SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------------
For the Quarter Ended March 31, 1998, Commission File No. 0-15450
SIERRAWEST BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 68-0091859
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Reorganization)
10181 Truckee Tahoe Airport Rd., P.O. Box 61000, Truckee, California 96160-9010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (530) 582-3000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 4, 1998: Common Stock - Authorized 10,000,000 shares of no par value;
issued and outstanding - 5,053,666.
-1-
10-Q Filing
March 31, 1998
Part I. Financial Information
Item 1. Financial Statements
Following are condensed consolidated financial statements for SierraWest Bancorp
("Bancorp", or together with its subsidiary, the "Company") for the reportable
period ended March 31, 1998. These condensed consolidated financial statements
are unaudited; however, in the opinion of management, all adjustments have been
made for a fair presentation of the financial condition and earnings of the
Company in conformity with generally accepted accounting principles. The
accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
March 31, 1998 and December 31, 1997
(Amounts in thousands of dollars)
ASSETS 03/31/98 12/31/97
- ------ -------- --------
Cash and due from banks $ 39,425 $ 47,660
Interest-bearing deposits in other banks 0 396
Federal funds sold 34,500 13,500
Investment securities and investments
in mutual funds 61,606 59,844
Loans held for sale 73,840 17,061
Loans and leases, net of unearned income, deferred loan
fees/costs and allowance for possible loan and lease
losses of $6,558 in 1998 and $6,649 in 1997 369,381 409,439
Other assets 41,749 41,855
---------- ----------
TOTAL ASSETS $ 620,501 $ 589,755
========== ==========
LIABILITIES
Deposits $ 554,817 $ 526,269
Other liabilities 11,093 9,856
---------- ----------
TOTAL LIABILITIES 565,910 536,125
---------- ----------
SHAREHOLDERS' EQUITY
Common stock 29,878 29,587
Retained earnings 24,212 23,281
Accumulated other comprehensive income 501 762
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 54,591 53,630
---------- ----------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 620,501 $ 589,755
========== ==========
The accompanying notes are an integral part of these Condensed
Consolidated Statements of Condition.
-3-
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
(Amounts in thousands except per share amounts)
Three Three
Months Months
Ended Ended
03/31/98 03/31/97
--------- --------
Interest Income:
Interest and fees on loans and leases $ 11,195 $ 8,690
Interest on federal funds sold 236 403
Interest on investment securities and other assets 963 599
--------- ---------
Total Interest Income 12,394 9,692
--------- ---------
Interest Expense:
Interest on deposits 4,644 3,612
Interest on convertible debentures 0 116
Other interest expense 47 39
--------- ---------
Total Interest Expense 4,691 3,767
--------- ---------
Net Interest Income 7,703 5,925
Provision for Possible Loan and Lease Losses 450 450
--------- ---------
Net Interest Income After Provision for
Possible Loan and Lease Losses 7,253 5,475
Non-interest Income 2,415 1,880
Non-interest Expense 6,770 5,475
--------- ---------
Income Before Provision for Income Taxes 2,898 1,880
Provision for Income Taxes 1,143 713
--------- ---------
NET INCOME $ 1,755 $ 1,167
========= =========
Basic Earnings per share $ 0.43 $ 0.38
Weighted average shares used to calculate
basic earnings per share 4,113 3,074
Diluted earnings per share $ 0.40 $ 0.31
Weighted average shares used to calculate
diluted earnings per share 4,334 4,006
The accompanying notes are an integral part of these Condensed
Consolidated Statements of Income.
-4-
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
(Amounts in thousands of dollars)
Three Three
Months Months
Ended Ended
03/31/98 03/31/97
-------- --------
Net Cash Provided by (Used) in Operating Activities $ 24 $ (1,076)
Cash Flow From Investing Activities:
Proceeds from:
Maturities of investment securities held to maturity 1,000 1,012
Maturities of investment securities available for sale 3,327 2,505
Purchase of mutual funds available for sale (2,000) (2,000)
Purchase of investment securities available for sale (4,308) (15,079)
Loans and leases made net of principal collections (14,394) (20,781)
Capital expenditures (466) (414)
---------- ----------
Net Cash Used In Investing Activities $ (16,841) $ (34,757)
---------- ----------
Cash Flow From Financing Activities:
Net increase in demand, interest bearing
and savings accounts 1,918 18,954
Net increase in time deposits 26,630 4,972
Dividend paid (824) (524)
Increase in notes payable 1,311 0
Proceeds from issuance of common stock 151 365
---------- ----------
Net Cash Provided by Financing Activities 29,186 23,767
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 12,369 (12,066)
Cash and Cash Equivalents at Beginning of Year 61,556 58,634
---------- ----------
Cash and Cash Equivalents at March 31 $ 73,925 $ 46,568
========== ==========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Common stock was issued in conversion of $4.6 million of convertible
debentures during the first quarter of 1997. This amount is net of debenture
offering costs of $315 thousand.
For the three months ended March 31, 1998, $161 thousand of loans were
transferred to other real estate owned.
During the three months ended March 31, 1998 and 1997, $13.5 million and
$21.0 million of unguaranteed SBA loans were transferred to held for sale
status.
The accompanying notes are an integral part of these Condensed
Consolidated Statements of Cash Flows.
-5-
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements
March 31, 1998 and December 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format and, therefore, do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been
reflected in the financial statements. The results of operations for
the three months ended March 31, 1998, are not necessarily indicative
of the results to be expected for the full year. Certain
reclassifications have been made to prior period amounts to present
them on a basis consistent with classifications for the three months
ended March 31, 1998.
2. COMMITMENTS & CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to extend
credit and letters of credit, which are not reflected in the financial
statements. Management does not anticipate any material loss as a
result of these transactions.
3. COMPREHENSIVE INCOME
Effective January 1998, SierraWest Bancorp adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". This statement requires that all items recognized under
accounting standards as components of comprehensive income be reported
in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive income by
their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized
gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will
be reclassified, as required. SierraWest Bancorp's total comprehensive
income were as follows:
Three Months Ended March 31
---------------------------
1998 1997
---- ----
(In thousands of dollars)
Net income $ 1,755 $ 1,167
Other comprehensive (loss) income (261) 640
------- -------
Total comprehensive income $ 1,494 $ 1,807
======= ========
-6-
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements
March 31, 1998 and December 31, 1997
4. EARNINGS PER SHARE
The following reconciles the numerator and denominator used in the
calculation of both the basic earnings per share and diluted earnings per
share for each of the periods ended March 31:
1998 1997
---- ----
Calculation of Basic Earnings Per Share
Numerator - net income $1,755 $ 1,167
Denominator - weighted average common shares
outstanding 4,113 3,074
------ -------
Basic Earnings Per Share $ 0.43 $ 0.38
====== =======
Calculation of Diluted Earnings Per Share
Numerator:
Net Income $1,755 $ 1,167
Effect of convertible debentures 0 68
------ -------
Net Income and assumed conversions $1,755 $ 1,235
Denominator:
Weighted average common shares outstanding 4,113 3,074
Dilutive effect of options 221 172
Dilutive effect of convertible debentures 0 760
------ -------
4,334 4,006
------ -------
Diluted Earnings Per Share $ 0.40 $ 0.31
====== =======
-7-
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements
March 31, 1998 and December 31, 1997
5. ACQUISITIONS
At the close of business on April 15, 1998, California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB) was merged into SierraWest Bancorp ("Bancorp") and its
wholly owned subsidiary SierraWest Bank (SWB). The merger, which was
announced on November 13, 1997, was approved by a majority of the
Bancorp's and of CCBC shareholders on March 26, 1998 and March 16, 1998,
respectively. By virtue of the merger, Bancorp acquired all of the assets
of CCBC and SWB acquired all of the assets of CPB.
Under the terms of the Plan of Acquisition and Merger dated November 13,
1997, shareholders of CCBC received shares of Bancorp's common stock at
an exchange ratio of 0.8283 which was based upon a closing price of
$37.94 which was the average of the closing price for Bancorp's stock
from March 11, 1998 to April 7, 1998. Approximately 1,178 thousand
Bancorp common shares are expected to be issued pursuant to the
transaction. Of this total approximately 250 thousand shares represent
shares to be issued related to the future conversion of debentures and
the exercise of stock options. This transaction has been accounted for
under the pooling-of-interests accounting method. No gain or loss for tax
purposes will be recognized by CCBC shareholders, except with respect to
cash received in lieu of fractional shares. The value of the acquisition,
based upon an average price of $37.94 per share totaled approximately
$44.7 million.
The following unaudited pro-forma combined financial information, based
on the historical financial statements of the parties, summarizes the
combined results of operations of the Company and CCBC based on the
pooling-of-interests method of accounting, as if the combination had been
consummated on January 1 of each of the periods presented. Weighted
average shares and earnings per share were calculated based on an
exchange ratio of 0.8283.
Unaudited Pro-Forma Combined Summary of Operations
(In thousands, except per share data)
For the Three Months Ended March 31,
------------------------------------
1998 1997
------ ------
Net interest income................................................ $ 9,793 $ 7,834
Net income......................................................... $ 2,019 $ 1,531
Basic Earnings Per Share........................................... $ 0.40 $ 0.39
======== ========
Weighted average shares used
to calculate basic earnings per share............................. 5,035 3,903
Net income adjusted for effect of
convertible debentures............................................ $ 2,047 $ 1,636
Diluted Earnings Per Share......................................... $ 0.37 $ 0.32
======== ========
Weighted average common shares adjusted for
dilutive effect of options and convertible debentures............. 5,473 5,115
-8-
SIERRAWEST BANCORP AND SUBSIDIARY
Item 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
- -------------------
Certain statements in this document include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions; volatility of rate sensitive deposits;
operational risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets.
Total assets increased by $30.7 million from $589.8 million at December 31,
1997, to $620.5 million at March 31, 1998. This increase included increases of
$16.7 million in loans and loans held for sale, net of the allowance for
possible loan and lease losses, $1.7 million in investment securities, and $21.0
million in federal funds sold. These increases were partially offset by
decreases of $0.1 million in other assets and $8.6 million in cash and due from
banks. Mutual funds, federal funds sold and unpledged investment securities
classified as available for sale are all sources of short-term liquidity and can
be used somewhat interchangeably to provide liquidity. Of the Company's total
investment securities, $34.9 million were pledged at March 31, 1998.
The following table summarizes the Company's deposit and loan portfolios as of
March 31, 1998, and December 31, 1997.
Deposits: 03/31/98 12/31/97 Change
---------------- ---------------- --------------
Non-interest bearing demand................................ $ 125,677 $ 130,122 $ (4,445)
Savings.................................................... 14,516 14,023 493
Interest bearing transaction accounts...................... 164,757 158,887 5,870
Time....................................................... 249,867 223,237 26,630
---------- --------- ---------
TOTAL DEPOSITS........................................... $ 554,817 $ 526,269 $ 28,548
========== ========= =========
Loans: 03/31/98 12/31/97 Change
---------------- ------------ ------------
SBA........................................................ $ 177,888 $ 163,764 $ 14,124
Other Commercial........................................... 80,114 79,782 332
Real Estate................................................ 176,125 169,264 6,861
Individual and Other....................................... 6,916 6,920 (4)
Lease Receivables.......................................... 9,759 16,055 (6,296)
---------- --------- ---------
SUBTOTAL................................................. 450,802 435,785 15,017
Net deferred loan fees/costs and unearned income on leases. (1,023) (2,636) 1,613
---------- --------- ---------
TOTAL GROSS LOANS AND LEASES............................. 449,779 $ 433,149 16,630
========== ========= =========
-9-
Loans held for sale at March 31, 1998 totaled $73.8 million. This represents an
increase of $56.8 million from December 31, 1997 and primarily represents the
reclassification of loans to held for sale. Loans and portions of loans
guaranteed by the federal government were approximately $68.8 million. This
compares to $60.0 million at December 31, 1997.
The Company completed a securitization of approximately $85 million of SBA 504
and similar loans during the second quarter of 1998. Loans held for sale at
March 31, 1998 include approximately $69.5 million which were included in this
securitization.
Loans and deposits at the Company's Northern Nevada branches increased by $3.2
million and $14.3 million, respectively, during the first quarter of 1998. The
increase in deposits from Nevada activities was partially offset by a decline of
$4.8 million in deposits at the Company's Sacramento branches.
As a temporary funding source the Company increased its level of out-of-area
time deposits from $10.1 million at December 31, 1997 to $28.1 million at March
31, 1998. Additional funding for the Company's third and fourth quarter loan
growth is expected to be provided from the proceeds of the SBA 504
securitization.
During the first quarter of 1998 the Company sold approximately $4 million of
its lease portfolio recognizing a gain on sale of $83 thousand.
Included in other assets at March 31, 1998 are interest-only strips receivable
with an estimated market value of $16.4 million. This includes an unrealized
gain of $400 thousand. The amortized book value of servicing assets, net of a
valuation allowance of $37 thousand, was $1.9 million at March 31, 1998.
At March 31, 1998, accumulated other comprehensive income included $232 thousand
related to the fair value adjustment of the interest-only strips receivable. In
addition, this balance included an unrealized loss of $40 thousand related to
mutual fund investments and an unrealized gain of $309 thousand related to other
investment securities.
Effective April 15, 1998 the Company acquired California Community Bancshares
Corporation ("CCBC") and its wholly owned subsidiary Continental Pacific Bank.
This transaction has been accounted for under the pooling-of-interests
accounting method. See note 4 of notes to condensed consolidated financial
statements.
RESULTS OF OPERATIONS (Three Months Ended March 31, 1998 and 1997)
- ---------------------
Net income for the three months ended March 31, 1998 increased by $588 thousand
or 50% from $1,167 thousand for the three months ended March 31, 1997 to $1,755
thousand during the current three month period. Increases of $1,778 thousand in
net interest income and $535 thousand in non-interest income were partially
offset by an increase of $1,295 thousand in non-interest expense and a $430
thousand increase in the provision for income taxes.
Net Interest Income
- -------------------
The yield on average interest earning assets for the three months ended March
31, 1998 was 5.93%. This compares to 5.87% for the first three months of 1997.
The increase reflects an increase in the average prime rate during the
comparison periods, and an increase in the percentage of average loans to
average interest earning assets. Average earning assets increased from $409
million during the first quarter of 1997 to $527 million in the current quarter.
-10-
Yields and interest earned, including loan fees for the three months ended March
31, 1998 and 1997, were as follows (in thousands except percent amounts):
Three Three
Month Months
Ended Ended
03/31/98 03/31/97
-------- --------
Average loans outstanding (1) $443,182 $332,967
Average yields 10.2% 10.6%
Amount of interest and origination fees earned $ 11,195 $ 8,690
(1) Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $249 thousand and $306 thousand for the three months
ended March 31, 1998 and 1997, yields on average loans outstanding were 10.0%
and 10.2%, respectively. The prime rate (upon which a large portion of the
Company's loan portfolio is based), averaged 8.50% for the 1998 period and 8.27%
for the 1997 period. This decline in loan yield includes the effect of the June
1997 securitization. The securitized loans had a higher yield on average than
the Company's overall portfolio. In addition the Company has been aggressive in
growing its loan portfolio and has encountered price competition in its service
areas, particularly the Sacramento and Reno markets. There is strong competition
in these markets for larger, higher quality loans, and the decrease in loan
yields reflects this. However, the effect of this decline in loan yield on net
interest margin was offset by an increase in the percentage of average loans to
average interest-earning assets from 81% during the 1997 first quarter to 84% in
the first quarter of this year.
Other earning assets, which primarily consist of investment securities and
federal funds sold, had an average yield of 5.8% for the first quarter of 1998
and 5.3% for the first quarter of 1997.
Rates and amounts paid on average deposits including non-interest bearing
deposits for the three months ended March 31, 1998 and 1997 were as follows (in
thousands except percent amount):
Three Three
Months Months
Ended Ended
03/31/98 03/31/97
-------- --------
Average deposits outstanding (1) $529,003 $409,608
Average rates paid 3.6% 3.6%
Amount of interest paid or accrued $ 4,644 $ 3,612
The effective interest rate paid on NOW accounts, Money Market accounts and Time
Certificates of Deposits during the first three months of 1998 and 1997 were as
follows:
1998 1997
----------------- -------------------
MONEY MONEY
NOW MARKET TIME NOW MARKET TIME
-------------------------------- -------------------------------
Average Balance (in thousands) (1) $59,168 $101,349 $237,102 $50,099 $78,686 $188,910
Rate Paid 1.5% 3.9% 5.8% 1.3% 3.8% 5.7%
(1) Amount outstanding is the average of daily balances for the period.
The increase in rates is reflective of market conditions in the Company's
service area.
11
Provision for Possible Loan Losses
- ----------------------------------
In evaluating the Company's loan loss reserve, management considers the credit
risk in the various loan categories in its portfolio. Historically, most of the
Company's loan losses have been in its commercial lending portfolio, which
includes SBA loans and local commercial loans. From inception of its SBA lending
program in 1983, the Company has sustained a relatively low level of losses from
these loans, averaging less than 0.5% of loans outstanding per year. Net losses
in 1995 for these loans were $575 thousand. During 1996, net losses in the SBA
loan portfolio decreased to $27 thousand. For 1997, SBA net loan losses totaled
$763 thousand and during the first quarter of 1998, net losses on SBA loans were
$253 thousand.
Most of the Company's other commercial loan losses have been for loans to
businesses within the Tahoe basin area, and in its Nevada operations. It is
important for the Company to maintain good relations with local business
concerns and, to this end, it supports small local businesses with commercial
loans. It also attempts to mitigate this risk through the loan review and
approval process.
The provision for loan losses was $450 thousand for the first three months of
1998 and 1997, respectively. The provision in 1997 and 1998 includes the effect
of growth in the loan portfolio.
The allowance for possible loan and lease losses as a percentage of loans was
1.46% at March 31, 1998, 1.54% at December 31, 1997, and 1.38% at March 31,
1997. Net charge-offs were $541 thousand for the first three months of 1998.
This compares to net charge-offs of $189 thousand during the three months ended
March 31, 1997. Unguaranteed loans and leases increased $7.9 million and $23.3
million in the first quarter of 1998 and 1997, respectively. Guaranteed portions
of loans at March 31, 1998 totaled $68.8 million and at March 31, 1997 they
totaled $38.6 million. The Company will monitor its exposure to loan losses each
quarter and adjust its level of provision in the future to reflect changing
circumstances. Management considers the allowance of $6.6 million at March 31,
1998, to be adequate as a reserve against foreseeable losses at that time.
Of total gross loans and leases at March 31, 1998, $5.4 million were considered
to be impaired. The allowance for possible loan and lease losses included $511
thousand related to these loans. The average recorded investment in impaired
loans during the three months ended March 31, 1998 was $5.6 million.
The following table sets forth the ratio of nonperforming loans to total loans,
the allowance for possible loan and lease losses to nonperforming loans and the
ratio of the allowance for possible loan and lease losses to total loans, as of
the dates indicated.
March 31, December 31,
------------------------------- --------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Nonaccrual loans to total loans 1.2% 1.6% 1.4% 1.7% 2.3%
Allowance for possible loan and lease
losses to nonaccrual loans 122.0% 87.9% 111.1% 84.8% 70.2%
Allowance for possible loan and lease
losses to total loans 1.5% 1.4% 1.5% 1.4% 1.6%
If the guaranteed portions of loans on nonaccrual status, which total $1.9
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans at March 31, 1998 declines to 0.8% and the allowance for possible
loan and lease losses to nonaccrual loans increases to 186.4%. At March 31,
1997, excluding guaranteed portions of loans on nonaccrual, these same
percentages are 1.2% and 120.3%.
12
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
March 31 December 31
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Nonaccrual loans:
SBA................................................. $4,675 $4,490 $5,281 $4,985 $ 5,351
Other............................................... 700 976 702 378 125
Accruing loans past due 90 days or more:
SBA................................................. 1,899 897 1,127 1,071 816
Other............................................... 446 1,053 255 1,061 207
Restructured loans (in compliance with
modified terms)...................................... 600 267 660 275 78
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company places a loan on nonaccrual status when any installment
of principal or interest is 90 days or more past due, unless, in management's
opinion, the loan is well secured and the collection of principal and interest
is probable, or management determines the ultimate collection of principal or
interest on a loan to be unlikely. When a loan is placed on nonaccrual status,
the Company's general policy is to reverse and charge against current income
previously accrued but unpaid interest. Interest income on such loans is
subsequently recognized only to the extent that cash is received and future
collection of principal is deemed by management to be probable.
Although the level of nonperforming assets will depend on the future economic
environment, as of April 30, 1998, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $135
thousand in potential problem loans about which it has serious doubts as to the
ability of the borrowers to comply with the present repayment terms and which
may become nonperforming assets, based on known information about possible
credit problems of the borrower.
Interest income on nonaccrual loans which would have been recognized if all such
loans had been current in accordance with their original terms totaled $150
thousand for the three months ended March 31, 1998. Interest income actually
recognized on nonaccrual loans for the three months ended March 31, 1998 was $33
thousand based on cash collections.
13
The following table shows the loans outstanding, actual charge-offs, recoveries
on loans previously charged off, the allowance for possible loan and lease
losses and net loans charged off to average loans outstanding during the periods
and as of the dates indicated (amounts in thousands except percentage amounts):
March 31 December 31
------------------------------ -----------------------------------------------
1998 1997 1997 1996 1995
------------ -------------- ------------ -------------- -------------
Average gross loans............................ $443,182 $332,967 $378,732 $284,487 $203,231
Total gross loans at end of period............. 449,779 347,480 433,149 323,366 239,969
Allowance for possible loan and lease losses:
Balance beginning of period.................... $ 6,649 $ 4,546 $ 4,546 $ 3,845 $ 3,546
-------- -------- -------- -------- --------
Actual charge-offs:
SBA.......................................... 259 76 820 114 595
Commercial and industrial.................... 157 124 593 337 350
Leases....................................... 133 0 14 84 0
Real estate.................................. 0 0 0 0 40
Installment.................................. 57 36 63 58 40
-------- -------- ------- -------- --------
Total....................................... 606 236 1,490 593 1,025
-------- -------- ------- -------- --------
Less recoveries:
SBA.......................................... 6 16 57 87 20
Commercial and industrial.................... 57 20 135 182 26
Leases....................................... 0 0 6 0 0
Real estate.................................. 0 0 0 0 0
Installment.................................. 2 11 51 15 8
-------- -------- ------- -------- -------
Total...................................... 65 47 249 284 54
-------- -------- ------- -------- -------
Net charge-offs................................ 541 189 1,241 309 971
Provision for possible loan and lease
losses......................................... 450 450 2,480 1,010 1,270
-------- -------- ------- ------- -------
Acquisition.................................... 0 0 864 0 0
Balance-end of period.......................... $ 6,558 $ 4,807 $ 6,649 $ 4,546 $ 3,845
======== ======== ======= ======= =======
Net loans charged off to average loans
outstanding (1)................................ 0.50% 0.23% 0.33% 0.11% 0.48%
(1) Percentages for the three months are based on annualized net
charge-offs.
14
The following table sets forth management's historical allocation of the
allowance for possible loan and lease losses by loan category and percentage of
loans in each category. Percentage amounts are the percentage of loans in each
category to total loans at the dates indicated (in thousands except percentage
amounts):
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ------------------------------
Percent- Percent- Percent-
Amount age Amount age Amount age
---------- --------------- ------------ ------------ -------------- -----------
SBA loans...................... $ 2,205 38% $ 1,561 45% $ 1,468 49%
Commercial and
industrial loans(2)........... 2,449 22 1,720 21 1,592 24
Real estate loans.............. 1,673 37 1,010 30 564 23
Consumer loans to
individuals (1)................ 322 3 255 4 221 4
------- ---- ------- ------ ------ ----
Total........................ $ 6,649 100% $ 4,546 100% $ 3,845 100%
======= ==== ======= ====== ======= ====
March 31,
------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Percent- Percent-
Amount age Amount age
-------------- --------------- --------------- ---------------
SBA loans........................ $2,085 39% $1,653 44%
Commercial and
industrial loans (2)............ 2,129 20 1,703 18
Real estate loans................ 2,025 38 1,216 35
Consumer loans to
individuals (1)................. 319 3 235 3
------ ---- ------ ----
Total.......................... $6,558 100% $4,807 100%
====== ==== ====== ====
- -----------------------------------
(1) Includes equity lines of credit
(2) Includes commercial leases
In allocating the Company's loan loss allowance, management has considered the
credit risk in the various loan categories in its portfolio. While every effort
has been made to allocate the allowance to specific categories of loans,
management believes that any breakdown or allocation of the loan loss allowance
into loan categories lends an appearance of exactness which does not exist, in
that the allowance is utilized as a single unallocated reserve available for
losses on all types of loans.
15
Non-interest Income
- -------------------
Non-interest income increased by $535 thousand during the first three months of
1998 compared to the three months ended March 31, 1997. During the 1997 quarter
the Company recognized a $75 thousand gain on sale of $1.5 million in government
guaranteed loans. No sales of government guaranteed loans were made during the
first quarter of 1998.
Income related to the Company's servicing assets and interest-only strip
receivables as defined under SFAS 125, net of the amortization of these assets,
increased by $262 thousand from $921 thousand for the three months ended March
31, 1997 to $1,183 thousand during the current quarter. This increase is related
to the June 1997 securitization of $51.3 million in SBA 7A loans.
During 1997 and continuing into 1998, the Company has experienced an increase in
the prepay speed experienced in its SBA loan portfolio. In response to this
increase in prepayments, the Company has increased the speed at which it
amortizes its servicing and interest-only strip assets. This had the effect of
increasing amortization by $70 thousand during the first quarter of 1998 and is
expected to increase amortization by $950 thousand for the remainder of 1998.
Other significant increases in non-interest income include the $83 thousand gain
on sale of $4 million in leases, $43 thousand in merchant credit card fees, $40
thousand in service charges on deposit accounts, $73 thousand in sundry
recoveries and $75 thousand related to a decrease in the estimated recourse
obligation recorded on the June 1997 securitization.
Non-interest Expense
- --------------------
The following table compares the various elements of non-interest expense as an
annualized percentage of total assets for the first three months of 1998 and
1997 (in thousands except percentage amounts):
Three Months Salaries & Occupancy & Other
Ended Average Related Equipment Operating
March 31 Assets (1) Benefits (2) Expenses Expenses
- -------------------------------------------------------------------------------
1998 $ 594,154 2.2% 0.9% 1.3%
1997 $ 460,827 2.7% 0.8% 1.2%
(1) Based on average daily balances.
(2) Excludes provision for payment of bonuses and contribution to KSOP plan.
Including these items, percentages are 2.4% and 2.8% for 1998 and 1997,
respectively.
16
The following table summarizes the principal elements of operating expenses and
discloses the increases (decreases) and percent of increases (decreases) for the
three months ended March 31, 1998 and 1997 (amounts in thousands except
percentage amounts):
Increase (Decrease)
-------------------
Three Months Ended March 31, 1998 over 1997
---------------------------- --------------
1998 1997 Amount Percentage
---- ---- ------ ----------
Salaries and related benefits............... $ 3,541 $ 3,192 $ 349 10.9%
Occupancy and equipment..................... 1,312 945 367 38.8
Amortization of intangibles................. 55 0 55 100
Postage..................................... 101 77 24 31.2
Stationery and supplies..................... 99 107 (8) (7.5)
Advertising................................. 278 219 59 26.9
Legal....................................... 141 51 90 176.5
Consulting.................................. 128 137 (9) (6.6)
Audit and accounting fees................... 61 47 14 29.8
Directors' fees and expenses................ 153 87 66 75.9
Other....................................... 901 613 288 47.0
--------- --------- ------
$ 6,770 $ 5,475 $1,295 23.7%
========= ========= ======
Excluding an increase of $147 thousand in commission and incentive payments and
$104 thousand in bonus plan expense and optional bonus payments, salaries and
related benefits increased by $98 thousand or 3.1%. This increase is attributed
to higher levels of payroll taxes, group insurance and contributions to the
Company's KSOP Plan. Commissions and incentive payments are primarily driven by
the volume of loans and deposits that eligible employees generate. Bonus Plan
expense is reflective of several factors including the salary base of senior
staff employees, the number of employees eligible for bonus payments and the
profitability of the Company; primarily measured by return on equity.
During the first quarter of 1998 the Company incurred $295 thousand in expenses
related to its acquisition of CCBC. Included in the $295 thousand were $121
thousand in equipment costs, $37 thousand in accounting costs, $92 thousand in
legal fees and $32 thousand in stock issuance costs.
Rent expense increased by $80 thousand during the 1998 quarter. This increase
included normal annual adjustments to rent on office and branch leases, the sale
and lease back of the Company's Carson City branch and the Company's expanded
operations.
Included in Directors' fees and expenses is $45 thousand related to an
adjustment required to reflect the increase in value of the phantom stock shares
allocated to the Company's Directors Deferred Compensation and Stock Award Plan.
Provision for Income Taxes
- --------------------------
Provision for income taxes has been made at the prevailing statutory rates and
includes the effect of items which are classified as permanent differences for
federal and state income tax. The provision for income taxes was $1,143 thousand
and $713 thousand for the three months ended March 31, 1998 and 1997,
respectively, representing 39.4% and 37.9% of income before taxation for the
respective periods. The increase in 1998 relates to certain merger related
expenses which cannot be deducted in the calculation of taxable income.
17
Year 2000
- ---------
Many existing computer programs use only two digits to identify a year in the
date datum field (e.g., "98" for "1998"). As a result, the Company, like most
other companies, will face a potentially serious information systems (computer)
problem because many software applications and operational programs written in
the past may not properly recognize calendar dates beginning in the year 2000.
If not corrected, many computer applications could fail or create erroneous
results by or at the year 2000.
The Company is in the process of communicating with customers that the Company
has significant lending relationships with and other third parties to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies will be timely converted, or that
a failure to convert by another company, would not have a material adverse
effect on the Company.
The Company began the process of identifying the changes required to its
software and hardware in 1997 in consultation with software and hardware
providers, a consulting firm and bank regulators. While the Company believes it
is taking all appropriate steps to assure that its information systems are
prepared for the year 2000, it is dependent on vendor compliance to some extent.
The Company is requiring its systems and software vendors to represent that the
services and products provided are, or will be, year 2000 compliant, and
contemplates a program of testing compliance to commence in 1998. The Company
estimates that its costs related to year 2000 compliance will be at least
$200,000 and may be significantly more. This cost is being funded through
operating cash flows. The "year 2000" problem is pervasive and complex as
virtually every computer operation will be affected in some way by the rollover
of the two digit year value to 00. Consequently, no assurance can be given that
year 2000 compliance can be achieved without costs and uncertainties that might
affect future financial results or cause reported financial information not to
be necessarily indicative of future operating results or future financial
condition.
Item 3
- ------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion there has not been a material change in the Company's
market risk profile during the three months ended March 31, 1998.
18
SierraWest Bancorp
10-Q Filing
March 31, 1998
Part II.
Item 1. Legal Proceedings.
During 1987, SierraWest Bank, ("the Bank") took title, through
foreclosure, of a property located in Placer County which
subsequent to the Bank's sale of the property was determined to
be contaminated with a form of hydrocarbons. At the time it owned
the property, the Bank became aware of and investigated the
status of certain underground tanks that had existed on the
property. The Bank hired a consultant to study the tanks and
properly seal them. Several years later, and after resale of the
property, contamination was observed in the area of at least one
of the buried tanks and along an adjoining riverbank of the Yuba
River. The Bank, at the time of resale of the property, was not
aware of this contamination to the tanks but was aware of the
existence of the tanks and disclosed this to its purchaser.
A formal plan of remediation has not been approved by the County
of Placer or the State Regional Water Quality Board. As a result
of the discovery of the contamination, two civil lawsuits were
instituted against the Bank and other prior owners by the current
owner of the property, Rainbow Holding Company, who is also the
Bank's borrower. One of the actions, the state court matter, was
dismissed by agreement of the parties. The other matter, filed in
the summer of 1995 in the U.S. District Court, Eastern District
of California, went to mediation in May, 1998. The mediation has
now been concluded and has resulted in an agreement in principle
as to the resolution of this matter. This agreement in principle
is being formalized in a written settlement agreement and is also
subject to final court approval. The Bank's participation under
the agreement in principle, if fully executed, is primarily to
acquire two senior deeds of trust; substitute as lender to
Rainbow Holding Company as to this debt; and redocument and
reamortize the acquired debt. In addition, the Bank will
reschedule certain debt already held by it. The Bank will also
make a contribution to assist in remediation and assign certain
reimbursements.
The Bank's external and internal counsel on this matter believe
that the Bank's share of the cost of remediation and the costs of
defense will not be material to the Bank's or the Company's
performance and will be within existing reserves established by
the Bank for this matter. It is still expected that clean-up of
the property will commence during 1998 following final settlement
and the raising of sufficient funds.
In addition, the Company is subject to some minor pending and
threatened legal actions which arise out of the normal course of
business and, in the opinion of Management and the Company's
General Counsel, the disposition of these claims currently
pending will not have a material adverse affect on the Company's
financial position or results of operations.
Item 2. Change in Securities. No changes.
Item 3. Defaults Upon Senior Securities. Not applicable.
19
SierraWest Bancorp
10-Q Filing
March 31, 1998
Item 4. Submission of Matters to a Vote of Securities Holders.
A special shareholder meeting was held on March 26, 1998. The
purpose of the meeting was to approve the acquisition of
California Community Bancshares Corporation and its subsidiary
Continental Pacific Bank. The meeting was held at 8:00 a.m. in
the administrative offices of SierraWest Bank. Only shareholders
of record at the close of business on January 30, 1998 were
entitled to vote. The shares outstanding at the record date
totaled 4,111,531 with 2,400,696 represented at the meeting. The
merger was approved with votes cast as follows:
For: 2,349,606
Against: 2,774
Abstain: 48,316
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. None
(b) Reports on Form 8-K.
Bancorp filed one Form 8-K during the first quarter of
1998. This Form 8-K, dated January 30, 1998, reported the
amendment of the Company's Shareholder Rights Plan,
increasing the purchase price from $40 for each one
one-hundredth of a share of preferred stock purchasable
upon exercise of a right to $100 for each one
one-hundredth of a share of preferred stock purchasable
upon exercise. In addition, the Company amended the
agreement to reflect a change in the Company's name from
Sierra Tahoe Bancorp to SierraWest Bancorp.
20
SierraWest Bancorp
10-Q Filing
March 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1998 /s/ William T. Fike
------------ -------------------
William T. Fike
President, Chief Executive Officer
Date: May 13, 1998 /s/ Richard L. Belstock
------------ -----------------------
Richard L. Belstock
Controller and Chief Accounting Officer
21