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 June 30, 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, 96160-9010
Truckee, California
(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 August 1, 1998: Common Stock - Authorized 10,000,000 shares of no par;
issued and outstanding - 5,167,793
10-Q Filing
June 30, 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 ending June 30, 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
June 30, 1998 and December 31, 1997
(Amounts in thousands of dollars)
(Unaudited)
ASSETS 06/30/98 12/31/97*
- ------ -------- --------
Cash and due from banks $ 56,918 $ 58,345
Federal funds sold 95,800 22,275
Investment securities and
investments in mutual funds 100,685 108,309
Loans and leases, net of unearned
income, deferred loan fees/costs and
allowance for possible loan
and lease losses of $7,978
in 1998 and $7,891* in 1997 523,598 545,822
Other assets 69,599 51,995
---------- ----------
TOTAL ASSETS $ 846,600 $ 786,746
========== ==========
LIABILITIES
- -----------
Deposits $ 755,303 $ 701,001
Other liabilities 19,923 16,362
---------- ----------
TOTAL LIABILITIES 775,226 717,363
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Common stock 43,373 42,148
Retained earnings 27,547 26,598
Accumulated other
comprehensive income 454 637
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 71,374 69,383
---------- ----------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 846,600 $ 786,746
========== ==========
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
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 and Six Months Ended June 30, 1998 and 1997
(Amounts in thousands except per share amounts)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
06/30/98 06/30/97* 06/30/98 06/30/97*
-------- -------- -------- --------
Interest Income:
Interest and fees on loans and leases $ 13,389 $ 12,287 $ 27,359 $ 23,615
Interest on federal funds sold 1,188 301 1,611 733
Interest on investment securities and other assets 1,498 1,497 3,119 2,875
--------- --------- --------- ---------
Total Interest Income 16,075 14,085 32,089 27,223
--------- --------- --------- ---------
Interest Expense:
Interest on deposits 6,368 5,483 12,428 10,496
Interest on convertible debentures 0 (1) 49 188
Other interest expense 175 106 287 209
--------- --------- --------- ---------
Total Interest Expense 6,543 5,588 12,764 10,893
--------- --------- --------- ---------
Net Interest Income 9,532 8,497 19,325 16,330
Provision for Possible Loan and Lease Losses 905 1,030 1,430 1,569
--------- --------- --------- ---------
Net Interest Income After Provision for
Possible Loan and Lease Losses 8,627 7,467 17,895 14,761
Non-interest Income 4,050 5,101 6,920 7,457
Non-interest Expense 12,340 8,299 21,072 15,501
--------- --------- --------- ---------
Income Before Provision for Income Taxes 337 4,269 3,743 6,717
Provision for Income Taxes 416 1,651 1,802 2,568
--------- --------- --------- ---------
NET (LOSS)INCOME $ (79) $ 2,618 $ 1,941 $ 4,149
========= ========= ========= =========
Basic (loss)earnings per share $ (0.02) $ 0.59 $ 0.38 $ 1.00
Weighted average shares used to calculate
basic (loss)earnings per share 5,072 4,418 5,054 4,161
Diluted (loss)earnings per share $ (0.02) $ 0.52 $ 0.36 $ 0.83
Weighted average shares used to calculate
diluted (loss)earnings per share 5,072 5,138 5,486 5,127
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
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 Six Months Ended June 30, 1998 and 1997
(Amounts in thousands of dollars)
Six Six
Months Months
Ended Ended
06/30/98 06/30/97*
-------- --------
Net Cash Provided by Operating Activities $ 45,150 $ 48,613
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 15,995 7,011
Sales of investment securities -
available for sale 0 4,618
Purchase of mutual funds available for sale (2,000) 0
Purchase of investment securities available for sale (7,608) (25,080)
Loans and leases made net of principal collections (33,388) (72,111)
Capital expenditures (1,047) (836)
Net cash received in acquisition 0 11,882
Other 751 (190)
--------- ---------
Net Cash Used in Investing Activities (26,297) (73,694)
--------- ---------
Cash Flow From Financing Activities:
Net increase in demand, interest
bearing and savings accounts 27,716 32,761
Net increase in time deposits 26,586 34,855
Dividend paid (991) (830)
Proceeds from issuance of common stock 372 540
Other (438) (669)
--------- ---------
Net Cash Provided by Financing Activities 53,245 66,657
--------- ---------
Net Increase in Cash and Cash Equivalents 72,098 41,576
Cash and Cash Equivalents at Beginning of Year 80,620 75,574
--------- ---------
Cash and Cash Equivalents at June 30 $ 152,718 $ 117,150
========= =========
Interest paid $ 12,910 $ 11,072
Income tax payments $ 2,138 $ 2,073
- -------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
On June 30, 1997, the Company purchased all the capital stock of Mercantile Bank
for $6.6 million. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair Value of assets acquired $44,609,000
Cash paid for capital stock 3,301,000
Common stock issued for capital stock 3,317,000
-----------
Liabilities assumed $37,991,000
===========
Common stock was issued in conversion of $662 thousand and $9,457 thousand in
convertible debentures in 1998 and 1997, respectively. Common stock issued is
net of debenture offering costs of $41 thousand and $638 thousand in 1998 and
1997.
For the six months ended June 30, 1998 and 1997, $501 thousand and $186 thousand
of loans, respectively, were transferred to other real estate owned.
In 1998 and 1997, $13.5 million and $21.0 million of unguaranteed SBA loans were
transferred to held for sale status. In addition, $9.1 million in 1998 and $5.8
million in 1997 of government guaranteed SBA loans were transferred to held for
sale status and subsequently sold and included in the Consolidated Statements of
Cash Flows.
In 1998 $1.7 million in debt was issued in exchange for $1.7 million in lease
receivables.
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Cash Flows.
5
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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
six months ended June 30, 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 six months ended June 30, 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
(loss) was as follows:
Three Months Ended June 30
--------------------------
1998 1997
------------ -----------
(In thousands of dollars)
Net income $ (79) $ 2,618
Other comprehensive (loss) income,
net of tax (9) 486
---------- ----------
Total comprehensive (loss) income $ (88) $ 3,104
========== ==========
Six Months Ended June 30
-------------------------
1998 1997
----------- ------------
(In thousands of dollars)
Net income $ 1,941 $ 4,149
Other comprehensive (loss) income,
net of tax (183) 992
---------- ----------
Total comprehensive income $ 1,758 $ 5,141
========== ==========
6
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 three months and six months ended June 30:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
6/30/98 6/30/97* 6/30/98 6/30/97*
------- -------- ------- --------
Calculation of Basic Earnings Per Share
Numerator - Net (Loss)Income $ (79) $ 2,618 $ 1,941 $ 4,149
Denominator - weighted average
common shares outstanding 5,072 4,418 5,054 4,161
------- ------- ------ -------
Basic (Loss)Earnings Per Share $ (0.02) $ 0.59 $ 0.38 $ 1.00
======= ======= ======= =======
Calculation of Diluted Earnings Per Share
Numerator:
Net (Loss)Income $ (79) $ 2,618 $ 1,941 $ 4,149
Effect of convertible debentures 0 32 29 109
------- ------- ------- -------
Net (Loss)Income and effect of
assumed conversions $ (79) $ 2,650 $ 1,970 $ 4,258
------- ------- ------- -------
Denominator:
Weighted average common shares outstanding 5,072 4,418 5,054 4,161
Dilutive effect of options 0 208 282 211
Dilutive effect of convertible debentures 0 512 150 755
------- ------- ------- -------
5,072 5,138 5,486 5,127
------- ------- ------- -------
Diluted (Loss)Earnings Per Share $ (0.02) $ 0.52 $ 0.36 $ .83
======= ======= ======= =======
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
5. POOLING OF INTERESTS
--------------------
On April 15, 1998, the Company completed the acquisition of California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB), under the pooling-of-interests method of accounting and
accordingly, the Company's historical consolidated results have been restated.
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 price of $37.94 which was the average of
the closing price for Bancorp's stock from March 11, 1998 to April 7, 1998. No
gain or loss for tax purposes was 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.
7
The following summarizes the separate results of the combined entities for the
periods shown prior to the combination.
Pro-Forma
Three months ended June 30, 1997 SWB CCBC Combined
--- ---- --------
Net interest income $ 6,495 $ 2,002 $ 8,497
Net income 2,177 441 2,618
Basic Earnings Per Share 0.62 0.41 0.59
Diluted Earnings Per Share 0.54 0.35 0.52
Six months ended June 30, 1997
Net interest income $ 12,419 $ 3,911 $ 16,330
Net income 3,344 805 4,149
Basic Earnings Per Share 1.01 0.78 1.00
Diluted Earnings Per Share 0.84 0.66 0.83
At December 31, 1997
Total assets $ 589,755 $ 196,991 $ 786,746
Total Deposits 526,269 174,732 701,001
Total Shareholder's Equity 53,630 15,753 69,383
6. CHANGE IN ACCOUNTING ESTIMATE
-----------------------------
The Company has experienced a significant increase in the prepayment speed of
its SBA loan portfolio during the fourth quarter of 1997 and continuing into the
current quarter. As a result the Company reevaluated the useful lives of the
loans included in the SBA portfolio, and increased the speed at which it
amortizes its servicing assets and interest-only strips receivable. The increase
in amortization resulted in a decrease in net income of $41 thousand ($0.01 per
diluted share) and $187 thousand ($0.04 per diluted share) for the first two
quarters of 1998, respectively.
7. SUBSEQUENT EVENT
----------------
The Company has called for the redemption, effective August 31, 1998, the
remaining $1.8 million of convertible subordinated debentures acquired in the
merger with CCBC. It is expected that these debentures will be converted into
common stock prior to the redemption date. The conversion of 100% of the
outstanding debentures would result in the issuance of approximately 117,000
Bancorp common shares.
8. NEW ACCOUNTING PRONOUNCEMENT
----------------------------
In June, 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company has not determined the impact of SFAS No. 133 on the
Company's financial statements.
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.
On April 15, 1998, the Company completed the acquisition of California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB), under the pooling-of-interests method of accounting and
accordingly, the Company's historical consolidated results have been restated.
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 price of $37.94 which was the average of
the closing price for Bancorp's stock from March 11, 1998 to April 7, 1998. No
gain or loss for tax purposes was 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.
Total assets increased by $59.9 million from $786.7 million at December 31,
1997, to $846.6 million at June 30, 1998. An increase of $73.5 million in
federal funds sold and $17.6 million in other assets were partially offset by
decreases of $1.4 million in cash and due from banks, $7.6 million in investment
securities and investments in mutual funds, and $22.2 million in loans, net of
the allowance for possible loan and lease losses.
During May, 1998, the Company completed a securitization of approximately $85
million of SBA 504 and similar loans. This resulted in a reduction in loans of
approximately $68 million during the second quarter. An additional $15.5 million
in loans will be delivered in the third quarter of 1998. This will complete the
Company's commitment.
The increase in federal funds sold and the reduction in loans includes the
effect of this securitization. Currently the Company has liquid assets in excess
of that which it requires to meet its liquidity needs; however it is anticipated
that federal funds sold will decline in future months as the securitization
proceeds are utilized to fund loan growth.
In addition the Company sold $9.1 million of guaranteed portions of SBA loans.
These sales were completed during the last week of June; however the cash was
not received until July. At June 30, 1998, other assets included a receivable of
approximately $10 million related to these sales. In addition other assets at
June 30, 1998, included interest-only strips receivable with a fair value of $8
million related to May's securitization. The securitization included a cash
reserve fund of an initial $2.1 million. This reserve fund is expected to be
returned to the Company over time. The initial cash reserve fund is included in
the balance of the interest-only strips receivable.
9
The following table summarizes the change in deposits between December 31, 1997
and June 30, 1998.
06/30/98 12/31/97 Change
-------- -------- --------
Non-interest bearing demand....................................... $165,132 $162,242 $ 2,890
Savings........................................................... 24,517 24,259 258
Interest-bearing transaction accounts(1).......................... 255,992 231,424 24,568
Time.............................................................. 309,662 283,076 26,586
-------- -------- --------
TOTAL DEPOSITS.............................................. $755,303 $701,001 $ 54,302
======== ======== ========
(1) Balance includes money market deposit accounts.
The growth in interest bearing deposits was primarily realized from the
Company's Northern Nevada and Sacramento, California locations.
Other liabilities increased by $3.6 million from December 31, 1997. This
increase includes a $2.3 million recourse obligation recorded upon the 1998
securitization. Additionally, other liabilities included $2.1 million in
deferred compensation payable to four former senior officers of Continental
Pacific Bank.
At June 30, 1998, accumulated other comprehensive income included $173 thousand
related to the fair value adjustment of the interest-only strips receivable. In
addition, this balance included an unrealized loss of $24 thousand related to
mutual fund investments and an unrealized gain of $305 thousand related to other
investment securities.
Interest-only strips receivable totaled $23 million at June 30, 1998 including a
positive market value adjustment of $295 thousand. The balance of interest-only
strips receivable related to 1998's securitization totaled $8 million at June
30, 1998 including a positive market value adjustment of $749 thousand. The
Company's remaining interest-only strips receivable totaled $15 million,
including a negative market value adjustment of $454 thousand.
The value of the Company's interest-only strips receivable has decreased
significantly during 1998 related to an increase in prepayments on the
underlying loans associated with these assets. In response, the Company has
increased its amortization of its interest-only strips receivable and servicing
assets. Please see the non-interest income discussion contained within "Results
of Operations" elsewhere herein.
The amortized book value of servicing assets, net of a valuation allowance of
$150 thousand, was $1.96 million at June 30, 1998.
The Company has completed negotiations for the sale of its Truckee, California
headquarters building. This sale is expected to be completed during the fourth
quarter of 1998. Terms of the sale require that the Company leases back
approximately 17,000 square feet at a rate of $1.30 per square foot per month
plus utilities and common area maintenance costs for a period of 10 years. Sales
proceeds are expected to be approximately $4.5 million. Additionally, the
Company is currently negotiating for the sale and leaseback of its Reno, Nevada
branch.
The Company has called for redemption, effective August 31, 1998, the remaining
$1.8 million of convertible subordinated debentures acquired in its acquisition
of CCBC. It is expected that these debentures will be converted into common
stock prior to the redemption date. The conversion of 100% of the outstanding
debentures would result in the issuance of approximately 117 thousand Bancorp
common shares.
10
RESULTS OF OPERATIONS (Six Months Ended June 30, 1998 and 1997)
- ---------------------
Net income for the six months ended June 30, 1998 decreased by $2,208 thousand
or 53.2% from $4,149 thousand for the six months ended June 30, 1997 to $1,941
thousand during the current six month period. Net interest income increased by
$2,995 thousand, the provision for possible loan and lease losses decreased by
$139 thousand and the provision for income taxes decreased by $766 thousand. The
positive effect of these items on net income was offset by a $537 thousand
decrease in non-interest income and a $5,571 thousand increase in non-interest
expense.
Non-interest expense included one-time merger related costs of $3.9 million. The
effect on net income of these costs was to decrease net income by $2.7 million.
Net Interest Income
- -------------------
The yield on average interest-earning assets for the six months ended June 30,
1998 was 5.42%. This compares to 5.54% for the first six months of 1997. The
decrease reflects a decrease in the percentage of average loans to average
interest-earning assets and a decrease in loan yields. Offsetting the effect of
the decrease in yield was an increase in average interest-earning assets from
$595 million during the first six months of 1997 to $719 million during the six
months ended June 30, 1998.
Yields and interest earned, including loan fees for the six months ended June
30, 1998 and 1997, were as follows (in thousands except percent amounts):
Six Six
Months Months
Ended Ended
06/30/98 06/30/97
-------- --------
Average loans outstanding (1) $548,944 $466,664
Average yields 10.1% 10.2%
Amount of interest and
origination fees earned $ 27,359 $ 23,615
(1)Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $747 thousand and $688 thousand for the six months ended
June 30, 1998 and 1997, yields on average loans outstanding were 9.8% and 9.9%,
respectively. The prime rate (upon which a large portion of the Company's loan
portfolio is based), averaged 8.5% for the 1998 period and 8.4% for the 1997
period. The Company has been aggressive in growing its loan portfolio and has
encountered price competition in Sacramento and Reno for larger, higher quality
loans, and the decrease in loan yields reflects this. In addition to the effect
of competition on loan yield, the Company's 1997 securitization had the effect
of reducing the Company's overall loan yield. Loans included in this
securitization generally earned interest at a higher rate than the weighted
average rate of the Company's remaining loan portfolio.
Other interest-earning assets, which consist primarily of investments in debt
securities and federal funds sold, totaled an average balance of $170.5 million
during the first six months of 1998 and an average yield of 5.6%. This compares
to an average balance of $128.3 million during the first half of 1997 and an
average yield of 5.7% during the 1997 period. The decline in yield during 1998
includes the effect of an increase in average federal funds sold as a percentage
of average interest-earning assets from 22.4% during the first half of 1997 to
35.3% in the current six month period.
The Company has experienced a decrease in its overall cost of deposits from
3.56% for the six months ended June 30, 1997 to 3.49% in the current period.
This relates to a decrease in average interest-bearing deposits to average total
deposits from 81.6% during the 1997 period to 79.3% in the current period.
11
Rates and amounts paid on average deposits including non-interest bearing
deposits for the six months ended June 30, 1998 and 1997 were as follows (in
thousands except percent amount):
Six Six
Months Months
Ended Ended
06/30/98 06/30/97
-------- --------
Average deposits outstanding (1) $717,221 $593,753
Average rate paid 3.49% 3.56%
Amount of interest paid or accrued $ 12,428 $ 10,496
(1) Amounts outstanding are the average of daily balances for the periods.
The effective interest rate paid on interest-bearing transaction accounts,
savings accounts and time certificates of deposit during the first six months of
1998 and 1997 were as follows:
1998 1997
--------------------------------- -------------------------------
INTEREST- INTEREST-
BEARING BEARING
TRANSACTION(2) SAVINGS TIME TRANSACTION(2) SAVINGS TIME
----------- ------- --------- ----------- ------- -------
Average balance
(in thousands)(1) $240,273 $24,766 $303,691 $201,561 $23,139 $259,745
Average rate paid 3.1% 2.1% 5.7% 3.0% 2.2% 5.6%
(1) Amounts outstanding are the average of daily balances for the periods.
(2) Includes money market accounts
Provision for Possible Loan and Lease 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 half of 1998, net losses on SBA loans were
$658 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 possible loan and lease losses was $1,430 thousand and $1,569
thousand for the first six months of 1998 and 1997, respectively. The provision
in 1997 includes the effect of growth in the loan portfolio, additional amounts
to provide for certain charged off amounts and reflects revised estimates of
potential losses primarily related to two large loans. 1998's provision includes
amounts to replenish the allowance for 1998 charge-offs and the incorporation of
CCBC's loans into the Company's loan loss methodology.
The allowance for possible loan and lease losses as a percentage of loans was
1.5% at June 30, 1998, 1.43% at December 31, 1997, and 1.51% at June 30, 1997.
Net charge-offs were $1,343 thousand for the first six months of 1998. This
compares to net charge-offs of $646 thousand during the six months ended June
30, 1997.
12
Guaranteed portions of loans at June 30, 1998 totaled $72.8 million and at June
30, 1997 they totaled $43.6 million. The Company monitors its exposure to loan
losses each quarter and adjusts its level of provision to reflect changing
circumstances. The Company expects that its existing loan loss reserve will be
adequate to provide for losses inherent in the portfolio.
Of total gross loans and leases at June 30, 1998, $6.9 million were considered
to be impaired. The allowance for possible loan and lease losses included $572
thousand related to these loans. The average recorded investment in impaired
loans during the six months ended June 30, 1998 was $6.7 million.
The following table sets forth the ratio of nonaccrual loans to total loans, the
allowance for possible loan and lease losses to nonaccrual loans and the ratio
of the allowance for possible loan and lease losses to total loans, as of the
dates indicated.
June 30 December 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
------- -------- ------ ------ -----
Nonaccrual loans to total loans 1.3% 1.4% 1.1% 1.2% 1.9%
Allowance for possible loan and lease
losses to nonaccrual loans 116.3% 109.9% 126.3% 103.9% 76.7%
Allowance for possible loan and lease
losses to total loans 1.5% 1.5% 1.4% 1.3% 1.4%
If the guaranteed portions of loans on nonaccrual status, which total $2.1
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans at June 30, 1998, declines to 0.9% and the allowance for possible
loan and lease losses to nonaccrual loans increase to 167%. At June 30, 1997,
excluding guaranteed portions of loans on nonaccrual, these same ratios are 1.1%
and 135%.
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
June 30 December 31
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -----------------
Nonaccrual loans:
SBA............................. $4,977 $4,678 $5,307 $4,985 $5,351
Other........................... 1,885 2,083 1,836 448 1,174
Accruing loans past due 90 days or more:
SBA............................. 1,969 1,067 1,127 1,071 816
Other........................... 1,372 956 449 1,128 285
Restructured loans (in compliance
with modified terms)............. 2,818 2,433 1,922 1,249 548
13
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. A loan is placed on nonaccrual status even if principal or interest
is less than 90 days past due if management determines the ultimate collection
of principal or interest on the loan to be unlikely. When a loan is placed on
nonaccrual status, the Company's 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 July 31, 1998, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $822
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 $377
thousand for the six months ended June 30, 1998. Interest income actually
recognized on nonaccrual loans for the six months ended June 30, 1998 was $130
thousand based on cash collections.
14
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):
June 30 December 31
------------------------------- -----------------------------------------------------
1998 1997 1997 1996 1995
-------------- ------------ --------------- --------------- --------------
Average gross loans.............. $ 548,944 $466,663 $496,632 $396,669 $313,736
Total gross loans at end of
period .......................... 531,576 492,866 553,713 436,392 350,361
Allowance for possible loan and lease losses:
Balance beginning of period...... $ 7,891 $ 5,647 $ 5,647 $ 5,003 $ 4,654
--------- -------- -------- -------- --------
Actual charge-offs:
SBA.............................. 674 411 820 114 595
Commercial and industrial........ 437 233 681 554 454
Leases........................... 133 14 14 84 0
Real estate...................... 0 73 30 264 143
Installment...................... 209 79 169 73 115
--------- -------- -------- -------- --------
Total............................ 1,453 810 1,714 1,089 1,307
--------- -------- -------- -------- --------
Less recoveries:
SBA.............................. 16 17 57 87 20
Commercial and industrial........ 82 97 159 183 28
Leases........................... 0 0 6 0 0
Real estate...................... 1 1 13 26 0
Installment...................... 11 49 60 16 14
--------- -------- -------- -------- --------
Total............................ 110 164 295 312 62
--------- -------- -------- -------- --------
Net charge-offs.................. 1,343 646 1,419 777 1,245
Provision for possible loan and
lease losses..................... 1,430 1,569 2,799 1,421 1,594
--------- -------- -------- -------- --------
Subtotal 7,978 6,570 7,027 5,647 5,003
Acquisition of Mercantile Bank... 0 864 864 0 0
--------- -------- -------- -------- --------
Balance-end of period............ $7,978 $ 7,434 $ 7,891 $ 5,647 $ 5,003
========= ======== ======== ======== ========
Net loans charged off to average
loans outstanding (1)............ 0.49% 0.28% 0.29% 0.20% 0.40%
(1) Percentages for the six months are based on annualized net charge-offs.
15
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............. $ 2,227 30% $ 1,561 33% $ 1,468 34%
Commercial and
industrial loans(2).. 2,682 18 1,934 18 1,808 19
Real estate loans..... 2,480 49 1,845 42 1,439 40
Consumer loans to
individuals (1)...... 502 3 307 7 288 7
------- --- ------- --- ------- ---
Total............... $ 7,891 100% $ 5,647 100% $ 5,003 100%
======= === ======= === ======= ===
June 30,
------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Percent- Percent-
Amount age Amount age
-------------- --------------- --------------- ---------------
SBA loans........................... $ 1,452 28% $1,572 26%
Commercial and
industrial loans(2)................ 2,776 20 2,843 20
Real estate loans................... 3,143 47 2,610 51
Consumer loans to individuals (1)... 607 5 409 3
------- --- ------ ---
Total............................... $ 7,978 100% $7,434 100%
======= === ====== ===
- -----------------------------------
(1) Includes equity lines of credit
(2) Includes commercial leases
In allocating the Company's loan loss reserve, management has considered the
credit risk in the various loan categories in its portfolio. While every effort
has been made to allocate the reserve to specific categories of loans,
management believes that any breakdown or allocation of the loan loss reserve
into loan categories lends an appearance of exactness which does not exist, in
that the reserve is utilized as a single unallocated reserve available for
losses on all types of loans.
16
Non-interest Income
- -------------------
Non-interest income decreased by $537 thousand during the first six months of
1998 compared to the previous year's first six months.
During June 1997 the Company recorded a gain of approximately $2.6 million from
the sale and securitization of unguaranteed portions of SBA loans. The Company
completed a securitization of SBA 504 and similar loans during the second
quarter of 1998 and recorded a gain of $826 thousand on this transaction.
The net gain on the sale of government guaranteed loans increased from $357
thousand during the first half of 1997 to $607 thousand for the six months ended
June 30, 1998. Sales of government guaranteed loans were $14,936 thousand in
1997. 1997 sales included $9,176 thousand of Business & Industry ("B & I") loans
and $5,760 thousand of SBA 7(a) loans. Because B&I loans tend to have a lower
yield than SBA loans, the Company intends to sell the government guaranteed
portion of the B&I loans it originates. SBA loan sales were made in 1997
primarily to facilitate the securitization.
The Company intends to continue to hold a significant percentage of the
guaranteed portions of SBA loans in its portfolio; however with the increase in
prepayments management believes it is prudent to sell selected SBA loans into
the secondary market. During June, 1998 a total of $9.1 million of guaranteed
portions of SBA loans was sold. Similar sales are expected for the remaining two
quarters of 1998.
Income related to the Company's servicing assets and interest-only strips
receivable as defined under SFAS 125, net of the amortization of these assets,
increased by $301 thousand from $1,875 thousand for the first six months ended
1997 to $2,176 thousand during the current period. This increase is primarily
related to the June 1997 securitization of $51.3 million in SBA 7(a) 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
$318 thousand during the second quarter. In addition, it is expected that
related to this increase in prepayments, amortization will increase by a minimum
of $630 thousand during the remainder of 1998. During the first six months of
1998 the Company has recorded a valuation allowance on its servicing assets
totaling $150 thousand. The offset to this valuation allowance is a reduction in
service fee income.
Other significant increases in non-interest income include $120 thousand in
merchant credit card fees, $102 thousand in gains on sale of assets, $147
thousand in sundry recoveries and $150 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 six months of 1998 and 1997
(in thousands except percentage amounts):
Six Months Salaries & Occupancy & Other
Ended Average Related Equipment Operating
June 30 Assets (1) Benefits Expenses Expenses
- ----------------------------------------------------------------------------------------------------
1998 $ 805,481 2.9% 0.9% 1.5%
1998 (2) $ 805,481 2.3% 0.8% 1.2%
1997 $ 665,356 2.5% 0.9% 1.3%
(1) Based on average daily balances.
(2) Excluding merger costs
17
The Company incurred one-time charges related to its acquisition of CCBC
totaling $3.9 million during the first half of 1998. Included in salaries and
related costs are merger costs of $2.4 million, and consulting expense included
$627 thousand of merger costs which primarily related to investment banking
fees.
The following table summarizes the principal elements of operating expenses and
discloses the changes and percent of changes for the six months ended June 30,
1998 and 1997 (amounts in thousands except percentage amounts):
Increase (Decrease)
-----------------------
Six Months Ended June 30, Adjusted 1998 over 1997
----------------------------- -----------------------
Merger Amount Percentage
Cost Adjusted ------ ----------
1998 1998(1) 1998 1997
---- ---- ------ ------
Salaries and related benefits...... $11,513 $2,415 $ 9,098 $ 8,364 $ 734 8.8%
Occupancy and equipment............ 3,484 164 3,320 2,900 420 14.5
Insurance.......................... 203 42 161 159 2 1.2
Postage............................ 259 0 259 244 15 6.1
Stationery and supplies............ 385 17 368 323 45 13.9
Telephone.......................... 279 0 279 274 5 1.8
Advertising........................ 588 50 538 391 147 37.6
Legal.............................. 347 217 130 107 23 21.5
Consulting......................... 1,018 627 391 447 (56) (12.5)
Audit and accounting fees.......... 287 131 156 147 9 6.1
Directors' fees and expenses....... 255 0 255 213 42 19.7
Other real estate owned............ 53 0 53 36 17 47.2
Sundry losses...................... 521 155 366 614 (248) (40.3)
Other.............................. 1,880 116 1,764 1,282 482 37.6
------- ------ -------- ------- ------
$21,072 $3,934 $ 17,138 $15,501 $1,637 10.6%
======= ====== ======== ======= ======
(1) Nonrecurring costs related to the Company's acquisition of CCBC.
The increase in salaries and related benefits includes $500 thousand in
commission expense. This primarily relates to commissions earned on the
origination of SBA and similar loans and includes commissions paid on completion
of the Company's 1998 securitization. The increase in occupancy and equipment
includes the upgrading of the Company's PC network and growth in the Company
including the addition of a downtown Sacramento branch and various SBA loan
offices. Advertising expense reflects an expanded advertising budget to support
the Company's growth.
During the first quarter of 1997 the Company engaged an outside consulting firm
to assist in identifying opportunities to reduce operating expenses and to
recommend more efficient methods of operating. The high level of consulting
expense during 1997 is related to this engagement. As a result of this
engagement, sundry losses in 1997 reflect an accrual of $589 thousand for the
estimated salaries and benefits payable related to a reduction in staffing.
Sundry losses in 1998 include approximately $170 thousand in writedowns in the
value of OREO properties.
Provision for Income Taxes
- --------------------------
Provision for income taxes have been made at the prevailing statutory rates and
include the effect of items which are classified as permanent differences for
federal and state income tax. The provision for income taxes was $1,802 thousand
and $2,568 thousand for the six months ended June 30, 1998 and 1997,
respectively, representing 48.1% and 38.2% of income before taxation for the
respective periods. The increase in the 1998 percentage primarily relates to
certain merger expenses which are not deductible for federal and state taxes.
18
Results of Operations (Three months ended June 30, 1998 and 1997)
- ---------------------
As a result of one-time merger-related costs of $3.5 million, the Company
incurred a net loss for the quarter of $79 thousand. Net interest income
increased by $1,035 thousand during the comparison period and the provision for
possible loan and lease losses decreased by $125 thousand. These positive
variances were offset by a decrease in non-interest income of $1,051 thousand
and an increase in non-interest expense of $4,041 thousand. The tax provision
decreased by $1,235 thousand, from $1,651 thousand during the second quarter of
1997 to $416 thousand during the current quarter.
Net Interest Income
- -------------------
The yield on net interest-earning assets decreased from 5.58% during the second
quarter of 1997 to 5.22% during the second quarter of 1998. Consistent with the
six month comparison, yield was negatively affected by a decrease in the
percentage of loans to interest-earning assets and a decrease in loan yields.
This decline in yield was offset by an increase in average interest-earning
assets from $611 million for the three months ended June 30, 1997 to $733
million for the current period.
Yields and interest earned, including loan fees for the three months ended June
30, 1998 and 1997 were as follows (in thousands except percent amounts):
Three Three
Months Months
Ended Ended
06/30/98 06/30/97
-------- --------
Average loans outstanding (1) $536,259 $485,801
Average yields 10.0% 10.1%
Amount of interest and origination fees earned $ 13,389 $ 12,287
(1) Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $374 thousand and $289 thousand for the three months
ended June 30, 1998 and 1997, respectively, yields on average loans outstanding
were 9.7% and 9.9%. The prime rate (upon which a large portion of the Company's
loan portfolio is based) was 8.5% during both periods.
The decline in loan yield includes the effects of 1997's securitization and
market conditions in the Company's service areas.
Average other interest-earning assets, consisting primarily of federal funds
sold and investments in debt securities, totaled $196.3 million during the 1998
quarter and $125.3 million during the 1997 quarter. The average yield on these
investments for the quarters ending June 30, 1998 and 1997 were 5.5% and 5.8%.
As was the case in the six month comparison, the decline in yield includes an
increase in the percentage of average federal funds sold to average other
interest-earning assets from 18.1% during the 1997 period to 44.5% during the
second quarter of 1998.
19
Rates and amounts paid on average deposits, including non-interest bearing
deposits for the three months ended June 30, 1998 and 1997, were as follows (in
thousands except percent amounts):
Three Three
Months Months
Ended Ended
06/30/98 06/30/97
-------- --------
Average deposits outstanding (1) $730,501 $611,345
Average rate paid 3.5% 3.6%
Amount of interest paid or accrued $ 6,368 $ 5,483
Average interest-bearing deposits represented 79.5% of average total deposits
during the 1998 quarter and 81.6% during the 1997 quarter.
The effective interest rates paid on interest-bearing transactions, savings
accounts and time certificates of deposit during the second quarter of 1998 and
1997 were as follows (in thousands except percent amounts):
1998 1997
----------------------------------- ----------------------------------
INTEREST- INTEREST-
BEARING BEARING
TRANSACTION(2) SAVINGS TIME TRANSACTION(2) SAVINGS TIME
----------- ------- -------- ----------- ------- ---------
Average balance (1) $245,697 $24,894 $310,085 $205,943 $23,217 $269,879
Average rate paid 3.1% 2.1% 5.6% 3.0% 2.2% 5.7%
(1) Amount outstanding is the average of daily balances for the periods.
(2) Includes money market accounts.
Provision for Possible Loan and Lease Losses
- --------------------------------------------
The provision of $905 thousand during the second quarter of 1998 includes the
effect of replenishing the allowance for second quarter charge-offs of $815
thousand and the incorporation of CCBC's loans into the Company's loan loss
reserve methodology.
The provision of $1,030 thousand in the second quarter of 1997 includes the
effect of replenishing the allowance for loan and lease losses for charge-offs
of $427 thousand, significant growth in the Company's loan portfolio and revised
estimates of potential losses on two large loans. For a more complete discussion
of the change in provision, refer to the six month comparison.
Non-interest Income
- -------------------
As discussed in the six-month comparison, non-interest income was significantly
affected during the second quarter of 1997 as a result of the gain recognized on
the 1997 securitization of SBA 7(a) loans.
During 1997's second quarter the Company recorded a securitization gain of $2.6
million. The Company also completed a securitization during May of 1998; however
the loans included in the 1998 securitization were SBA 504 and similar loans.
These loans have, on average, a lower yield than the SBA 7(a) loans included in
the 1997 securitization and therefore a lower gain was recorded on the 1998
securitization. 1998's securitization gain totaled $826 thousand.
During the second quarter of 1998, a total of $9.1 million of guaranteed
portions of SBA loans were sold, resulting in a gain of $655 thousand.
Government guaranteed loan sales during the 1997 quarter totaled $12.1 million,
with a gain totaling $265 thousand recorded on sale.
20
1998 sales were exclusively SBA 7(a) loans, while 1997 sales included $7.9
million in B&I loans. 1997 gains were lower than those achieved during 1998
because B&I loan sales tend to produce lower gains than SBA 7(a) sales. B&I
loans, in general, are larger than SBA 7(a) loans but have a lower yield.
Excluding B&I loans, gains on sale of guaranteed portions of loans as a
percentage of loans sold were 7.4% during the 1997 quarter and 7.2% during 1998.
As previously discussed, the Company has increased its amortization of its
servicing assets and interest-only strips receivable in response to an increase
in prepayments of the underlying loans associated with these assets. Servicing
and interest-only strip income, net of amortization and other adjustments,
totaled $990 thousand during the 1998 quarter and $994 thousand during the
second quarter of 1997.
Non-interest Expense
- --------------------
The following table compares the various elements of non-interest expense as an
annualized percentage of total assets for the second quarter of 1998 and 1997
(in thousands except percentage amounts):
Salaries & Occupancy & Other
Three Months Average Related Equipment Operating
Ended June 30 Assets(1) Benefits Expenses Expenses
- ------------- ------ -------- -------- --------
1998 $819,367 3.5% 0.8% 1.7%
1998(2) $819,367 2.3% 0.8% 1.2%
1997 $683,848 2.5% 0.9% 1.4%
(1) Based on average daily balances.
(2) Excluding merger costs.
The following table summarizes the principal elements of operating expenses and
discloses the changes and percent of changes for the three months ended June 30,
1998 and 1997 (amounts in thousands except percentage amounts):
Increase (Decrease)
-----------------------
Three Months Ended June 30, Adjusted 1998 over 1997
----------------------------- -----------------------
Merger Amount Percentage
Cost Adjusted ------ ----------
1998 1998(1) 1998 1997
---- ---- ---- ----
Salaries and related benefits...... $ 7,064 $2,415 $ 4,649 $4,340 $ 309 7.1%
Occupancy and equipment............ 1,728 43 1,685 1,515 170 11.2
Insurance.......................... 114 42 72 80 (8) (10.0)
Postage............................ 126 0 126 139 (13) (9.4)
Stationery and supplies............ 232 17 215 152 63 41.4
Telephone.......................... 120 0 120 140 (20) (14.3)
Advertising........................ 300 50 250 152 98 64.5
Legal.............................. 137 65 72 35 37 105.7
Consulting......................... 816 561 255 299 (44) (14.7)
Audit and accounting fees.......... 154 73 81 57 24 42.1
Directors' fees and expenses....... 73 0 73 121 (48) (39.7)
Other real estate owned............ 25 0 25 14 11 78.6
Sundry losses...................... 423 155 268 599 (331) (55.3)
Other.............................. 1,028 70 958 656 302 46.0
------- ------ ------- ------ -----
$12,340 $3,491 $ 8,849 $8,299 $ 550 6.6%
======= ====== ======= ====== =====
(1) Nonrecurring costs associated with the Company's acquisition of CCBC.
Variances during the quarter related to salaries and related benefits,
consulting, occupancy and equipment, advertising and sundry losses are
consistent with those previously discussed in the six month review.
Included in Directors' fees and expenses is $47 thousand related to an
adjustment required to reflect the decrease in value of the phantom stock shares
allocated to the Company's Directors Deferred Compensation and Stock Award Plan.
21
Provision for Income Taxes
- --------------------------
The provision for income taxes was $416 thousand and $1,651 thousand for the
three months ended June 30, 1998 and 1997, respectively, representing 123.4% and
38.7% of income before taxation for the respective periods. The 1998 percentage
includes the effect of certain merger related expenses which are not deductible
for federal and state income tax.
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 with whom the
Company has significant lending relationships and other third parties to
determine their Year 2000 Compliance readiness and determining 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 has
begun a program of testing compliance. 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.
22
Item 3
- ------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not have
any market risk sensitive instruments entered into for trading purposes.
Management uses several different tools to monitor its interest rate risk. One
measure of exposure to interest rate risk is gap analysis. A positive gap for a
given period means that the amount of interest-earning assets maturing or
otherwise repricing within such period is greater than the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. The Company has a positive gap. Also, the Company uses interest rate
shock simulations to estimate the effect of certain hypothetical rate changes.
Based upon the Company's shock simulations, net interest income is expected to
rise with increasing rates and fall with declining rates.
The Company's positive gap results from the majority of its loans having
floating rates and a significant portion of its investments having a maturity of
one year or less, while a significant portion of its liabilities are non
interest and low interest-bearing accounts that are insensitive to rate changes.
Management has taken several steps to reduce the positive gap of the Company. In
1997, the Company added fixed rate loans and increased the number of longer term
investments. Also, the Company has entered into interest rate swap agreements
with its correspondent banks. The Company intends to continue increasing the
number of fixed rate loans and investments held and the use of derivative
products such as swaps. Also, in 1997, the Company securitized the unguaranteed
portions of loans made under the Small Business Administration's 7(a) program.
Securitization is an effective asset liability management tool because the asset
and liability cash flows and repricings are closely matched.
Included in the 1998 securitization was $7.8 million of fixed rate loans with
interest reset provisions after five to seven years. These loans were priced to
investors at a floating rate which means that the Company has accepted rate risk
with respect to these loans. This further helps mitigate the effect of the
Company's positive gap position. The Company intends to continue using
securitization as a source of funding its loans in the future.
23
The following table sets forth the distribution of the expected maturities of
the Company's interest-earning assets and interest-bearing liabilities as well
as the fair value of these instruments. Expected maturities are based on
contractual payments adjusted for the estimated effect of prepayments. SBA loans
have been assumed to prepay at an average rate of 12% per year. This rate is
consistent with the increase in prepayments experienced on these loans in recent
years. With respect to other loans, the Company has not tracked its historical
prepay speed, but for purposes of this table has utilized an 8% rate, except for
construction loans for which no prepayment is assumed. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the one year or less maturity category (dollars in thousands).
June 30, 1998
----------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------- -------- -------- -------- -------- ---------- ------- ----------
Federal funds sold...................... $ 95,800 $ 0 $ 0 $ 0 $ 0 $ 0 $ 95,800 $ 95,800
Weighted average rate.................. 5.48 5.48
Mutual Funds............................ 2,771 0 0 0 0 0 2,771 2,771
Weighted average yield................. 4.69 4.69
Investment in debt securities........... 35,494 15,853 9,279 7,750 3,332 25,597 97,305 97,305
Weighted average yield(2).............. 5.93 6.12 6.33 6.79 6.31 5.73 6.03
Fixed rate loans........................ 32,545 19,050 16,344 11,725 7,796 17,358 104,818 104,284
Weighted average rate.................. 8.89 9.38 9.33 9.36 9.26 9.09 9.16
Variable rate loans..................... 148,498 65,952 43,589 37,828 35,237 95,654 426,758 432,455
Weighted average rate.................. 9.74 9.87 9.59 9.72 9.55 9.77 9.73
Other Interest-bearing assets........... 6,327 0 0 0 0 609 6,936 6,936
Weighted average rate.................. 5.15 5.88 5.21
--------- -------- -------- -------- -------- --------- -------- --------
Total Interest-earning assets $321,435 $100,855 $ 69,212 $ 57,303 $ 46,365 $ 139,218 $734,388 $739,551
======== ======== ======== ======== ======== ========= ======== ========
Savings deposits(1)..................... $280,509 $ 0 $ 0 $ 0 $ 0 $ 0 $280,509 $280,509
Weighted average rate.................. 3.05 3.05
Time Deposits........................... 279,196 21,203 2,565 3,278 3,095 325 309,662 311,023
Weighted average rate.................. 5.52 5.80 5.92 6.26 6.11 6.55 5.56
Other interest-bearing liabilities...... 2,184 434 1,248 114 1,915 232 6,127 8,146
Weighted average yield................. 9.00 13.80 9.39 11.38 6.95 11.23 8.91
-------- -------- -------- -------- -------- --------- -------- --------
Total interest-bearing liabilities $561,889 $ 21,637 $ 3,813 $ 3,392 $ 5,010 $ 557 $596,298 $599,678
======== ======== ======== ======== ======== ========= ======== ========
(1) Savings deposits include interest-bearing transaction accounts.
(2) Interest on tax-exempt obligations has not been tax effected to include
the related tax benefits in calculating the weighted average yield.
The Company has three interest rate swaps outstanding at June 30, 1998. Terms of
these agreements are as follows:
Notional Company Company Estimated
Amount Maturity Pays Receives Fair Value
- ----------- -------- -------- -------- ----------
$20,000,000 3/99 Prime 8.17% $ 70
$10,000,000 5/01 COFI* plus .65% 3 Month Treasury bill $(60)
$ 900,000 1/04 6.74% One year constant $(67)
maturity Treasury index
* 11th District Cost of Funds index.
24
SierraWest Bancorp
10-Q Filing
June 30, 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 late in 1998 or in the spring of 1999
following final settlement and the payment of settlement amounts.
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.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
SierraWest Bancorp's Annual Meeting of Shareholders was held on
May 28, 1998, at the North Tahoe Convention Center at Kings Beach,
California. The following resolution was distributed to
stockholders and adopted:
1. To elect the following thirteen nominees to serve as
directors until the next Annual meeting and until their
successors are elected and have been qualified:
25
VOTE:
FOR WITHHELD
--- --------
David W. Clark 3,393,187 82,581
Ralph J. Coppola 3,393,926 81,842
William T. Fike 3,393,926 81,842
Richard S. Gaston 3,393,926 81,842
Jerrold T. Henley 3,393,926 81,842
John J. Johnson 3,393,926 81,842
Ronald A. Johnson 3,393,926 81,842
A. Morgan Jones 3,392,116 83,652
Jack V. Leonesio 3,391,934 83,834
William W. McClintock 3,393,889 81,879
Bernard E. Moore 3,393,926 81,842
Gary E. Stein 3,393,926 81,842
Thomas M. Watson 3,393,889 81,879
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
Bancorp filed two Forms 8-K during the second quarter of
1998. The first, dated April 15, 1998, reported the
merger between California Community Bancshares
Corporation and its wholly owned subsidiary, Continental
Pacific Bank, and SierraWest Bancorp and its wholly owned
subsidiary, SierraWest Bank, on April 15, 1998. The
second, dated May 8, 1998, reported a securitization and
sale of $85 million of SBA 504 Loans and similar loans,
$15.5 million of which were included in a pre-funding
account.
26
10-Q Filing
June 30, 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: August 13, 1998 /s/ William T. Fike
---------------------- -------------------
William T. Fike
President, Chief Executive Officer
Date: August 13, 1998 /s/ David C. Broadley
----------------------- ---------------------
David C. Broadley
Executive Vice President, Chief Financial Officer
27