(s) named, if any: _____________________________ 2. To ratify the Selection of KPMG LLP as Independent Public Accountants for 2000. /_/ FOR /_/ AGAINST /_/ ABSTAIN 3. To approve the Bank Holding Company reorganization. /_/ FOR /_/ AGAINST /_/ ABSTAIN 4. To transact such other business as may properly come before the Annual Meeting and any adjournment thereof. This Proxy will be voted as directed by the Shareholder or, if no instructions are given by the Shareholder, the Proxy Holders will vote "FOR" the above Proposals. If any other business is presented at said meeting, this Proxy shall be voted in accordance with the recommendations of the Board of Directors. Dated: ___________________, 2000 Signed _________________________________________ Dated: ___________________, 2000 Signed _________________________________________ - ------------------------------------------------------------------------------------------------------------------------------- Please Sign exactly as shown below and give your full title, if applicable - ------------------------------------------------------------------------------------------------------------------------------- I/We do /_/ do not /_/ expect to attend this meeting. Number expected to attend: -------------- Please indicate how you would like your nametag(s) to read: ---------------------------------------------- ----------------------------------------- Please Type or Print ---------------------------------------------- -----------------------------------------
PLEASE PROMPTLY COMPLETE THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE Name on account and number of shares as of February 29, 2000 EX-99.13 17 NOTIFICATION CERTIFICATION REGARDING BANK HOLDING COMPANY APPLICATION OF FIRST NORTHERN COMMUNITY BANCORP The Board of Directors of First Northern Community Bancorp, a California corporation ("Bancorp"), hereby certifies to the Federal Reserve Bank of San Francisco that to Bancorp's best knowledge and ability to ascertain, the requirements of Section 3(a)(5)(C) of the Bank Holding Company Act, 12 U.S.C. ss. 1842(a)(5)(C), and 12 C.F.R. ss. 225.17(a)(1) through (a)(7), inclusive, of Regulation Y are met with respect to its application dated February 9, 2000, to acquire control of First Northern Bank of Dixon pursuant to Section 3(a)(1) of the Bank Holding Company Act, 12 U.S.C. ss. 1842(a)(1). Executed as of February 9, 2000. /s/ Lori J. Aldrete /s/ Frank J. Andrews, Jr. - ---------------------------- -------------------------------- Lori J. Aldrete Frank J. Andrews, Jr. /s/ John M. Carbahal /s/ Gregory DuPratt - ---------------------------- -------------------------------- John M. Carbahal Gregory DuPratt /s/ John F. Hamel /s/ Diane P. Hamlyn - ---------------------------- -------------------------------- John F. Hamel Diane P. Hamlyn /s/ William H. Jones, Jr. /s/ Owen J. Onsum - ---------------------------- -------------------------------- William H. Jones, Jr. Owen J. Onsum /s/ David W. Schulze /s/ Thomas S. Wallace - ---------------------------- -------------------------------- David W. Schulze Thomas S. Wallace EX-99.14 18 PERMIT AND CERTIFICATE OF ISSUANCE Exhibit 99.9 STATE OF CALIFORNIA BUSINESS, TRANSPORTATION AND HOUSING AGENCY DEPARTMENT OF CORPORATIONS File No. 506-1972 PERMIT THIS PERMIT IS PERMISSIVE ONLY AND DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE SECURITIES PERMITTED TO BE ISSUED Issuer: First Northern Community Bancorp is hereby qualified to offer, sell and issue the securities described in its application filed March 10, 2000, and any amendments and supplements thereto to the date hereof, to the persons described in said application, for the considerations, uses and purposes, and in the manner set forth in said application. This qualification is effective for 12 months from the date hereof. Dated: San Francisco, California WILLIAM KENEFICK Acting Commissioner of Corporations April 25, 2000 By /s/ Roger Borgen ----------------------------------------- Roger Borgen Senior Corporations Counsel STATE OF CALIFORNIA BUSINESS, TRANSPORTATION AND HOUSING AGENCY DEPARTMENT OF CORPORATIONS File No. 506-1972 Applicant: First Northern Community Bancorp CERTIFICATE OF ISSUANCE OF PERMIT I, WILLIAM KENEFICK, Acting Commissioner of Corporations, hereby certify: 1. By application filed March 10, 2000, applicant seeks qualification for the offer and sale of securities under section 25121 of the Corporate Securities Law of 1968, as amended. 2. The terms and conditions of the proposed offer and sale of securities are described in that application and the Notice of Hearing executed March 27, 2000. 3. At applicant's request and upon due notice to all persons to whom it is proposed to issue such securities, a hearing was held April 25, 2000, before the Department of Corporations, upon the fairness of the terms and conditions of such offer and sale of securities. All proposed issuees had the right to appear. 4. The terms and conditions are fair and are approved. Qualification by permit for the offer and sale of such securities is effective the date hereof. Dated: San Francisco, California WILLIAM KENEFICK Acting Commissioner of Corporations April 25, 2000 By /s/ Roger Borgen ---------------------------------------- Roger Borgen Senior Corporations Counsel -2- -----END PRIVACY-ENHANCED MESSAGE-----