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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-15450
SIERRAWEST BANCORP
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(Exact name of registrant as specified in its charter)
California 68-0091859
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10181 Truckee-Tahoe Airport Road
P.O. Box 61000 Truckee, CA 96160-9010
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (530) 582-3000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value,
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(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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
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Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1999: $163,772,000 (based on closing sales price
at March 15, 1999)
Number of shares of Common Stock outstanding at March 15, 1999: 5,333,335.
TABLE OF CONTENTS
PART I Page No.
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ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . .30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . .30
PART II
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ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK. . . . . . . . . . . . . . . .31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . .32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . .35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . .55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . .59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . 107
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . 107
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 111
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 115
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 117
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K . 118
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
SierraWest Bancorp ("Bancorp", "SWB", or together with its subsidiary, the
"Company") was incorporated under the laws of the State of California on
December 5, 1985 as a bank holding company. Pursuant to a plan of
reorganization, SWB acquired 100% of the outstanding shares of common stock
of SierraWest Bank, then named Truckee River Bank in a one-for-one exchange
of its stock for the stock of SierraWest Bank on July 31, 1986. The
activities of SWB are subject to the supervision of the Board of Governors of
the Federal Reserve System (the "FRB"). SWB may engage, directly or through
subsidiary corporations, in those activities closely related to banking which
are specifically permitted under the Bank Holding Company Act of 1956, as
amended (the "BHC Act"). SWB's principal executive office is located at
10181 Truckee-Tahoe Airport Road, Truckee, California 96161 and its telephone
number is (530) 582-3000.
SierraWest Bank was incorporated under the laws of the State of California as
Truckee River Bank on March 19, 1980, and, with the approval of the
California Commissioner of Financial Institutions (the "Commissioner"),
opened for business on January 20, 1981. Truckee River Bank commenced
operations in Truckee, California, a small tourist-based town located in the
County of Nevada and situated in the High Sierra about 12 miles north of Lake
Tahoe. Truckee River Bank changed its name to SierraWest Bank in early 1996.
SierraWest Bank maintains 20 branch offices in the following communities:
Truckee (two branches), South Lake Tahoe, Tahoe City, Kings Beach, Grass
Valley (two branches), Auburn, Vacaville (two branches), Fairfield (two
branches), Benicia, Vallejo (two branches), Concord and Sacramento (two
branches), California, and in Reno and Carson City, Nevada. In addition,
SierraWest Bank maintains lending offices or agency relationships, primarily
for its SBA lending activities, in the following states: California, Nevada,
Arizona, Florida, Colorado, Alabama, Georgia, Oregon, Tennessee, Texas and
Washington. SierraWest Bank's deposits are insured by the FDIC up to
applicable limits.
In June 1997, SWB acquired Mercantile Bank, formerly a state-chartered
commercial bank with its principal office in Sacramento, California, through
a merger of Mercantile Bank with and into SierraWest Bank. On the
acquisition date, Mercantile Bank had assets of $42.8 million, deposits of
$37.7 million and shareholders' equity of $4.9 million. The consideration
for the acquisition was a combination of cash and shares of SWB common stock
with an aggregate value of approximately $6.6 million. The acquisition was
treated as a purchase for accounting purposes.
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. On the acquisition date, CCBC had assets of $206 million,
deposits of $184 million and shareholders' equity of $15.4 million. 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.
On February 25, 1999, the Company entered into an Agreement and Plan of
Merger ("Plan") with BancWest Corporation ("BancWest"). Under the terms of
the Plan, BancWest will acquire all the outstanding common stock of the
Company in exchange for 0.82 shares of BancWest common stock. The merger,
which is expected to close in the second or third quarter of 1999 is subject
to the approval of the Company's shareholders, various regulatory agencies
and certain other conditions. The transaction is expected to be accounted
for under the pooling-of-interests accounting method.
The Company offers commercial banking services, including the acceptance of
demand, savings and time deposits, and the making of commercial, real estate,
personal, home improvement, automobile and other installment and term loans.
It offers traveler's checks, safe deposit boxes, note collection services,
notary public, ATMs and other customary bank services, except international
banking and trust services. Annuities and mutual fund investments are also
offered through third party providers. Merchant drafts are processed
pursuant to established bank card programs. Additionally, the Company
provides a 24 hour automated telephone inquiry
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service, and a P.C. banking product for its business customers. In 1996, the
Company started a loan purchase program for the acquisition of real estate
loans which it securitizes in marketable parcels.
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 Exchange Act of 1934, as amended, and are
subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to,
the following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins;
general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions;
volatility of rate sensitive deposits; operational risks including data
processing system failures (including the risk that systems may not process
dates after December 31, 1999 properly) or fraud; asset/liability matching
risks and liquidity risks; and changes in the securities markets.
NARRATIVE DESCRIPTION OF BUSINESS
The Company's total assets have grown from $398.5 million at December 31,
1993 to $879.2 million at December 31, 1998, a compound annual increase of
17.1%. The Company's assets grew 11.7% in 1998. For the year ended December
31, 1998, the Company reported net income of $7.7 million, or a return on
average assets of approximately 0.9% and return on average equity of 10.5%.
Excluding costs associated with the Company's acquisition of CCBC, net income
would total $10.5 million and return on average equity would increase to
14.3%. At December 31, 1998, the Company had total loans of $625.0 million,
loan loss reserves of $8.7 million, deposits of $782.6 million and total
equity capital of $78.3 million.
GENERAL LENDING OVERVIEW
The four general areas in which the Company has directed its lending
activities are: SBA loans; residential and non-SBA commercial real estate
loans; commercial loans and consumer loans to individuals (including home
equity lines of credit). As of December 31, 1998, these four categories
accounted for approximately 30%, 49%, 19%, and 2%, respectively, of the
Company's total loan portfolio.
SMALL BUSINESS ADMINISTRATION LENDING
The Company ranked 11th in the nation by dollars of Small Business
Administration ("SBA") government guaranteed ("SBA 7(a)") loans generated by
banks for the SBA's fiscal year ended September 30, 1998 as published by the
SBA. For the fiscal year ending September 30, 1999 the Federal government
approved a level of SBA loans guaranteed of $10 billion.
The SBA is headquartered in Washington, D.C., and operates through ten
regions throughout the United States. The SBA administers three levels of
lender participation in its general business loan program, pursuant to
Section 7(a) of the Small Business Act of 1953, and the rules and regulations
promulgated thereunder. Under the first level of lender participation,
commonly known as the Guaranteed Participant Program or "Section 7(a)", the
lender gathers and processes data from applicants and forwards it, along with
its request for the SBA's guarantee, to the local SBA office. The SBA then
completes an independent analysis and makes its decision on the loan
application. SBA turnaround time on such applications can vary greatly,
depending on the backlog of loan applications.
Under the second level of lender participation, known as the Certified Lender
Program, the lender (the "Certified Lender") gathers and processes the
application and makes its request to the SBA, as in the Guaranteed
Participant Program procedure. The SBA then performs a review of the
lender's credit analysis on an expedited basis, which is generally completed
within three working days. The SBA requires that lenders originate loans
meeting certain portfolio quality and volume criteria before authorizing
lenders to participate as Certified Lenders. Authorization to act as a
Certified Lender is granted independently by each SBA district office.
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The Company operates in California, Nevada, Oregon, Alabama and Tennessee
under the Preferred Lender Program. This designation is the third and
highest lender status granted by the SBA. Under this level of lender
participation, the lender has the authority to approve a loan and to obligate
the SBA to guarantee the loan without submitting an application to the SBA
for credit review. The Preferred Lender is required to promptly notify the
SBA of the approved loan, along with the submission of pertinent SBA
documents. The standards established for participants in the Preferred
Lender Program are more stringent than those for participants in the lower
two levels and involve meeting additional portfolio quality and volume
requirements. The Company may, at its option, submit loans for approval
under the Certified Lender Program.
The Company has, over the last fifteen years, developed an in-house expertise
in the generation and sale of SBA guaranteed loans. The Company's activities
in the SBA loan area are expected to continue to be a significant factor in
the earnings of the Company. In the past, the Company has acquired SBA
loans, mortgage loans and the rights to service these loans from others.
Prior to 1995 the Company sold the guaranteed portion of SBA 7(a) loans
(typically secured by first trust deeds on commercial real estate), generally
70% to 90% of the SBA 7(a) loan value, that it generated in the secondary
marketplace and retained the remaining percentage for its own portfolio. The
percentage of the retained portion of previously sold SBA 7(a) loans to total
loans included in the loan portfolio of the Company at December 31, 1998,
1997 and 1996 was 4%, 4% and 16%, respectively. Beginning in 1995 and
continuing through 1997, the Company retained the guaranteed portions of most
of the loans generated in its portfolio. During 1998 the Company began
selling a significant portion of the guaranteed portions of loans it
originates.
SBA 7(a) loans are made for terms from 7 to 25 years depending on the purpose
of the loan. In addition to being guaranteed by the SBA, most of the
Company's SBA 7(a) loans are collateralized by real estate. In the event of
a default, the Company shares in the proceeds upon the sale of collateral on
a pro rata basis with the SBA, e.g., if the unguaranteed portion of a loan is
20%, then 20% of the net liquidation proceeds would be available to the
Company for payment of the unguaranteed portion of the loan. In addition,
the SBA also shares in the liquidation costs on a pro rata basis.
Since 1983, to support its SBA program, the Company has relied in part on SBA
packagers who refer SBA loans to the Company and provide certain services to
the borrowers. The packagers receive fees of a fixed amount from the
borrower, subject to limits prescribed by the SBA. The packagers also
receive a fee from the Company for referring SBA loans to the Company. The
referral fee payments are included in the basis of the loans and hence are
not disclosed separately in the Company's financial statements. The
Company's relationships with its SBA packagers are informal arrangements.
SBA GUARANTEES. On October 12, 1995 the President signed the Small Business
Lending Enhancement Act of 1995. This act amended the maximum guarantee
percentage for loans made under the SBA's 7(a) program to 80% for loans up to
$100 thousand and 75% for all loans above $100 thousand. The maximum amount
of any loan or loans to any one borrower to whom the guarantee can apply was
set at $750 thousand. At the same time, the fee structure was revised to
include a fee of 0.5% per annum on the guaranteed portion of the outstanding
balance of all loans approved on or after October 12, 1995. As of December
31, 1998, included in total SBA loans of $185.3 million were portions of
loans guaranteed by the SBA totaling $68.8 million.
The SBA guarantee is conditional upon compliance with SBA regulations. In
connection with the underwriting and closing/servicing process, the Company
examines all loan files for compliance with SBA regulations; however, there
can be no assurance that all loans will comply with SBA regulations in all
instances. In the event of a default by a borrower on an SBA loan, if the
SBA establishes that any resulting loss is attributable to significant
technical deficiencies in the manner in which the loan was originated,
documented or funded by the Company, the SBA may seek recovery of funds from
the Company. With respect to the guaranteed portion of SBA loans that have
been sold in the secondary market, the SBA will honor its guarantee and may
then seek reimbursement from the Company in the event a proven loss is deemed
to be attributable to technical deficiencies. Loss of all or part of the SBA
guarantee on a loan could result in a loss to the Company if the underlying
collateral on the loan is insufficient to cover the outstanding loan value on
such loan. The Company maintains insurance coverage of $2.5 million against
losses of the SBA guarantee related to technical deficiencies.
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SBA SERVICING. As of December 31, 1998, 1997 and 1996, the Company serviced
1,612, 1,537 and 1,438 SBA loans, respectively, with a total unpaid
principal balance of approximately $497 million, $457 million and $423
million, respectively.
The servicing of SBA loans entails the collection of principal and interest
payments from borrowers, and for unguaranteed portions securitized and sold
the remittance of required payments to the trustee. For guaranteed portions
of loans sold to investors, servicing also entails the remittance of the
investor's share of principal and interest payments to Colson Securities
Corp. (the exclusive Fiscal and Transfer Agent for the guaranteed portion of
SBA loans sold into the secondary market), the review of financial statements
of borrowers and site inspections. Servicing also entails the taking of
certain actions required to protect the Company's and the SBA's position in
the event of default by the borrower, including the liquidation of collateral.
To compensate it for the cost of servicing, the Company, pursuant to
generally accepted accounting principles ("GAAP"), sets aside part of the
interest receivable on the portion of loans sold to cover its future costs
and a reasonable future profit.
SBA SALES. SBA 7(a) loans are primarily written at variable rates of
interest which are limited to a maximum of 275 basis points over the lowest
prime lending rate published in the Western Edition of THE WALL STREET
JOURNAL. The interest rate on most of the Company's SBA 7(a) loans adjusts
on the first day of each month. With respect to loans sold, the guaranteed
portions of SBA loans are converted into government guaranteed certificates,
which are sold to investors, and which yield for the investor a rate that is
lower than the note rates. The investor may pay a premium over the principal
amount of the loan purchased and additionally a portion of the interest on
the sold portion of the loan will be retained by SierraWest Bank. The
difference between the rate on the loan that is retained by the Company and
the rate that the investor receives plus a fee of 0.5% collected by the SBA
is referred to as the servicing spread. Lenders are required by the SBA to
maintain a minimum of 40 basis points of servicing spread unless loans are
sold for cash premiums, in which case this increases to 100 basis points.
When the SBA lender retains higher levels of servicing spread, lower cash
premiums are received from investors.
Prior to January 1, 1997, the unamortized book value of the servicing spread
less the normal servicing cost was recorded on the Company's balance sheet as
excess servicing assets.
Effective January 1, 1997, the Company adopted SFAS No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES. In accordance with the accounting standards provided by this
statement, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Implementation of SFAS No. 125
had the effect of reclassifying the previously recorded excess servicing
asset into two separate assets. The first asset represents the servicing
spread in excess of 40 basis points and less than or equal to 100 basis
points for those loans sold at a premium. This is referred to as a servicing
asset. All other servicing spread in excess of normal servicing cost is
recorded as an interest-only ("I/O") strip receivable. I/O strips receivable
are classified as interest-only strips receivable available for sale and are
carried at fair value. The servicing asset is carried at cost, less any
required valuation allowance and is included in other assets.
At December 31, 1998, the balance of the servicing asset, net of a valuation
allowance of $420 thousand, was $2.0 million and its market value was also
$2.0 million. The I/O strips receivable were recorded at $22.1 million net
of an unrealized loss of $528 thousand. These assets represent servicing
spread generated from sold guaranteed portions of SBA 7(a) loans, the
unguaranteed portion of SBA 7(a) loans sold in the 1997 securitization,
unguaranteed SBA 504 and similar loans sold in 1998's securitization and sold
guaranteed portions of Business and Industry loans ("B&I"). See "SBA
Securitization" and "Other Government Lending" below. Income from the
servicing spread received for the years ended December 31, 1998, 1997 and
1996, was $7.7 million, $6.3 million and $5.6 million, respectively.
Amortization of the related asset(s) for these same periods was $3.5 million,
$1.7 million and $1.5 million, respectively. The surplus income from the
servicing spread over the amortization represents an important part of the
Company's income.
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Servicing spread primarily represents the servicing spread on previously sold
guaranteed portions of SBA 7(a) loans and securitized loans. In addition to
servicing spread generated from the sale and securitization of SBA loans,
servicing spread has been generated on the sale of the guaranteed portions of
B&I loans. To date servicing spread from this source has not been
significant.
In recording the initial value of the servicing assets and I/O strips
receivable, the Company uses estimates which are made based on management's
expectations of future prepayment rates and other considerations. If actual
prepayments with respect to sold loans occur more quickly than was projected
at the time such loans were sold, the carrying value of the servicing assets
may have to be written down through a charge to earnings in the period of
adjustment. Additionally a decrease in the fair value of the I/O strips
receivable would also be expected under these circumstances. During 1997 and
continuing into 1998, the Company experienced an increase in the prepayment
speed of its SBA loan portfolio. During 1998 the Company recorded a
valuation allowance on its servicing assets totaling $420 thousand. The
offset to this valuation allowance is a reduction in service fee income.
Additionally, during this period the Company has experienced a decline in the
value of its I/O strips receivable.
SBA 504 LOANS. The SBA provides long term financing to small businesses
through its 504 loan program, by partnering with banks to assist small
businesses in buying land, buildings, machinery and equipment. Under this
program, the bank provides 50% of the financing and obtains a first lien
position on the collateral. The SBA works through a local Certified
Development Company to provide 40% of the required financing and the small
business provides 10% of the project cost. There are no government
guarantees provided under this program, however the bank attempts to mitigate
its risk with these loans by having a low loan to value on the collateral,
which is usually real property. Included in the Company's SBA loan portfolio
at December 31, 1998 are loans totaling $67.4 million related to this and
similar lending programs in conjunction with the SBA.
SBA SECURITIZATION. In June 1997 the Company securitized $51.3 million of
the unguaranteed portion of its SBA 7(a) loans. This was the first bank
securitization of this product. The Company booked a gain of $2.6 million on
this securitization. Because of recent changes in SBA regulations the
Company is unlikely to securitize additional unguaranteed portions of its SBA
7(a) loans in the future.
During 1998, the Company completed a securitization of SBA 504 and similar
loans. This securitization included loans totaling approximately $85
million. The securitization included loans generated by the Company through
its loan production offices and branches and loans purchased from third party
financial institutions through the Company's wholesale loan purchase program.
The securitization also included a limited amount of similar conventional
loans where the SBA has not been involved in the loan origination. Because
the average yield on these loans is lower than the average yield on loans in
the Company's 1997 securitization, the gain on this securitization, which
totaled $890 thousand, was substantially lower than the 1997 securitization
gain. The Company intends to continue to securitize this product in
economically viable sized transactions, which the Company considers to be in
excess of $75 million.
OTHER GOVERNMENT LENDING
The U.S. Department of Agriculture Rural Development ("USDA") offers a
guaranteed loan program, known as the B&I Loan Program. This program is
designed to stimulate economic activity in rural communities with populations
of 50,000 or less. Commercial and industrial businesses and real estate
projects are the target of the program. The Bank participates by financing
up to $10,000,000, with the USDA providing an 80% guarantee on loans up to
$5,000,000 and 70% on loans from $5,000,000 to $10,000,000. These guarantees
are similar to those offered through the SBA 7(a) program and can be sold on
the secondary market. Included in the Company's loan portfolio are B&I loans
totaling $28.6 million at December 31, 1998. No sales of B&I loans were made
during 1998.
OTHER LENDING ACTIVITIES
The Company's commercial loans are primarily made to small and medium-sized
businesses and are for terms ranging from one to seven years, with the
majority of loans being due in less than five years. The Bank provides
conventional commercial term real estate loans, both owner occupied and
investor owned, with maturities of 5-10
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years and monthly amortizing payments scheduled over 25 years. Construction
loans are also provided, for residential and commercial purposes, with terms
ranging from 6 to 18 months. Consumer loans are typically for a maximum term
of 36 months for unsecured loans and for a term of not more than the
depreciable life of tangible property used as collateral for secured loans.
Beginning in 1995, the Company provided 100% equipment lease financing to
small and medium-sized businesses and municipalities with terms ranging from
two to seven years. The Company exited its leasing activities during 1997.
LOAN COMMITMENTS
In the normal course of business, the Company has various outstanding
commitments to extend credit that are not reflected in the financial
statements. As of December 31, 1998, the Company had approximately $222
million in undisbursed loan commitments and $4.3 million in standby letters
of credit. About 28% of the undisbursed loan commitments relate to SBA loans,
while the remaining represent undisbursed construction, commercial, real
estate and personal loans (including equity lines of credit). Most of these
off-balance sheet items are or will be secured by real estate or other
assets; however, a portion are unsecured commercial lines of credit.
Off-balance sheet items undergo a level of underwriting scrutiny similar to
the criteria applied to the Company's loan portfolio, and outstanding
balances are monitored to minimize risk and loss exposure.
DISTRIBUTION OF LOANS
The distribution of the Company's loan portfolio, as of the dates indicated,
is shown in the following table (in thousands):
December 31,
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TYPE OF LOAN: 1998 1997 1996 1995 1994
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SBA loans:
SBA guaranteed loans(1). . . . . . . . $ 91,975 $ 82,079 $ 63,142 $ 47,557 $ 17,053
Other SBA loans(2) . . . . . . . . . . 93,326 86,325 85,065 71,321 79,649
--------- --------- --------- --------- ----------
Total SBA Loans . . . . . . . . . . . . 185,301 168,404 148,207 118,878 96,702
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Real estate loans (includes
loans secured primarily by real
estate, except for SBA loans):
Construction and land development . . 68,506 69,723 42,635 41,054 27,663
Mortgage. . . . . . . . . . . . . . . 225,529 186,493 144,463 110,559 96,712
Equity lines of credit. . . . . . . . 15,030 18,127 17,153 14,334 10,670
--------- --------- --------- --------- ----------
Total Real Estate Loans . . . . . . . . 309,065 274,343 204,251 165,947 135,045
--------- --------- --------- --------- ----------
Commercial and industrial loans . . . . 115,656 87,898 65,195 52,047 40,034
Individual and other loans. . . . . . . 9,614 9,954 10,435 10,109 11,211
Lease receivables . . . . . . . . . . . 5,347 13,114 8,304 3,380 202
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Total Loans . . . . . . . . . . . . . . 624,983 553,713 436,392 350,361 283,194
Less allowance for possible loan losses 8,709 7,891 5,647 5,003 4,654
--------- --------- --------- --------- ----------
Total Net Loans . . . . . . . . . . . . $616,274 $545,822 $ 430,745 $ 345,358 $ 278,540
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
(1) Loans guaranteed in part by the SBA which are in process of disbursement,
available for sale, or awaiting sale. The total guaranteed portion was
$68.8 million, $59.9 million, $37.6 million, $30.8 million and $12.2
million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(2) Includes the unguaranteed retained portion of loans for which the
guaranteed portion has been sold to investors and loans on which the
Company has a first lien position on collateral and the SBA has secondary
liens.
CREDIT RISK MANAGEMENT
In managing its loan portfolio, the Company utilizes procedures designed to
achieve an acceptable level of quality and to bring any potential losses or
potential defaults in existing loans to the attention of the appropriate
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management personnel. As used in this discussion, the term "loan"
encompasses both loans and leases. Each loan officer is granted a lending
limit by the Chief Credit Officer, subject to review and approval by the
Board of Directors of SierraWest Bank. Each lending officer has primary
responsibility to conduct credit and documentation reviews of the loans for
which he or she is responsible. The Chief Credit Officer is responsible for
the general supervision of the loan portfolio and adherence by the loan
officers to the Company's loan policy.
Loan officers evaluate the applicant's financial statements, credit reports,
business reports and plans and other data to determine if the credit and
collateral satisfy the Company's standards as to historic debt service
coverage, reasonableness of projections, strength of management, sufficiency
of secondary repayment and SBA and B&I eligibility rules, if applicable.
Recommended applications are approved by loan officers up to their designated
lending limits. Those loans in excess of individual lending limits are
approved by the Chief Credit Officer or other officer with appropriate
administrative lending authority. If a loan exceeds the Chief Credit
Officer's lending limit, it is forwarded to the Directors' Loan Committee for
approval. Approved SBA loan applications not made under the Preferred Lender
Program are then submitted to the district SBA office for approval. All SBA
loans are secured by various collateral including, where appropriate, real
estate, machinery and equipment, inventory and accounts receivable, or such
other assets as are specified in the SBA loan authorization. In the case of
the Company's SBA loans, approximately 80% were collateralized by commercial
real estate at December 31, 1998. Prior to submission of the application to
the SBA for guarantee, as required, any real property to be taken as
collateral is appraised by independent appraisers.
SierraWest Bank's management presents written reports to the Directors' Loan
Committee monthly, including the Allowance for Loan and Lease Loss analysis
and Lending Activity Summary. The Chief Credit Officer also presents a
statistical analysis of loan delinquencies by loan type. Management and the
Board of Directors of SierraWest Bank also review all loan evaluations made
during periodic examinations by the Superintendent of Financial Institutions
of the State of California, the FDIC and by external and internal personnel.
The Directors' Loan Committee of SierraWest Bank reviews and approves the
Bank's credit policy, as well as management reports on the quality of the
loan portfolio.
The Allowance for Loan and Lease Loss analysis takes into consideration an
analysis of several components to the lending portfolio. Provisions are
based on several criteria, including loan exposure by grade of the loan and
collateral coverage, type of credit and a subjective assessment of various
factors affecting the loan portfolio.
The problem loans graded Special Mentioned or worse are analyzed by the loan
officer on a quarterly or semi-annual basis, depending on the severity of the
loan grade and level of loss potential. This analysis is documented in
writing with each problem loan analyzed for credit quality, collateral
adequacy and potential exposure based on liquidation collateral values
(primarily real estate). Based on historical trends the Company allocates
general reserves to its loan and lease portfolio. A 1% general reserve is
allocated to the covered portion of the principal and a specific reserve is
allocated to the uncovered portion, ranging from 10% to 50%, depending on
severity of the loan grade. Other reserves are allocated, if it is determined
there are circumstances that would warrant additional reserves (e.g.
potential environmental problems, disruptions in the company, temporary
economic setbacks). The documentation for all changes to and from problem
loan grades and accompanying loss reserve analysis is approved by Credit
Administration management. No loss reserve provisions are allocated for the
government guaranteed portions of loans. Pass loans are reserved as a pool
at 1%, regardless of collateral pledged.
As a pool, equipment leases, net of municipal leases, are reserved at 2.4%.
Credit card and Ready Reserve (overdraft lines) balances are reserved at 5%.
Reserves are allocated at 1% of one-sixth of the undisbursed loan proceeds,
on the theory that these loans are, on the average, fully disbursed over six
months.
In addition to the 1% reserve, the bank applies a reserve factor to the pass
loans based on several discretionary factors. The areas assessed on a
quarterly basis by the Chief Credit Officer cover the following issues:
Credit Policy (adequacy), Economy (stability), Volume (loan growth, portfolio
distribution), Management (adequacy, staffing issues, etc), Credit Review
(internal and external results), Concentrations (risk potential),
Competitive/Regional (environment and economic factors), Past Due/Classified
(portfolio trends) and Year 2000 (risk assessment efforts). Each area is
graded from Excellent to Poor, with a Satisfactory rating requiring no
-9-
adjustment, an Excellent rating resulting in a negative 0.02% adjustment and
less than Satisfactory ratings resulting in increased reserve adjustments at
0.02% incremental adjustments. Other adjustments are Marginally Satisfactory
+0.02%, Needs Improvement +0.04%, Fair +0.06% and Poor +0.08%. A composite
of the grade factors in the areas provides the additional reserve to be
allocated against the pass loans. The adjustment for the assessment of the
borrower's Y2K efforts was introduced in the first quarter of 1998.
The aggregate calculated minimum reserve level is compared to the actual
level of reserves and a level based on an informal calculation of the
Interagency Recommended formula. These factors, in addition to potential
problem credits and anticipated losses and recoveries in the near future,
determine the level of loan loss provisions to be allocated for the month.
This determination is based on collaboration between Credit Administration
and the Controller's Department.
The bank is in the process of reassessing its Allowance for Loan and Lease
Loss methodology to bring it more in line with industry practices. Under
consideration is the development of allocation factors for Special Mentioned
and Substandard loans to more clearly reflect the bank's loss experience
using migration analysis. The revised factors should then be allocated as a
pool to the Special Mentioned and Substandard loans, in addition to the
current allocation for Doubtful loans. The calculation of specific reserves
would be focused on loans with higher risk of loss, with a focus on loans not
adequately covered by collateral. Discretionary factors would be used to
account for differences in the current loss rates versus historical loss
rates developed from the migration analysis. Prior to implementation, the
revised methodology is to be discussed with the bank's accountants,
regulatory bodies and the bank's external credit review consultants for
acceptability and conformity with industry best practices. While these
factors are essentially subjective, management considers the allowance of
$8.7 million at December 31, 1998 to be adequate.
The Company's credit services department is responsible for monitoring,
collecting and liquidating loans. In addition, on a selective basis, the
servicing staff conducts site inspections after loan funding and periodically
during the life of the loan to verify the use of the proceeds and maintenance
of collateral and to assist in the collection process and management of
classified loans.
ASSET QUALITY
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, in the process of collection
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.
Loans for which the collateral has been repossessed are written down to fair
value and classified as Other Real Estate Owned ("OREO") or, if the
collateral is personal property, as other assets, on the Company's financial
statements.
-10-
The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated (amounts in thousands except percentage amounts).
December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- -----------
NONPERFORMING ASSETS:
Nonaccrual loans:
SBA . . . . . . . . . . . . . . . $ 4,736 $ 5,307 $ 4,985 $ 5,351 $ 2,423
Other . . . . . . . . . . . . . . 3,928 1,642 448 1,174 1,317
In-substance foreclosures. . . . . . 0 0 0 0 572
Other real estate owned. . . . . . . 1,059 1,534 596 940 916
--------- --------- --------- --------- -----------
Total nonperforming assets. . . . $ 9,723 $ 8,483 $ 6,029 $ 7,465 $ 5,228
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Accruing loans past due 90 days or more:
SBA . . . . . . . . . . . . . . . $ 2,795 $ 1,127 $ 1,071 $ 816 $ 1,754
Other . . . . . . . . . . . . . . 361 449 1,128 285 505
Restructured loans (in compliance
with modified terms) . . . . . . . $ 1,916 $ 1,922 $ 1,249 $ 548 $ 194
Nonperforming assets to
total assets (1) . . . . . . . . . 1.1% 1.1% 0.9% 1.5% 1.3%
Allowance for possible loan and lease
losses to nonaccrual loans . . . . 100.5% 113.6% 103.9% 76.7% 124.4%
- ---------
(1) Nonperforming assets exclude restructured loans in compliance with
modified terms and accruing loans past 90 days or more.
Of total gross loans and leases at December 31, 1998, $8.7 million were
considered to be impaired. The allowance for possible loan and lease losses
included $1.1 million related to these loans. The amount of interest
received and recognized on these impaired loans in 1998 was $419 thousand.
The average recorded investment in impaired loans during 1998 was $7.3
million.
Of total gross loans and leases at December 31, 1997, $6.9 million were
considered to be impaired. The allowance for possible loan and lease losses
included $867 thousand related to these loans. The amount of interest
received and recognized on these impaired loans in 1997 was $416 thousand.
The average recorded investment in impaired loans during 1997 was $6.8
million.
While the portfolio has grown significantly in 1998, the level of
nonperforming loans as a percentage of total loans has remained steady, with
nonaccrual loan totals reducing in the SBA guaranteed products, offset by
increases on non-SBA products. Other Real Estate Owned totals have declined
both in numbers and dollars, with a quicker turnover in foreclosed property
seen in 1998.
Although the level of nonperforming assets will depend on the future economic
environment, as of March 15, 1999, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $570
thousand in potential problem loans as to 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.
-11-
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 pertinent ratios during the periods and as of the dates indicated
(dollars in thousands).
December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Average loans. . . . . . . . . . . . . . $ 553,756 $ 496,633 $ 396,668 $ 313,736 $ 273,873
Total loans at end of period . . . . . . 624,983 553,713 436,392 350,361 283,195
Allowance for possible loan and lease
losses: Balance--beginning of period . $ 7,891 $ 5,647 $ 5,003 $ 4,654 $ 4,562
--------- --------- --------- --------- ---------
Actual charge-offs:
SBA. . . . . . . . . . . . . . . . . . 863 820 114 595 447
Commercial and industrial. . . . . . . 730 681 554 454 511
Leases . . . . . . . . . . . . . . . . 133 14 84 0 0
Real estate. . . . . . . . . . . . . . 56 30 264 143 206
Installment. . . . . . . . . . . . . . 285 169 73 115 150
--------- --------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . 2,067 1,714 1,089 1,307 1,314
--------- --------- --------- --------- ---------
Less recoveries:
SBA. . . . . . . . . . . . . . . . . . 210 57 87 20 74
Commercial and industrial. . . . . . . 274 159 183 28 188
Leases . . . . . . . . . . . . . . . . 0 6 0 0 0
Real estate. . . . . . . . . . . . . . 1 13 26 0 0
Installment. . . . . . . . . . . . . . 30 60 16 14 3
--------- --------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . 515 295 312 62 265
--------- --------- --------- --------- ---------
Net charge-offs. . . . . . . . . . . . . 1,552 1,419 777 1,245 1,049
Allowance applicable to sold loans . . . 0 0 0 0 0
Provision for possible loan and lease
losses . . . . . . . . . . . . . . . . 2,370 2,799 1,421 1,594 1,141
--------- --------- --------- --------- ---------
Acquisition. . . . . . . . . . . . . . 0 864 0 0 0
--------- --------- --------- --------- ---------
Balance--end of period . . . . . . . . . $ 8,709 $ 7,891 $ 5,647 $ 5,003 $ 4,654
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratios:
Net loans charged off to average
loans outstanding . . . . . . . . . . 0.28% 0.29% 0.20% 0.40% 0.38%
Net loans charged off to total loans
at end of period. . . . . . . . . . . 0.25 0.26 0.18 0.36 0.37
Provision for possible loan and lease
losses to average loans . . . . . . . 0.43 0.56 0.36 0.51 0.42
Provision for possible loan and lease
losses to total loans at end of period 0.38 0.51 0.33 0.45 0.40
Net loans charged off to end of
period allowance for possible
loan and lease losses . . . . . . . . 17.8 18.0 13.8 24.9 22.5
Allowance for possible loan and lease
losses to total loans and leases
at end of period. . . . . . . . . . . 1.39 1.43 1.29 1.43 1.64
- ----------
Net loan loss activity by product remains fairly consistent between 1997 and
1998, with the overall increase in net charge-offs attributable to
installment loans and other products. The bulk of the increase came from
unusual/infrequent items: a charge-off of $135 thousand, which has since been
recovered, and a $133 thousand loss on a commercial lease.
The overall allowance for loan loss reserves to total loans at the end of
1998 has declined slightly to 1.39%, from 1.43% for 1997. A review of
charge-off activity by category for the major lending categories of
commercial, construction/real estate and government lending loans, reveals a
stable to declining charge-off rate. While relative increases were seen in
the consumer and lease products, those totals are small and were
significantly affected by one-time items.
The unallocated portion of reserves is 6.6% at 12/31/98, down from 9.2% at
12/31/97. For the purposes of the table on page 14 these unallocated
portions of reserves have been allocated to the various loan categories. The
reduction of reserve levels is supported by a reduced level of problem loans
to total loans from period to period,
-12-
a flat net charge-off percentage and an improved subjective assessment,
resulting in a decline in the discretionary factor from 80 basis points to 40
basis points. This improvement resulted from improvements in credit
administration and the credit review process.
In 1998 there was a slight increase in the ratio of classified loans (loans
classified in accordance with regulatory guidelines) to total loans from 5.6%
to 5.7%; however, the profile of classified loans shows a positive shift
during the year from non-performing substandard and doubtful credits to
substandard credits. While delinquencies have increased from 2.8% to 3.2%,
the bulk of the increase is seen in a few large, conforming real estate loans.
-13-
The following table sets forth management's historical allocation of the
allowance for possible loan 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 (dollars in thousands).
December 31,
------------------------------------------------
1998 1997
--------------------- ----------------------
Amount Percentage Amount Percentage
------- ---------- ------- ----------
SBA loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,342 30% $ 2,227 30%
Commercial and industrial loans (2). . . . . . . . . . . . . . . 3,048 19 2,682 18
Real estate loans. . . . . . . . . . . . . . . . . . . . . . . . 3,949 49 2,480 49
Consumer loans to individuals(1) . . . . . . . . . . . . . . . . 370 2 502 3
------- ---------- ------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,709 100% $ 7,891 100%
------- ---------- ------- ----------
------- ---------- ------- ----------
December 31,
-------------------------------------------------------------------------
1996 1995 1994
---------------------- --------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- ------- ---------- ------- ----------
SBA loans. . . . . . . . . . . . . . . . $ 1,561 33% $ 1,468 34% $ 2,372 34%
Commercial and industrial loans(2) . . . 1,934 18 1,808 19 865 14
Real estate loans. . . . . . . . . . . . 1,845 42 1,439 40 1,205 44
Consumer loans to individuals(1) . . . . 307 7 288 7 212 8
-------- ---------- ------- ---------- ------- ----------
Total. . . . . . . . . . . . . . . . $ 5,647 100% $ 5,003 100% $ 4,654 100%
-------- ---------- ------- ---------- ------- ----------
-------- ---------- ------- ---------- ------- ----------
- ----------
(1) Includes equity lines of credit.
(2) Includes commercial leases.
In allocating the Company's allowance for possible loan and lease losses,
management has considered the credit risk in various loan categories in its
portfolio. Historically, most of the Company's loan losses have been in its
commercial lending area, including local commercial loans and SBA loans.
From inception of its SBA lending program in 1983, the Company has sustained
relatively low loan losses from these loans, averaging less than 0.5% of
loans outstanding per year. Most of the Company's other loan losses have
been for loans to businesses in the bank's local service areas, including the
Lake Tahoe basin and Reno, Nevada. The service area has expanded to
Sacramento and along the Highway 80 corridor to the San Francisco Bay Area
with the establishment of a commercial lending office in Sacramento in 1996,
the acquisition of Mercantile Bank in 1997 and the acquisition of Continental
Pacific Bank in 1998.
Because the Company's residential real estate loans consist primarily of
construction lending with prearranged loan takeouts, losses on such loans
have been minimal. The Company has increased its lending in conforming
commercial real estate development projects centered in the Sacramento and
Reno markets.
While every effort has been made to allocate the allowance to specific
categories of loans, management believes that any allocation of the allowance
for possible loan and lease losses into loan categories lends an appearance
of exactness which does not exist, in that the allowance is utilized as a
single unallocated allowance available for losses on all types of loans.
-14-
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table sets forth the distribution by maturity date of certain
of the Company's loan categories (in thousands) as of December 31, 1998. In
addition, the table shows the distribution between total loans with
predetermined (fixed) interest rates and those with variable (floating)
interest rates (in thousands). Floating rates generally fluctuate with
changes in the prime rate of leading banking institutions or other indexes
such as the five year Treasury, or may reset after a defined period based on
a predefined index.
Year Ended
December 31, 1998
-----------------------------------------------------
After One
Within But Within After
One Year(1) Five Years Five Years Total
----------- ----------- ----------- ----------
Real estate - construction . . . . . . . $ 55,743 $ 5,243 $ 7,520 $ 68,506
Commercial, except SBA . . . . . . . . . 75,973 37,160 2,523 115,656
SBA. . . . . . . . . . . . . . . . . . . 4,539 26,208 154,553 185,300
Distribution between fixed
and floating interest rate:
Fixed interest rates . . . . . . . . . 19,755 13,612 32,495 65,862
Floating interest rates. . . . . . . . 116,500 54,999 132,101 303,600
- ----------
(1) Demand loan and overdrafts are shown as "Within One Year"
-15-
AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST INCOME AND
EXPENSE
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amount of interest income from average interest-earning assets and
resultant yields and the dollar amounts of interest expense and average
interest-bearing liabilities and resultant rates (in thousands except
percentage amounts):
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest Balance Rate Interest
-------- ------ -------- -------- ------ -------- -------- ------ --------
ASSETS:
Interest-earning assets:
Loans(1) . . . . . . . . . . $553,756 9.86% $54,593 $496,633 10.14% $50,383 $396,688 10.39% $41,210
Investment Securities:
Taxable. . . . . . . . . . 91,782 5.81 5,330 87,678 6.11 5,353 55,259 5.94 3,285
Tax exempt(3). . . . . . . 17,596 5.01 881 12,074 5.14 620 10,387 5.24 544
Mutual funds . . . . . . . . 2,446 1.84 45 2,857 2.35 67 1,342 7.30 98
Federal funds sold(5). . . . 75,960 5.25 3,990 36,798 5.33 1,960 21,486 5.22 1,121
Other . . . . . . . . . . . 5,158 5.10 263 3,888 4.68 182 2,225 5.08 113
-------- -------- -------- -------- -------- --------
Total interest-earning
assets . . . . . . . . . 746,698 8.72 65,102 639,928 9.15 58,565 487,387 9.51 46,371
Allowance for possible
loan losses. . . . . . . . . . (8,090) (6,912) (5,646)
Non-interest-earning assets:
Cash and due from
banks. . . . . . . . . . . 39,517 38,018 28,586
Premises and equipment,
net. . . . . . . . . . . . 13,012 14,031 13,409
I/O strips receivable and
servicing assets(2). . . . 22,455 17,621 14,304
Other assets . . . . . . . . 20,385 14,413 12,558
-------- -------- --------
Total average assets . . . . $833,977 $717,099 $550,598
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing liabilities:
Transaction accounts(4). . . $251,246 2.94% 7,385 $218,239 3.00% 6,551 $167,855 2.85% $ 4,781
Savings accounts . . . . . . 24,876 2.02 503 23,524 2.14 504 22,830 2.12 484
Certificates of deposit. . . 308,363 5.53 17,052 272,611 5.66 15,442 205,731 5.55 11,427
Convertible debentures . . . 1,540 3.25 50 5,564 5.09 283 13,204 8.12 1,072
Other liabilities. . . . . . 4,457 14.14 630 3,507 12.57 441 3,254 6.02 196
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities. . . . . . . . . 590,482 4.34 25,620 523,445 4.44 23,221 412,874 4.35 17,960
Non-interest-bearing liabilities:
Deposits . . . . . . . . . . 158,175 124,000 88,455
Other liabilities. . . . . . 12,075 9,625 4,817
-------- -------- --------
Total liabilities. . . . . . 760,732 657,070 506,146
Total shareholders'
equity . . . . . . . . . . 73,245 60,029 44,452
-------- -------- --------
Total liabilities and
shareholders'
equity . . . . . . . . . . $833,977 $717,099 $550,598
-------- -------- -------- -------- -------- --------
-------- -------- --------
Net interest income. . . . . . $39,482 $35,344 $28,411
-------- -------- --------
-------- -------- --------
Interest income as a
percentage of interest -
earning assets . . . . . . 8.72% 9.15% 9.51%
Interest expense as a
percentage of interest -
earning assets . . . . . . 3.43 3.63 3.68
------ ------ ------
Net interest margin. . . . . . 5.29% 5.52% 5.83%
------ ------ ------
------ ------ ------
- ----------
(1) Includes nonaccrual loans with an average balance of $7.3 million, $6.8
million, and $6.1 million for the years ended December 31, 1998, 1997 and
1996, respectively.
(2) Represents excess servicing assets in 1996.
(3) The tax equivalent yield on tax exempt investment securities was 7.37%,
7.45% and 7.60% in 1998, 1997 and 1996. The tax equivalent yield is
calculated by dividing the adjusted yield by one minus the Federal Tax
rate. The adjusted yield is determined by subtracting the Tefra penalty
from the unadjusted tax exempt investment yield. The unadjusted tax exempt
investment yield is computed by dividing tax exempt interest income by the
average historical cost of tax exempt securities. The Tefra penalty is
computed by dividing total interest expense (annualized) by average assets
and multiplying the result by 20% (Tefra disallowance) and 35% or 34%
(Federal Tax rate).
(4) Includes money market savings accounts.
(5) Includes securities purchased under agreements to resell.
-16-
INVESTMENT SECURITIES & INVESTMENTS IN MUTUAL FUNDS
The Company's current investment policy provides for the purchase of U.S.
Treasury securities, obligations of U.S. government agencies, U.S. government
sponsored agencies, corporate bonds, commercial paper, banker's acceptances,
pass-through mortgage-backed securities, adjustable rate mortgage pass-through
securities, collateralized mortgage obligations, asset-backed securities,
municipal general obligation and revenue bonds, mutual funds and certificates of
deposit. The Company's policy requires all corporate bonds, commercial paper,
mortgage-backed securities, collateralized mortgage obligations or municipal
securities be rated "A" or better by any nationally recognized rating agency.
If a local municipality is issuing an unrated bond, the Company may purchase it
after normal credit underwriting procedures are performed.
The Company's investment committee reviews all securities transactions on a
monthly basis and presents a monthly report to the Board of Directors of the
Company covering this review. Under California law, SierraWest Bank may not
invest an amount exceeding 15% of its shareholders' equity in the securities of
any one obligor, subject to certain exceptions (e.g., obligations of the United
States and the State of California). Acceptable securities (i.e., Federal or
state government or any county or municipality securities) may be pledged to
secure public deposits in excess of $100 thousand.
The following table summarizes the amounts and the distribution of the Company's
investment securities (in thousands):
December 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Book Market Book Market Book Market
Value(1) Value Value(1) Value Value(1) Value
--------- --------- --------- --------- --------- ---------
U.S. Treasury securities . . . . . . . . $ 29,461 $ 29,461 $ 47,646 $ 47,646 $ 27,403 $ 27,402
Securities of U.S. government
agencies. . . . . . . . . . . . . . . . 38,189 38,189 14,349 14,349 18,325 18,325
Securities of states and
political subdivisions. . . . . . . . . 21,917 21,917 14,070 14,070 10,675 10,675
Mortgage-backed securities . . . . . . . 43,652 43,652 30,919 30,919 29,557 29,557
FHLB Stock . . . . . . . . . . . . . . . 763 763 592 592 490 490
--------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . . $ 133,982 $ 133,982 $ 107,576 $ 107,576 $ 86,450 $ 86,449
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
- ----------
(1) Securities held to maturity are stated at cost, adjusted for amortization
of premium and accretion of discount. Securities available for sale are
recorded at fair value. There were no securities classified as held to
maturity at December 31, 1998.
In addition, in prior years, the Company has invested in mutual funds whose
assets are invested primarily in U.S. government securities. There were no
investments in mutual funds at December 31, 1998. At December 31, 1997 and 1996
mutual funds with an estimated market value of $0.7 million and $1.3 million
have been classified as available for sale. At these same dates the Company had
recorded an unrealized loss on mutual funds, net of tax, of $47 and $99
thousand. The weighted average maturity of portfolio securities held by the
mutual funds at December 31, 1997 and 1996 was 7.1 and 7.2 years.
-17-
MATURITY OF INVESTMENT SECURITIES
The following table presents the maturities for investment securities (except
for FHLB Stock with a carrying value of $763 thousand) as of December 31, 1998
(dollars in thousands).
December 31, 1998
----------------------------------
Weighted
Book Average Market
Value Yield Value
--------- --------- ---------
U.S. Treasury securities:
Within 1 year. . . . . . . . . . . . . . . . . . . . . . . $ 29,461 5.94% $ 29,461
U.S. government agencies:
Within 1 year. . . . . . . . . . . . . . . . . . . . . . . 5,387 5.11 5,387
After 1 year but within 5 years. . . . . . . . . . . . . . 27,790 5.15 27,790
After 5 years but within 10 years. . . . . . . . . . . . . 404 7.48 404
Over 10 years. . . . . . . . . . . . . . . . . . . . . . . 4,608 6.55 4,608
--------- ---------
Total U. S. government agencies securities . . . . . . . 38,189 5.34 38,189
--------- ---------
Securities of states and political subdivisions(1):
After 1 year but within 5 years. . . . . . . . . . . . . . 2,056 5.48 2,056
After 5 years but within 10 years. . . . . . . . . . . . . 3,810 5.20 3,810
Over 10 years. . . . . . . . . . . . . . . . . . . . . . . 16,051 5.00 16,051
--------- ---------
Total securities of states and political subdivisions. . 21,917 5.08 21,917
--------- ---------
Mortgage - backed securities:. . . . . . . . . . . . . . . . 43,652 6.37 43,652
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133,219 5.77 $ 133,219
--------- ---------
--------- ---------
(1) Interest on these tax-exempt obligations has not been tax effected to
include the related tax benefits in calculating the average yield.
DEPOSITS
As of December 31, 1998, the Company had a total of $443.8 million in demand
deposits (including money market savings and checking accounts), with an average
account balance of $14.3 thousand; $24.5 million in savings deposits for
individuals and corporations, with an average balance of $2.6 thousand; and
$314.2 million in CDs, of which $159.9 million were in the form of CDs in
denominations of $100 thousand or more. Average CD balances for the year ended
December 31, 1996 were 42.4% of average total deposits. Average CD balances
increased to 42.7% of average total deposits for the year ended December 31,
1997, but decreased to 41.5% of average total deposits for the year ended
December 31, 1998. Deposit accounts at SierraWest Bank are insured by the FDIC
to the maximum amount permitted by law.
As of December 31, 1998, approximately 3% of total deposits were held on behalf
of public entities. Deposits of public entities in excess of amounts insured by
the FDIC are secured by SierraWest Bank by pledging securities. Included in
deposits at December 31, 1998 were deposits of $12.9 million which were
classified as broker deposits.
In 1992, SierraWest Bank began to make available to its customers money market
investment funds and annuities. Volume has been increasing during recent years;
however income from this source is not significant. The Company does not
believe that placement by customers of funds in these alternative investment
sources has had any overall negative impact on the level of the Banks' deposits.
-18-
The Company's business is subject to some seasonal influences. Deposits tend to
decrease during the off-season for tourism in "the Sierra", which is between
March and May and between September and November.
The following table indicates the maturity of the Company's CDs of $100 thousand
or more as of December 31, 1998 (dollars in thousands):
December 31, 1998
-----------------------------
Percentage
Balance of Total
---------- ----------
Three months or less $ 77,812 48.7%
Over three months through six months 39,294 24.6
Over six months through twelve months 30,892 19.3
Over twelve months 11,907 7.4
---------- ----------
Total $ 159,905 100.0%
---------- ----------
---------- ----------
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
The Company competes for deposits and loans principally with major commercial
banks, other independent banks, savings and loan associations, savings banks,
thrift and loan associations, credit unions, mortgage companies, insurance
companies and other lending institutions. With respect to deposits, additional
significant competition arises from corporate and governmental debt securities,
as well as money market mutual funds. Several of the nation's largest savings
and loan associations and commercial banks have a significant number of branch
offices in the areas in which the Company conducts operations. Among the
advantages of the larger of these institutions are their ability to make larger
loans, finance extensive advertising campaigns, access international money
markets and generally allocate their investment assets to regions of highest
yield and demand.
The Company ranked 11th in the nation by dollars of SBA 7(a) loans generated by
banks for the SBA's fiscal year ended September 30, 1998.
The Company's competitive position with respect to deposit-gathering in its
market places is illustrated in the following chart(1) (dollars in thousands):
Total Deposits Held
# of Company # of Banking Deposits Held by all Banks
County State Branches Offices by Company and Offices
- ------------- -------------- ------------ ------------ ------------- -------------
El Dorado California 1 37 $ 28,695 $ 1,069,942
Nevada California 4 30 $ 145,941 $ 981,885
Placer California 3 69 $ 91,741 $ 2,050,169
Sacramento California 2 192 $ 125,150 $ 10,135,152
Solano California 7 53 $ 168,427 $ 1,952,791
Contra Costa California 1 219 $ 11,112 $ 15,500,256
Carson City Nevada 1 17 $ 65,580 $ 697,253
Washoe Nevada 1 80 $ 127,825 $ 3,323,543
A total of 14 financial institutions in Nevada County at June 30, 1998 were
included in the above survey. Of these 14, SierraWest Bank ranked second in
terms of total deposits held. In Placer County, SierraWest Bank ranked eighth
out of 22 institutions. In Solano County, California, SierraWest Bank ranked
fifth out of 15 financial institutions. In Washoe County, Nevada, SierraWest
Bank ranked seventh out of 12 financial institutions and in Carson City County,
SierraWest Bank ranked seventh out of 11 financial institutions. As disclosed
above, SierraWest Bank's presence in the other counties is not significant.
-19-
(1) Based on the annual survey of banking office deposits as of June 30, 1998
conducted by the FDIC. Banking offices include each banking office of
commercial banks, savings institutions, and each U.S. branch of a foreign bank
for all FDIC insured commercial banks, savings institutions, and U.S. branches
of foreign banks.
-20-
SUPERVISION AND REGULATION
THE EFFECT OF GOVERNMENTAL POLICY ON BANKING
The earnings and growth of SierraWest Bank are affected not only by local
market area factors and general economic conditions, but also by government
monetary and fiscal policies. For example, the Federal Reserve influences
the supply of money through its open market operations in U.S. Government
securities and adjustments to the discount rates applicable to borrowings by
depository institutions and others. Such actions influence the growth of
loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of SierraWest Bank cannot be predicted.
As a consequence of the extensive regulation of commercial banking activities
in the United States, the business of the Company is particularly susceptible
to being affected by the enactment of Federal and state legislation which may
have the effect of increasing or decreasing the cost of doing business,
modifying permissible activities or enhancing the competitive position of
other financial institutions. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of the
Company. See "Recently Enacted Legislation" herein.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
Bancorp is a bank holding company subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). Bancorp reports to, registers with, and may be
examined by, the Federal Reserve. The Federal Reserve also has the authority
to examine Bancorp's subsidiary. The costs of any examination by the Federal
Reserve are payable by Bancorp.
The Federal Reserve has significant supervisory and regulatory authority over
Bancorp and its affiliates. The Federal Reserve requires Bancorp to maintain
certain levels of capital. See "--Capital Standards." The Federal Reserve
also has the authority to take enforcement action against any bank holding
company that commits any unsafe or unsound practice, or violates certain
laws, regulations or conditions imposed in writing by the Federal Reserve.
See "--Prompt Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of (or, if
it is considered "well-managed" give prior notice to) the Federal Reserve
before it exercises a controlling influence over, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the
assets of any bank or bank holding company. Thus, Bancorp is required to
obtain the prior approval of or give prior notice to the Federal Reserve
before it acquires, merges or consolidates with any bank or bank holding
company; any company seeking to acquire, merge or consolidate with Bancorp
also would be required to obtain the approval of or give prior notice to the
Federal Reserve.
Bancorp is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than banking, managing banks, or providing services to
affiliates of the holding company. A bank holding company, with the approval
of the Federal Reserve, may engage, or acquire the voting shares of companies
engaged, in activities that the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. A bank holding company must demonstrate that the benefits
to the public of the proposed activity will outweigh the possible adverse
effects associated with such activity.
The Federal Reserve generally prohibits a bank holding company from declaring
or paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve's policy is that a bank holding company should
not continue its existing rate of cash dividends on its common stock unless
its net income is sufficient to fully fund each dividend and its prospective
rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
-21-
Transactions between Bancorp and its subsidiary are subject to a number of
other restrictions. Federal Reserve policies forbid the payment by bank
subsidiaries of management fees which are unreasonable in amount or exceed
the fair market value of the services rendered (or, if no market exists,
actual costs plus a reasonable profit). Additionally, a bank holding company
and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit, sale or lease of
property, or furnishing of services. Subject to certain limitations,
depository institution subsidiaries of bank holding companies may extend
credit to, invest in the securities of, purchase assets from, or issue a
guarantee, acceptance, or letter of credit on behalf of, an affiliate,
provided that the aggregate of such transactions with each affiliate may not
exceed 10% of the capital stock and surplus of the institution, and the
aggregate of such transactions with all affiliates may not exceed 20% of the
capital stock and surplus of such institution. Bancorp may only borrow from
depository institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the loan.
Further, Bancorp may not sell a low-quality asset to a depository institution
subsidiary.
Commercial banking organizations, insured depository institutions, and
mortgage bankers are subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations. In
addition to substantive penalties and corrective measures that may be
required for a violation of such laws, the Federal banking agencies may take
compliance with such laws into account when regulating and supervising other
activities. The Federal Reserve may not approve applications to acquire the
voting shares of another insured depository institution based on incorrect
reporting of home mortgage lending data, and the possibility that applicants
may have engaged in discriminatory treatment of minorities in mortgage
lending in violation of the Equal Credit Opportunity Act.
BANK REGULATION AND SUPERVISION
As a California state-chartered bank, SierraWest Bank is regulated,
supervised and regularly examined by the California Department of Financial
Institutions ("DFI"). Under California law, SierraWest Bank is subject to
various restrictions on, and requirements regarding, its operations and
administration including the maintenance of branch offices and automated
teller machines, capital and reserve requirements, deposits and borrowings,
stockholder rights and duties, and investment and lending activities.
SierraWest Bank is not a member of the Federal Reserve System; SierraWest
Bank, however, is subject to certain regulations of the Federal Reserve
including reserve requirements. The primary Federal regulator of SierraWest
Bank is the FDIC.
CAPITAL STANDARDS
The FDIC and other Federal banking agencies have risk based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects
the degree of risk associated with a banking organization's operations for
both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are recorded as
off balance sheet items. Under these guidelines, nominal dollar amounts of
assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. government securities,
to 100% for assets with relatively higher credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance
sheet items. The regulators measure risk-adjusted assets and off balance
sheet items against both total qualifying capital (the sum of Tier 1 capital
and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital
consists of common stock, retained earnings, noncumulative perpetual
preferred stock and minority interests in certain subsidiaries, less most
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses, cumulative preferred stock,
term preferred stock, term subordinated debt and certain other instruments
with certain characteristics of equity. The inclusion of elements of Tier 2
capital are subject to certain other requirements and limitations of the
Federal banking agencies. Since December 31, 1992, the Federal banking
agencies have required a minimum ratio of qualifying total capital to
risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio
of Tier 1 capital to risk-adjusted assets and off balance sheet items of 4%.
-22-
In addition to the risk-based guidelines, Federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated
in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets
must be 3%. It is improbable, however, that an institution with a 3%
leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For
all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum.
Thus, the effective minimum leverage ratio, for all practical purposes, must
be at least 4% to 5%. In addition to these uniform risk based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
The following tables present the capital ratios for the Company and
SierraWest Bank, computed in accordance with their applicable regulatory
guidelines, compared to the standards for well-capitalized depository
institutions, as of December 31, 1998 (dollars in thousands).
The Company
----------------------------------------------------------------------
Actual
------------------------- To Be Well Capitalized For Capital
Qualifying Under Prompt Corrective Adequacy
Capital Ratio Action Provisions Purposes
---------- ------ ----------------------- -----------
Leverage . . . . . . . $76,146 8.8% N/A 4.0%
Tier 1 Risk Based. . . 76,146 11.2 N/A 4.0
Total Risk Based . . . 84,684 12.4 N/A 8.0
SierraWest Bank
----------------------------------------------------------------------
Actual
------------------------- To Be Well Capitalized For Capital
Qualifying Under Prompt Corrective Adequacy
Capital Ratio Action Provisions Purposes
---------- ------ ----------------------- -----------
Leverage . . . . . . . $67,712 7.8% 5.0% 4.0%
Tier 1 Risk Based. . . 67,712 9.9 6.0 4.0
Total Risk Based . . . 76,277 11.1 10.0 8.0
Effective in 1997 regulatory reports of condition and income are reported on
a GAAP basis; however regulatory capital ratios are calculated in accordance
with the regulatory agency's capital standards. This can result in
significant differences in the amount of capital reported under GAAP and the
amount included in the regulatory ratios. Future changes in FDIC regulations
or practices could further reduce the amount of capital recognized for
purposes of capital adequacy. Such changes could affect the ability of the
Company to grow and could restrict the amount of profits, if any, available
for the payment of dividends.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the regulators to improve capital standards to take account of risks
other than credit risk. In June 1996 a joint agency policy statement was
issued by all of the Federal banking agencies to provide guidance on sound
practices for managing interest rate risk. The agencies did not in the
policy statement elect to implement a standardized measure and quantitative
capital charge, though the matter was left open for future implementation.
Rather, the policy statement provided standards for the banking agencies to
evaluate the adequacy and effectiveness of a bank's interest rate risk
management and guidance to bankers for managing interest rate risk.
Specifically, effective interest rate risk management requires that there be
(i) effective board and senior management oversight of the bank's interest
rate risk activities, (ii) appropriate policies and practices in place to
control and limit risks, (iii) accurate and timely identification and
measurement of interest rate risk, (iv) an adequate system for monitoring and
reporting risk exposures and (v) appropriate internal controls for effective
risk management.
-23-
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
FDICIA requires each Federal banking agency to take prompt corrective action
to resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital
ratios. Applicable regulations defined the following five categories in which
an insured depository institution will be placed, based on the level of its
capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the
following categories based on capital measures indicated below:
"WELL CAPITALIZED"
Total risk-based capital of at least 10%;
Tier 1 risk-based capital of at least 6%;
and Leverage ratio of at least 5%.
"ADEQUATELY CAPITALIZED"
Total risk-based capital of at least 8%;
Tier 1 risk-based capital of at least 4%; and
Leverage ratio of at least 4%.
"UNDERCAPITALIZED"
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4%.
"SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated
as though it were in the next lower capital category if the appropriate
Federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The Federal banking
agencies, however, may not treat an institution as "critically
undercapitalized" unless its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely
monitored by the appropriate Federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a
guarantee of performance issued by the holding company. Further restrictions
and sanctions are required to be imposed on insured depository institutions
that are critically undercapitalized. The most important additional measure
is that the appropriate Federal banking agency is required to either appoint
a receiver for the institution within 90 days, or obtain the concurrence of
the FDIC in another form of action.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the Federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator
or receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
Additionally, a holding company's inability to serve as a source of strength
to its subsidiary banking organizations could serve as an additional basis
for a regulatory action against the holding company.
-24-
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions and
required Federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
the use of brokered deposits and the aggregate extensions of credit by a
depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
In addition to the statutory limitations, FDICIA requires the Federal banking
agencies to prescribe, by regulation, standards for all insured depository
institutions for such things as classified loans and asset growth. The
Riegle Community Development and Regulatory Improvement Act of 1994 amended
FDICIA to allow the Federal banking regulators to implement these standards
by either regulation or guidelines. See "Interstate Banking."
Federal regulations prescribe uniform guidelines for real estate lending.
The regulations require insured depository institutions to adopt written
policies establishing standards, consistent with such guidelines, for
extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
In July 1995, the federal banking agencies published Interagency Guidelines
Establishing Standards for Safety and Soundness. By adopting the standards
as guidelines, the agencies retained the authority to require an institution
to submit to an acceptable compliance plan as well as the flexibility to
pursue other more appropriate or effective courses of action given the
specific circumstances and severity of an institution's noncompliance with
one or more standards.
The federal banking agencies have issued an interagency policy statement
that, among other things, establishes certain benchmark ratios of loan loss
reserves to certain classified assets. The benchmark set forth by such
policy statement is the sum of (i) 100% of assets classified loss; (ii) 50%
of assets classified doubtful; (iii) 15% of assets classified substandard;
and (iv) estimated credit losses on other assets over the upcoming 12 months.
This amount is neither a "floor" nor a "safe harbor" level for an institution's
allowance for loan losses.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is
subject to statutory and regulatory restrictions which limit the amount
available for such distribution depending upon the earnings, financial
condition and cash needs of the institution, as well as general business
conditions. FDICIA prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited
exceptions, making capital distributions, including dividends, if, after such
transaction, the institution would be undercapitalized.
In addition to the restrictions imposed under Federal law, banks chartered
under California law generally may only pay cash dividends to the extent such
payments do not exceed the lesser of retained earnings of the bank or the
bank's net income for its last three fiscal years (less any distributions to
shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the
prior approval of the DFI in an amount not exceeding the greatest of the
bank's retained earnings, the bank's net income for its last fiscal year, or
the bank's net income for its current fiscal year.
State and federal regulators also have authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly
prohibited by statute.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
-25-
SierraWest Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate
income neighborhoods. In addition to substantive penalties and corrective
measures that may be required for a violation of certain fair lending laws,
the federal banking agencies may take compliance with such laws and CRA into
account when regulating and supervising other activities.
In March 1994, the Federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment, and evidence of disparate impact.
In 1996, new compliance and examination guidelines for the CRA were
promulgated by each of the federal banking regulatory agencies, fully
replacing the prior rules and regulatory expectations with new ones
ostensibly more performance based than before that were fully phased in as of
July 1, 1997. The guidelines provide for streamlined examinations of smaller
institutions.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The
FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any borrowings not
repaid by asset sales are to be repaid through insurance premiums assessed to
member institutions. Such premiums must be sufficient to repay any borrowed
funds within 15 years and provide insurance fund reserves of $1.25 for each
$100 of insured deposits. FDICIA also provides authority for special
assessments against insured deposits. See Recently Enacted Legislation - 1996
Act. Effective November 14, 1995, the new assessment rate schedule for
deposit premiums ranges from $0 per $100 of deposits to $.27 per $100 of
deposits applicable to BIF members.
FDICIA requires all insured depository institutions to undergo a full-scope,
on-site examination by their primary Federal banking agency at least once
every 12 months. A special rule allows for examination of certain small well
capitalized and well managed institutions every 18 months. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate Federal banking agency against each institution
or affiliate as it deems necessary or appropriate.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), eliminated many of the restrictions to interstate
banking and branching. The Interstate Banking Act permits full nationwide
interstate banking to adequately capitalized and adequately managed bank
holding companies beginning in 1995 without regard to whether such
transaction is expressly prohibited under the laws of any state. The
Interstate Banking Act's branching provisions permit full nationwide
interstate bank merger transactions to adequately capitalized and adequately
managed banks beginning June 1, 1997. However, states retained the right to
completely opt out of interstate bank mergers and to continue to require that
out-of-state banks comply with the states' rules governing entry. Banks
located in states that opt out are not permitted to have interstate branches.
Only Texas opted out of interstate banking.
The Riegle-Neal Amendments Act of 1997 amends federal law to provide that
branches of state banks that operate in other states will be governed in most
cases by the laws of the home state, rather than the laws of the host state.
Exceptions are that a host state may apply its own laws of community
reinvestment, consumer protection, fair lending and interstate branching.
Host states cannot supplement or restrict powers granted by a bank's home
state. The amendment will assure state chartered banks with interstate
branches uniform treatment in most areas of their operation.
-26-
The laws governing interstate banking and interstate bank mergers provide
that transactions, which result in the bank holding company or bank
controlling or holding in excess of ten percent of the total deposits
nationwide or thirty percent of the total deposits statewide, will not be
permitted except under certain specified conditions. However, any state may
waive the thirty percent provision for such state. In addition, a state may
impose a cap of less than thirty percent of the total amount of deposits held
by a bank holding company or bank provided such cap is not discriminatory to
out-of-state bank holding companies or banks.
Assembly Bill 1482 (known as the Caldera, Weggeland and Killea California
Interstate Banking and Branching Act of 1995 and referred to herein as
"CIBBA") permits an out-of-state bank to acquire or merge with a California
bank that has been in existence for at least five years. California law
provides an express prohibition against interstate branching through the
acquisition of a branch in California without the acquisition of the entire
California bank. The Interstate Banking Act also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through
the establishment of de novo or new branches by out-of-state banks.
California law expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of the Interstate
Banking Act. CIBBA also amends the California Financial Code to include
agency provisions to allow California banks to establish affiliated insured
depository institution agencies out of state as allowed under the Interstate
Banking Act.
Other provisions of CIBBA amend the intrastate branching laws, govern the use
of shared ATMs, allow the repurchase of stock with the prior written consent
of the Superintendent, and amend intrastate branch acquisition and bank
merger laws. Another banking bill enacted in California in 1995 was Senate
Bill 855 (known as the State Bank Parity Act and is referred to herein as the
"SBPA"). SBPA went into effect on January 1, 1996, and its purpose is to
allow a California state bank to be on a level playing field with a national
bank by the elimination of certain disparities and allowing the California
Commissioner of Financial Institutions authority to implement certain changes
in California banking law which are parallel to changes in national banking
law, such as closer conformance of California's version of Regulation O to
the FRB's version of Regulation O.
ECONOMIC GROWTH AND REGULATORY PAPERWORK REDUCTION ACT
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act")
as part of the Omnibus Appropriations Bill was enacted on September 30, 1996
and includes many banking related provisions. The most important banking
provision was the recapitalization of the Savings Association Insurance Fund
("SAIF"). The 1996 Act provided for a one time assessment of approximately 65
basis points per $100 of deposits of SAIF insured deposits including Oakar
deposits payable on November 30, 1996. For the years 1997 through 1999 the
banking industry was required to assist in the payment of interest on FICO
bonds that were issued to help pay for the clean up of the savings and loan
industry. Banks currently pay approximately 1.3 cents per $100 of deposits
for this special assessment, and after the year 2000, banks will pay
approximately 2.4 cents per $100 of deposits until the FICO bonds mature in
2017. The 1996 Act also had certain regulatory relief provisions for the
banking industry. Lender liability under the Superfund was eliminated for
lenders who foreclose on property that is contaminated provided that the
lenders were not involved with the management of the entity that contributed
to the contamination. There is a five year sunset provision for the
elimination of civil liability under the Truth in Savings Act. The FRB and
Department of Housing and Urban Development are to develop a single format
for Real Estate Settlement Procedures Act and Truth in Lending Act ("TILA")
disclosures. TILA disclosures for adjustable mortgage loans have been
simplified. Significant revisions are made to the Fair Credit Reporting Act
("FCRA") including requiring that entities which provide information to
credit bureaus conduct an investigation if a consumer claims the information
to be in error. Regulatory agencies may not examine for FCRA compliance
unless there is a consumer complaint investigation that reveals a violation
or where the agency otherwise finds a violation. In the area of the Equal
Credit Opportunity Act, banks that self-test for compliance with fair lending
laws will be protected from the results of the test provided that appropriate
corrective action is taken when violations are found.
ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual
and interim reporting standards for an enterprise's business
-27-
segments and related disclosures about its products, services, geographic
areas, and major customers. This statement will not impact the Company's
consolidated financial position, results of operations or cash flows.
Management evaluates the Company's performance as a whole and does not
allocate resources based on the performance of different lending or
transaction activities and reports its operations on the basis of a single
business segment.
In June 1998, the Financial Accounting Standards Board issued 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 is in the process of
determining the impact of SFAS No. 133 on the Company's financial statements,
which is not expected to be material.
-28-
EMPLOYEES
As of March 15, 1999, the Company employed 371 persons (286 full-time and 85
part-time). The Company's employees are not represented by a union or
covered by a collective bargaining agreement and management believes that, in
general, its employee relations are good.
-29-
ITEM 2. PROPERTIES
The Company currently maintains an administrative facility in Truckee,
California which is utilized by Bancorp and SierraWest Bank. During 1997,
the Company sold and leased back its real property in Carson City, Nevada.
The Company maintains twenty branches, 12 stand-alone loan production
offices, and one remote off-site ATM machine.
The Company owns a 32,000 sq. ft. office building in Vacaville, California.
The building was partially occupied by CCBC's corporate offices and currently
approximately 84% of this building is leased to third party tenants. The
Company does not anticipate retaining future ownership of this building. All
branches and loan production offices are leased to the Company except for the
administrative facility and the Reno branch which are owned by the Company.
The Company is currently constructing a new branch facility in Vacaville,
California to replace a current leased facility. The Company believes that
it has adequate space within its current facilities to provide for expansion
and growth in the near future.
ITEM 3. 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 adjacent to the tanks but
was aware of the existence of the tanks and disclosed this to the purchaser.
A formal settlement agreement has been executed by the parties and is
awaiting final court approval by the Eastern California District of the U. S.
District Court where an action was filed in the summer of 1995. Under the
terms of the formal settlement, the Bank will pay a small sum to a common
fund for remediation of the property and the Bank further agrees to refinance
on behalf of the existing owner of the property two senior liens and to
consolidate certain other debt securing the property into a new deed of trust
contingent upon remediation of the contamination by a licensed contractor and
approval by the appropriate governmental agencies.
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 effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
-30-
PART II
ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK
-------------------------------------
Bancorp's Common Stock is quoted on the Nasdaq National Market under the
symbol "SWBS". The following table sets forth the high and low sales prices
of the Bancorp's stock as reported on Nasdaq for the periods indicated.
High Low
---- -----
1997
- ----
First Quarter. . . . . . . . . . . . . $18.69 $14.64
Second Quarter . . . . . . . . . . . . 20.12 16.68
Third Quarter. . . . . . . . . . . . . 25.75 18.81
Fourth Quarter . . . . . . . . . . . . 36.00 24.75
1998
- ----
First Quarter. . . . . . . . . . . . . 39.00 30.00
Second Quarter . . . . . . . . . . . . 39.00 29.75
Third Quarter. . . . . . . . . . . . . 35.75 20.50
Fourth Quarter . . . . . . . . . . . . 28.00 18.00
1999
- ----
First Quarter (through March 15, 1999) 32.56 23.50
At March 15, 1999, there were 1,405 shareholders of record. Additionally
management believes there are approximately 2,000 beneficial holders of its
Common Stock. On March 15, 1999, the closing sales price of Bancorp's common
stock on Nasdaq was $32.25.
Bancorp paid cash dividends of $0.40 per share in 1998, and as adjusted for a
5% stock dividend paid August 29, 1997, $0.31 per share in 1997. On February
25, 1999 Bancorp's Board of Directors declared a dividend of $0.26 per share,
payable on March 31, 1999. During 1999, Bancorp's Board of Directors will
continue its policy of reviewing dividend payments on a semi-annual basis.
During the first six months of 1997, $8.5 million of the Company's 8 1/2 %
convertible debentures were converted into 852 thousand shares of common
stock. In addition, the Company acquired $2.4 million of debentures with the
acquisition of CCBC. These debentures were called for redemption during 1998
with all but $44 thousand converting to common stock at a conversion rate of
$15.39 per share.
There are regulatory limitations on cash dividends that may be paid by
Bancorp, as well as limitations on cash dividends that may be paid by the
Bank, which could, in turn, limit Bancorp's ability to pay dividends. Under
Federal law and applicable Federal regulations, capital distributions would
be prohibited, with limited exceptions, if a bank were categorized as
"undercapitalized." Further, the FDIC has the authority to prohibit the
payment of dividends by SierraWest Bank if it finds that such payment would
constitute an unsafe or unsound practice. See "Supervision and
Regulation--Bank Regulation and Supervision."
-31-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
The following table presents selected consolidated financial data for the
Company as of and for each of the five years in the period ended December 31,
1998. The statements of operations data and statements of financial
condition data for each of the five years in the period ended December 31,
1998 are derived from the consolidated financial statements of the Company
and the notes thereto. The information below is qualified in its entirety by
the detailed information included elsewhere herein and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the Consolidated Financial
Statements and Notes thereto included elsewhere herein. Average assets and
equity are computed as the average of daily balances (dollars in thousands,
except per share amounts).
At or for the Year Ended
December 31,
---------------------------------------------------------------------
1998 1997(6) 1996(6) 1995(6) 1994(6)
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA
Total interest income. . . . . . . . . . . . . . . . $ 65,102 $ 58,565 $ 46,371 $ 38,141 $ 30,610
Total interest expense . . . . . . . . . . . . . . . 25,620 23,221 17,960 13,972 9,693
--------- --------- --------- --------- ---------
Net interest income. . . . . . . . . . . . . . . . . 39,482 35,344 28,411 24,169 20,917
Provision for possible loan and lease losses . . . . 2,370 2,799 1,421 1,594 1,141
--------- --------- --------- --------- ---------
Net interest income after provision for possible
loan and lease losses. . . . . . . . . . . . . . . 37,112 32,545 26,990 22,575 19,776
Total non-interest income. . . . . . . . . . . . . . 14,601 13,686 9,370 10,147 10,839
Total non-interest expense . . . . . . . . . . . . . 38,268 31,610 28,478 27,574 23,964
Provision for income taxes . . . . . . . . . . . . . 5,767 5,673 2,995 1,827 2,427
--------- --------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 $ 3,321 $ 4,224
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
STATEMENTS OF FINANCIAL CONDITION DATA
Total assets . . . . . . . . . . . . . . . . . . . . $ 879,169 $ 786,746 $ 639,718 $ 497,601 $ 416,707
Loans and leases, net(1) . . . . . . . . . . . . . . 616,274 545,822 430,745 345,358 278,541
Allowance for possible loan and lease losses . . . . 8,709 7,891 5,647 5,003 4,654
Total deposits . . . . . . . . . . . . . . . . . . . 782,552 701,001 569,994 435,388 359,603
Convertible debentures . . . . . . . . . . . . . . . 0 2,468 12,210 14,025 14,025
Notes payable. . . . . . . . . . . . . . . . . . . . 2,650 2,650 2,650 0 0
Shareholders' equity . . . . . . . . . . . . . . . . 78,270 69,383 47,285 42,095 38,889
PER SHARE DATA(2)
Book value . . . . . . . . . . . . . . . . . . . . . $ 14.76 $ 13.82 $ 12.67 $ 11.95 $ 10.98
Net income:
Basic. . . . . . . . . . . . . . . . . . . . . . . 1.49 1.96 1.35 0.94 1.20
Diluted. . . . . . . . . . . . . . . . . . . . . . 1.41 1.73 1.10 0.81 1.00
Cash dividends declared(4) . . . . . . . . . . . . . 0.40 0.40 0.38 0.31 0.14
Shares used to compute net income per share:
Basic. . . . . . . . . . . . . . . . . . . . . . . 5,151 4,566 3,622 3,525 3,518
Diluted. . . . . . . . . . . . . . . . . . . . . . 5,474 5,280 5,014 4,951 4,859
Dividend payout ratio:
Basic. . . . . . . . . . . . . . . . . . . . . . . 26.7% 20.2% 28.0% 33.2% 11.3%
Diluted. . . . . . . . . . . . . . . . . . . . . . 28.2 23.0 34.3 38.5 13.5
SELECTED RATIOS
Return on average assets . . . . . . . . . . . . . . 0.9% 1.2% 0.9% 0.7% 1.0%
Return on average shareholders' equity . . . . . . . 10.5 14.9 11.0 8.2 11.3
Net interest margin(3) . . . . . . . . . . . . . . . 5.3 5.5 5.8 6.3 6.0
Average shareholders' equity to average assets . . . 8.8 8.4 8.1 9.2 9.1
-32-
At or for the Year Ended
December 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
ASSET QUALITY RATIOS
Allowance for possible loan and lease losses
to total loans and leases . . . . . . . . . . . . . . . . . . 1.4% 1.4% 1.3% 1.4% 1.6%
Allowance for possible loan and lease
losses to nonaccrual loans. . . . . . . . . . . . . . . . . . 100.5 113.6 103.9 76.7 124.4
Net charge-offs to average loans outstanding . . . . . . . . . 0.3 0.3 0.2 0.4 0.4
Nonaccrual and restructured performing loans to total loans. . 1.7 1.6 1.5 2.0 1.4
Nonperforming assets to total assets(5). . . . . . . . . . . . 1.1 1.1 0.9 1.5 1.3
- ------------------
(1) The term "Loans and leases, net" means total loans, including loans held
for sale, less the allowance for possible loan and lease losses.
(2) All per share data has been adjusted to reflect stock dividend and stock
splits and has been restated under the guidelines of SFAS 128. See "Market
for Bancorp's Common Stock." Book value per share is calculated as total
shareholders' equity divided by the number of shares outstanding at the end
of the period.
(3) Ratio of net interest income to total average earning assets.
(4) Dividends declared per share is calculated by dividing the amount of cash
dividends by the weighted average number of common shares.
(5) For purposes of this schedule nonperforming assets are defined as
nonaccrual loans and other real estate owned.
(6) 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.
-33-
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table sets forth the Company's unaudited data regarding
operations for each quarter of 1998 and 1997. This information, in the
opinion of management, includes all adjustments (which are of a normal
recurring nature) necessary to state fairly the information therein. The
operating results for any quarter are not necessarily indicative of results
for any future period (amounts in thousands except per share data).
Quarter
----------------------------------------------
First (2) Second Third Fourth
---------- -------- -------- ---------
1998
- ----
Interest income. . . . . . . . . . . . . . . $ 16,014 $ 16,075 $ 16,543 $ 16,470
Interest expense . . . . . . . . . . . . . . 6,221 6,543 6,685 6,171
---------- -------- -------- ---------
Net interest income. . . . . . . . . . . . . 9,793 9,532 9,858 10,299
Provision for possible loan and lease losses 525 905 440 500
---------- -------- -------- ---------
Net interest income after provision for possible
loan and lease losses. . . . . . . . . . . 9,268 8,627 9,418 9,799
Total non-interest income. . . . . . . . . . 2,870 4,050 3,944 3,737
Total non-interest expense . . . . . . . . . 8,733 12,340 8,621 8,574
---------- -------- -------- ---------
Income before provision for income taxes . . 3,405 337 4,741 4,962
Provision for income taxes . . . . . . . . . 1,386 416 1,921 2,044
---------- -------- -------- ---------
Net income (loss). . . . . . . . . . . . . . $ 2,019 $ (79) $ 2,820 $ 2,918
---------- -------- -------- ---------
---------- -------- -------- ---------
Basic earnings per share (1) . . . . . . . . $ 0.40 $ (0.02) $ 0.54 $ 0.55
Diluted earnings per share (1) . . . . . . . 0.37 (0.02) 0.51 0.54
1997 (2)
- --------
Interest income. . . . . . . . . . . . . . . $ 13,139 $ 14,085 $ 15,508 $ 15,833
Interest expense . . . . . . . . . . . . . . 5,305 5,588 6,160 6,168
---------- -------- -------- ---------
Net interest income. . . . . . . . . . . . . 7,834 8,497 9,348 9,665
Provision for possible loan and lease losses 539 1,030 615 615
---------- -------- -------- ---------
Net interest income after provision for possible
loan and lease losses. . . . . . . . . . . 7,295 7,467 8,733 9,050
Total non-interest income. . . . . . . . . . 2,220 5,101 3,073 3,292
Total non-interest expense . . . . . . . . . 7,067 8,299 7,852 8,392
---------- -------- -------- ---------
Income before provision for income taxes . . 2,448 4,269 3,954 3,950
Provision for income taxes . . . . . . . . . 917 1,651 1,509 1,596
---------- -------- -------- ---------
Net income . . . . . . . . . . . . . . . . . $ 1,531 $ 2,618 $ 2,445 $ 2,354
---------- -------- -------- ---------
---------- -------- -------- ---------
Basic earnings per share (1) . . . . . . . . $ 0.39 $ 0.59 $ 0.49 $ 0.47
Diluted earnings per share (1) . . . . . . . 0.32 0.52 0.46 0.44
(1) All per share data has been adjusted to reflect stock dividend and stock
splits and has been restated under the guidelines of SFAS 128.
(2) 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.
-34-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company derives income from four principal revenue sources: (1) net
interest income, which is the difference between the interest income the Company
receives on interest-bearing loans and investments and the interest expense it
pays on interest-bearing liabilities such as deposits and borrowings; (2) the
origination and sale of SBA loans including the securitization during 1998 of
$85 million in SBA 504 and similar loans and during 1997 of $51 million in
unguaranteed portions of SBA loans; (3) servicing fee income and interest only
strip income which results from the ongoing servicing of loans sold by the
Company; and (4) service charges and fees on deposit accounts.
On April 15, 1998, the Company completed the acquisition of California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB), utilizing the pooling-of-interests method of accounting and
accordingly, the Company's historical consolidated results have been restated.
Net income for the year ended December 31, 1998 decreased 14%, from $8.9 million
during 1997 to $7.7 million during 1998. This decrease resulted from an
increase of 21% in non-interest expense. Of the $6.7 million increase in
non-interest expense during 1998, $4.0 million relates to non-recurring costs
incurred from the Company's acquisition of CCBC. Excluding the after tax effect
of these costs would result in net income of $10.5 million during 1998.
Net income for the year ended December 31, 1997 increased by 83%, from $4.9
million during 1996 to $8.9 million during 1997. This increase resulted
primarily from an increase in net interest income related to strong asset growth
and a $2.6 million gain realized on 1997's securitization.
The following table summarizes the operating results for the years ended
December 31, 1998, 1997, and 1996 (amounts in thousands except percentage
amounts):
December 31, 1998 over 1997 1997 over 1996
-------------------------------- ----------------------- -------------------------
1998 1997 1996 Amount Percentage(1) Amount Percentage(1)
------- ------- ------- ------- ------------- -------- -------------
Total interest income. . . . . . $65,102 $58,565 $46,371 $ 6,537 11.2% $ 12,194 26.3%
Total interest expense . . . . . 25,620 23,221 17,960 2,399 10.3 5,261 29.3
------- ------- ------- ------- --------
Net interest income. . . . . . . 39,482 35,344 28,411 4,138 11.7 6,933 24.4
Provision for possible
loan and lease losses . . . . 2,370 2,799 1,421 (429) (15.3) 1,378 97.0
------- ------- ------- ------- --------
Net interest income after
provision for possible
loan and lease losses . . . . 37,112 32,545 26,990 4,567 14.0 5,555 20.6
Total non-interest income. . . . 14,601 13,686 9,370 915 6.7 4,316 46.1
Total non-interest expense . . . 38,268 31,610 28,478 6,658 21.1 3,132 11.0
------- ------- ------- ------- --------
Income before provision for taxes 13,445 14,621 7,882 (1,176) (8.0) 6,739 85.5
Provision for income taxes . . . 5,767 5,673 2,995 94 1.7 2,678 89.4
------- ------- ------- ------- --------
Net Income . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887 $(1,270) (14.2) $ 4,061 83.1
------- ------- ------- ------- --------
------- ------- ------- ------- --------
- ----------
(1) Increase (decrease) over previous year's amount.
NET INTEREST INCOME. Net interest income is influenced by a number of factors
such as the volume and distribution of interest earning assets, the rate charged
on loans for interest and fees, the rate earned on investments and federal funds
sold and the rate paid for deposits and other liabilities.
-35-
The following table sets forth (in thousands), for the periods indicated, a
summary of the changes in interest income and interest expense resulting from
changes in volume and from changes in rates. Income from tax-exempt securities
has not been presented on a tax-equivalent basis as it is not significant. For
purposes of this table, the change not solely attributable to volume or rate has
been allocated to change due to rate.
1998 over 1997 1997 over 1996
--------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN INTEREST INCOME:
Loans. . . . . . . . . . . . . . . . $ 5,795 $(1,585) $ 4,210 $10,383 $(1,210) $ 9,173
Mutual funds . . . . . . . . . . . . (10) (12) (22) 111 (142) (31)
Taxable securities . . . . . . . . . 251 (274) (23) 1,927 141 2,068
Tax-exempt securities. . . . . . . . 284 (23) 261 88 (12) 76
Federal funds sold(2). . . . . . . . 2,086 (56) 2,030 799 40 839
Other. . . . . . . . . . . . . . . . 59 22 81 84 (15) 69
--------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . 8,465 (1,928) 6,537 13,392 (1,198) 12,194
--------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN INTEREST EXPENSE:
Deposits:
Savings deposits . . . . . . . . . 29 (30) (1) 15 5 20
Transaction accounts(1). . . . . . 991 (157) 834 1,435 335 1,770
Time deposits. . . . . . . . . . . 2,025 (415) 1,610 3,715 300 4,015
--------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . 3,045 (602) 2,443 5,165 640 5,805
--------- --------- --------- --------- --------- ---------
Other. . . . . . . . . . . . . . . . 119 70 189 15 230 245
Convertible debentures . . . . . . . (205) (28) (233) (620) (169) (789)
--------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . 2,959 (560) 2,399 4,560 701 5,261
--------- --------- --------- --------- --------- ---------
Increase in
net interest income. . . . . . . . $ 5,506 $(1,368) $ 4,138 $ 8,832 $(1,899) $ 6,933
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
(1) Includes money market savings accounts.
(2) Includes securities purchased under agreements to resell.
As disclosed in the foregoing table, the Company's net interest income in 1998
and 1997 increased over preceding years. In both 1998 and 1997 volume increases
were primarily related to an increase in the asset size of the Company. During
1998 and 1997, total daily average assets increased by 16.3% and 30.2%,
respectively. Total daily average interest-earning assets increased by 16.7% in
1998 and 31.3% in 1997. During these same periods, the volume component of the
increase in net interest income was 15.6% and 31.1%, respectively.
The Company has funded much of its growth through the use of interest-bearing
deposits. The Company charges interest rates and fees in accordance with market
interest rates, general economic conditions, capital and liquidity constraints,
and desired net interest margin levels.
Approximately 57% of the Company's loan portfolio consists of variable rate
loans tied to the prime rate for leading banks and as used by the Company
("prime rate"). An additional 18% are variable rates tied to other indexes.
The prime rate is influenced by forces outside the Company's control. Because
the Company has a lower volume of variable rate deposits than variable rate
loans, the Company would expect to incur a reduction in its net interest margin
when interest rates fall, and when interest rates rise, the reverse would be
expected to apply.
For additional discussion of the Company's interest rate risk management, see
"Quantitative and Qualitative Disclosures About Market Risk".
-36-
The average prime rate for 1998 was 8.35% compared to 8.44% in 1997. This
decrease equates to a negative rate variance on loans tied to prime in 1998 of
$0.3 million. In total, the Company experienced an actual negative rate
variance of $1.6 million. The difference includes a decrease in the
contribution of loan fees. As a percentage of average loans, loan fees
represented 0.23% in 1998, 0.30% in 1997 and 0.41% in 1996. In addition to the
effect of loan fees on yield, other factors resulting in a reduction in yield
during 1998 and 1997 include aggressive growth in the loan portfolio, the 1997
securitization and a movement to more fixed rate loan products.
The Company has been aggressive in growing its loan portfolio and has
encountered price competition for larger, higher quality loans, and the decrease
in loan yields reflects this. Average loans increased by 11.5% in 1998 and
25.2% in 1997. 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.
Additionally, the Company has been increasing the amount of loans in its
portfolio with fixed rates that may reset after approximately five years and are
priced based on a spread over the five year Treasury rates. These loans
generally have a lower rate than the current rate earned on the Company's
variable rate loans.
In 1997, the average prime rate was 8.44% compared to 8.27% for 1996. This 1997
increase equated to a positive price variance on loans tied to prime in 1997 of
$0.5 million. However, the Company's entire loan portfolio experienced a
negative price variance of $1.2 million. The difference includes a decrease in
the contribution of loan fees, increased competitive pressures, the 1997
securitization and decreases in yield on variable rate loans tied to lagging
indexes such as certificates of deposit index and cost of funds index.
The positive volume variance in federal funds sold during 1998 and 1997 resulted
from the Company's increase in liquid assets as its overall size increased.
During 1998 and 1997 the Company also experienced several months when it held a
large amount of federal funds sold related to the cash infusion from its 1998
and 1997 securitizations. The 1998 securitization resulted in a larger cash
infusion and therefore had a larger impact on federal funds sold. Those
funds were used to support loan growth and lessen the Company's reliance on
out-of-area CDs. In addition, a higher level of federal funds sold was desired
given the increase in loan funding levels.
The 1998 and 1997 rate variances in federal funds sold are primarily attributed
to the interest rate changes during these periods.
During 1998 and 1997 the Company increased its holding of guaranteed portions of
SBA loans. These loans, which can be sold in relatively short periods of time,
provide an available source of additional liquidity. During 1998 and 1997 the
Company decreased its reliance on short-term U.S. securities in funding its
liquidity needs while increasing its holdings of longer term tax-exempt
securities. These tax-exempt securities provide an attractive investment
alternative given the current interest rate environment and the increase in the
average maturity of the investment portfolio is consistent with the additional
sources of short-term liquidity.
The Company increased its U.S. Government security portfolio during 1997
primarily to meet its requirement for the pledging of these and similar
securities to support public deposits. Average public deposits, exclusive of
deposits acquired in the acquisition of CCBC, increased from $13.8 million in
1996 to $26.8 million in 1997. The increase in investment securities in 1998
relates primarily to growth in the Company's asset base.
The positive rate variance in 1997 in taxable investment securities includes the
effect of an increase in mortgage-backed securities in the Company's investment
portfolio and market interest rate conditions. The negative rate variance in
1998 primarily relates to market conditions.
Mutual funds consist of investments in mutual funds whose assets are invested
primarily in U.S. government securities. The increase in volume and decline in
rate during 1997 relates to the acquisition of a mutual fund purchased primarily
for tax planning purchases. The Company sold its remaining mutual fund
investments during 1998.
-37-
The average balance and average rate paid on interest bearing transaction
accounts, including money market savings accounts, and time certificates of
deposit during 1998 and 1997 are as follows:
Year Ended December 31,
-------------------------------------------------
(Dollars in thousands)
1998 1997
----------------------- -----------------------
Transaction Time Transaction Time
----------- --------- ----------- ---------
Average Balance. . . . . $251,246 $308,363 $218,239 $272,611
Rate paid. . . . . . . . 2.94% 5.53% 3.00% 5.66%
The rates paid on the Company's deposits are primarily driven by market
conditions in its service areas.
The Company has been successful in expanding its deposits throughout its branch
network, but the largest increases have been generated at its Sacramento,
California operations, and its Northern Nevada operations. During 1995, the
Company opened four new branches located in Carson City, Nevada, and in
Sacramento, South Grass Valley and Auburn, California. During the fourth
quarter of 1996, CCBC purchased a branch located in Concord, California, and in
June, 1997, the Company purchased Mercantile Bank, with its sole branch located
in downtown Sacramento, California. Additionally, during 1996 the Company moved
its Reno, Nevada branch into a larger facility.
Of the total $33 million increase in average interest bearing transaction
accounts during 1998, $15 million relate to the Company's Reno and Carson City
branches and $14 million to its Sacramento operations. Average time deposits
increased by $36 million during 1998, of which $22 million relates to the
Company's Nevada operations and $18 million relates to Sacramento, California
operations. The Company was successful in reducing its reliance on out-of-area
CDs. Average out-of-area CDs decreased by $19 million in 1998. Average
interest bearing transaction accounts at the former CCBC branches increased by
$2 million and average time deposits at these branches increased by $3 million.
Average interest bearing transaction accounts increased by $50.4 million in
1997. Average interest bearing transaction accounts increased in 1997 by $22
million at the branches added in 1995.
The downtown Sacramento facility purchased in 1997 added average interest
bearing transaction accounts totaling $8.4 million while the Reno facility grew
its average interest bearing transaction accounts by $12 million.
Average time deposits increased by $66.9 million during 1997. Of this increase
$33.3 million was generated at the four branches opened in 1995, $7.3 at the new
downtown Sacramento facility and $7.6 million at the Reno facility. Average
out-of-area CDs decreased by $4.7 million. The former CCBC branches
contributed $7.6 million in growth in interest-bearing transaction accounts and
$9.7 million in growth in average time deposits during the 1997 period.
The rate variance in other interest bearing liabilities during 1998 and 1997
includes the effect of the Company's interest rate swap agreements and the
interest component of payments made under the Company's Salary Continuation and
Director Emeritus plans.
The negative rate and volume variances during 1998 and 1997 in convertible
debentures relate to the conversion into common stock. When presented for
conversion any accrued but unpaid interest on debentures was forfeited by the
debenture holder.
The Company announced during 1998 and 1997 that it would redeem its outstanding
convertible debentures. The debentures called for redemption in 1998 were
acquired upon the acquisition of CCBC. Because the Company's stock was trading
at a price significantly above the redemption price, most debenture holders
chose to convert the debentures into common stock prior to the redemption dates.
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PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES. At December 31, 1998,
approximately 74% of the Company's loan portfolio was held in loans
collateralized primarily by real estate. Particular attention is given by the
Company to factors affecting the real estate markets. The primary risk elements
considered by management with respect to commercial real estate loans are
changes in real estate values in the Company's market area and general economic
conditions. The primary risks associated with other commercial loans are the
financial condition of the borrower, general economic conditions in the
Company's market area, the sufficiency of collateral, the timeliness of payment
and interest rate fluctuations. The primary risk elements considered by
management with respect to other loans are the lack of timely payment and the
value of collateral. The Company has a reporting system that monitors past due
loans and management has adopted policies to preserve the Company's position as
a creditor.
The Company maintains its allowance for estimable loan and lease losses to
provide for potential losses inherent in its loan and lease portfolio. The
allowance is established through charges to earnings in the form of a provision
for possible loan and lease losses. Loan losses are charged to, and recoveries
are credited to, the allowance for possible loan and lease losses. The
provision for possible loan and lease losses is determined after considering
various factors such as loan loss experience, current economic conditions,
maturity of the loan portfolio, size of the loan portfolio, industry
concentrations, borrower credit history, the existing allowance for possible
loan and lease losses, independent loan reviews, current charge-offs and
recoveries and the overall quality of the portfolio, as determined by
management, regulatory agencies and independent credit review consultants
retained by the Company.
In evaluating the Company's allowance for possible loan and lease losses,
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 the inception of its SBA lending program in 1983, the Company has
sustained relatively low level of losses from these loans, averaging less than
0.5% of loans outstanding per year. During 1996, net losses in the SBA loan
portfolio were an unusually low $27 thousand. For 1997, SBA net loan losses
totaled $763 thousand and 1998 net losses totaled $653 thousand.
The provision for loan and lease losses was $2.4 million and $2.8 million for
the years ended December 31, 1998 and 1997, respectively. The provision for
both years includes the effect of growth in the loan portfolio. Unguaranteed
loans increased $61 million and $93 million during 1998 and 1997, respectively.
The increase in the provision in 1998 and 1997 includes additional amounts to
reestablish the level of reserves after net loan losses of $1.6 million and $1.4
million, respectively.
The allowance for possible loan and lease losses as a percentage of loans and
leases was 1.39% at December 31, 1998, 1.43% at December 31, 1997 and 1.29% at
December 31, 1996. The increase of 0.10% in the allowance for possible loan and
lease losses as a percentage of loans from December, 1996 includes 0.09% related
to the acquisition of Mercantile Bank. Guaranteed portions of loans were $72.3
million and $62.5 million at December 31, 1998 and 1997, respectively.
Excluding loans and portions of loans guaranteed by the federal government, the
allowance for possible loan and lease losses to total loans and leases was 1.58%
at December 31, 1998 and 1.61% at December 31, 1997.
Of total gross loans and leases at December 31, 1998, $8.7 million were
considered to be impaired. The allowance for possible loan and lease losses
included $1.1 million related to these loans. The average recorded investment
in impaired loans during the year ended December 31, 1998 was $7.3 million.
For additional discussion see "Businesses - Asset Quality."
-39-
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 and leases,
as of the dates indicated.
December 31
--------------------------
1998 1997 1996
------ ------ ------
Nonaccrual loans to total loans and leases 1.4% 1.3% 1.2%
Allowance for possible loan and lease
losses to nonaccrual loans 100.5% 113.6% 103.9%
Allowance for possible loan and lease
losses to total loans and leases 1.4% 1.4% 1.3%
If the guaranteed portions of loans on nonaccrual status, which total $2.0
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans and leases at December 31, 1998 declines to 1.1% and the allowance
for possible loan and lease losses to nonaccrual loans increases to 131.4%.
At December 31, 1997, excluding the guaranteed portions of loans on nonaccrual,
these same percentages were 0.9% and 155.9%, respectively.
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
December 31
--------------------------
1998 1997 1996
------ ------ ------
Nonaccrual loans:
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,736 $5,307 $4,985
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,928 1,642 448
Accruing loans past due 90 days or more:
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,795 $1,127 $1,071
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 449 1,128
Restructured loans (in compliance with modified terms) . . . $1,916 $1,922 $1,249
Management considers the allowance of $8.7 million at December 31, 1998, to be
adequate as a reserve against foreseeable losses at that time.
TOTAL NON-INTEREST INCOME. Total non-interest income for the year ended
December 31, 1998 increased by 6.7% from the 1997 level. For 1997 non-interest
income increased by 46.1% as compared to 1996.
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The following table summarizes the principal elements of total non-interest
income and discloses the increases (decreases) and percent of increases
(decreases) for 1998 and 1997 (amounts in thousands except percentage amounts):
Increase (Decrease)
-----------------------------------------------
Year Ended December 31, 1998 over 1997 1997 over 1996
-------------------------------- ------------------------ -------------------
1998 1997 1996 Amount Percentage Amount Percentage
------- ------- ------- -------- ---------- ------- ----------
Service charges. . . . . . . . . $ 3,475 $ 3,207 $ 2,565 $ 268 8.4% $ 642 25.0%
Securities gains . . . . . . . . 326 51 75 275 539.2 (24) (32.0)
Net gain on sale of loans. . . . 2,020 694 479 1,326 191.1 215 44.9
Net gain on securitization . . . 890 2,626 0 (1,736) (66.1) 2,626 100.0
Net loan servicing income
and I/O strip income. . . . . . 4,230 4,595 4,100 (365) (7.9) 495 12.1
Real estate income . . . . . . . 504 503 542 1 0.2 (39) (7.2)
Other income . . . . . . . . . . 3,156 2,010 1,609 1,146 57.0 401 24.9
------- ------- ------- -------- --------
$14,601 $13,686 $ 9,370 $ 915 6.7 $ 4,316 46.1
------- ------- ------- -------- --------
------- ------- ------- -------- --------
Service charges on deposit accounts increased by 8.4% and 25% during 1998 and
1997, respectively. The increase during 1997 resulted from a change in service
charge structure during February of 1997 and growth in the Company checking
account deposit base. 1998's income reflects the Company's growth.
During September 1998 the Company sold $7.1 million of investment securities
and recorded a gain of $314 thousand on sale. This sale was made to take
advantage of market conditions. U.S. Treasury securities were sold and
replaced with U.S. agency securities having a similar remaining life.
In 1998 the Company completed a securitization of $85 million in SBA 504 and
similar loans and recorded a gain of $890 thousand on this transaction. Related
to this transaction the Company recorded a recourse obligation of $2.8 million,
representing the present value of projected future losses, and interest-only
strips receivable totaling $8.8 million.
In 1997 the Company completed its first securitization of the unguaranteed
portion of SBA 7(a) loans. This sale included over $51 million in loans. A
gain of approximately $2.6 million was recorded upon this sale. Related to this
transaction the Company recorded a recourse obligation of $3.3 million. This
represents the present value of projected future losses. In addition the
Company's interest-only strips receivable, excluding the fair market value
adjustment, increased by approximately $4 million related to the securitization
and discount on loans decreased by approximately $2.6 million.
Because the average yield on the loans included in 1998's securitization was
lower than the average yield on loans in the Company's 1997 securitization the
gain on this securitization was substantially lower than the 1997 gain.
Sales of the guaranteed portion of SBA 7(a) loans in 1998, 1997 and 1996 were
$32.3 million, $9.6 million, and $6.9 million, respectively. In 1995 the
Company altered its strategy with respect to the sale of SBA 7(a) loans. Rather
than continuing to sell the guaranteed portion of the portfolio the Company
began to retain the guaranteed portion and to securitize and sell portions of
unguaranteed SBA loans. The SBA loan sales in 1997 were made both to facilitate
the securitization and to reduce industry concentrations. The 1996 sales were
made primarily to reduce the Company's balance of loans to the hotel/motel
industry. By selling these guaranteed portions the Company is able to take
advantage of new lending opportunities in this industry while maintaining an
acceptable concentration level.
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 increase its sales of SBA
loans into the secondary market. 1998's increase in loan sales reflects this
strategy. The Company currently expects to sell up to $40.0 million in
guaranteed portions of SBA loans during 1999. Saleable guaranteed portions of
SBA loans in the Company's loan portfolio at December 31, 1998 totaled $54
million.
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In addition to sales of SBA 7(a) loans the Company sells the guaranteed portion
of the Business & Industry loans ("B&I") loans it generates. Sales of the
guaranteed portion of B&I loans totaled $10.4 million in 1997, and $3.6 million
in 1996. There were no sales of B & I loans in 1998. 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.
To support its SBA program the Company relies in part on third party SBA loan
packagers. The packagers refer proposed SBA loans to the Company and provide
certain services to the borrowers. The packagers receive fees of a fixed amount
from the borrowers, not exceeding limits prescribed by the SBA, for preparing
the SBA loan application for the borrower. They also receive a fee from the
Company for referring the loans. These referral fee payments are included in
the basis of loans and hence are not disclosed separately in the Company's
financial statements.
The Company expanded its ability to generate an increased volume of SBA loans
through the establishment of new loan production offices ("LPO"s) in Fresno in
December 1995, in Oregon, Colorado and Tennessee during 1997 and in Florida,
Washington, Oregon, Alabama, Georgia, Texas, and Tennessee in 1998. Depending
on individual circumstances the Company staffs an LPO either with full time
employees or will enter into an agency relationship with an independent third
party.
LPO offices located in Jacksonville, Florida, Atlanta, Georgia, Huntsville,
Alabama and Portland, Oregon (one of two offices) are staffed by third party
independent contractors. Those relationships provide for a base fee and a
referral fee on loans generated.
Net loan servicing and I/O strip income decreased by 7.9% in 1998 compared to
1997. This compares to an increase of 12.1% in 1997 from 1996. Net loan
servicing and I/O strip income primarily consists of income generated from
previously sold or securitized SBA loans. Servicing and I/O strip income on SBA
loans is reported net of the amortization of the related servicing and I/O strip
assets. Amortization is based on the expected average life of the related
loans.
1998's decrease in net loan servicing and I/O strip income is related to an
increase in amortization of these assets. Servicing and interest-only strip
income totaled $7.7 million during 1998 and $6.3 million during 1997. Included
in 1998's income is $1.5 million related to the 1998 securitization.
Amortization, including a $420 thousand valuation allowance on the company's
servicing assets, totaled $3.5 million in 1998 and $1.7 million during 1997.
The increase in net servicing and I/O strip income during 1997 relates to the
June 1997 securitization of $51 million in unguaranteed portions of SBA loans.
Servicing and I/O strip income exclusive of amortization increased from $5.6
million in 1996 to $6.3 million in 1997. A decline of approximately $300
thousand would have been experienced in 1997 absent the securitization. These
declines relate to payments on existing loans including normal amortization and
prepayments.
During 1997 and continuing into 1998, the Company has experienced an increase in
the prepayment speed of its SBA loan portfolio. In response to this increase in
prepayments, the Company increased the speed at which it amortizes its servicing
and interest-only strip assets. This had the effect of increasing amortization
the Company would have recorded in 1998 by approximately $1 million. During
1998 the Company has recorded a valuation allowance on its servicing assets
totaling $420 thousand. The offset to this valuation allowance is a reduction
in service fee income.
Income from real estate relates to Pacific Plaza East, a 32,000 square foot
commercial office building in Vacaville, California. The decline in income on
the property during 1997 was due to a reduction in the occupancy rate from 100%
in 1996 to 93% in 1997. At December 31, 1997 and 1998, the building was
approximately 84% occupied. The Company anticipates selling the property in
1999.
Other income consists primarily of merchant credit card fees, the sales of
mutual funds and annuities through a third party marketer and rental income.
The increase in other income in 1998 includes $134 thousand in merchant credit
card fees and $84 thousand rental income.
-42-
There was no significant change during 1998 in revenue from sales of mutual
funds and annuities. During 1998 the Company outsourced its official checks to
a third party. This has the effect of reducing non-interest-bearing demand
deposits, but the loss of those deposits is offset by fees paid to the Company
by the third party. Fees from this source contributed approximately $170
thousand to the increase in non-interest income. In addition, other income in
1998 includes $455 thousand related to a decrease in the estimated recourse
obligation recorded on the 1997 securitization.
The increase in other income during 1997 includes $74 thousand in rental income,
$179 thousand in income from the sale of mutual funds and annuities and a $131
thousand insurance recovery of legal costs incurred in prior years.
The increase in revenue from the sale of mutual funds and annuities during 1997
was primarily related to an increase in emphasis on and staffing for this
activity.
NON-INTEREST EXPENSE. The ratio of the Company's non-interest expenses to total
assets is higher than for California banks in general because SierraWest Bank
experiences higher operating expenses in its Lake Tahoe area of operation and
employs additional personnel and utilizes additional facilities to manage its
SBA loan program. Because of the extreme climatic conditions in the Lake Tahoe
area of operations (temperatures range from -35 degrees to +100 degrees and
average snow levels exceed 150 inches per year), local building codes require
more expensive construction and the Company experiences added costs of heating
and snow removal which increase occupancy costs. Additionally, the Company's
supplies are generally more expensive than in larger metropolitan regions
because of the added cost of freight.
The following table presents the ratio of major non-interest expense categories
to total average assets (in thousands except for percentage amounts):
Salaries Occupancy
and and Other
Year Ended Average Related Equipment Non-Interest
December 31, Assets Benefits Expenses Expenses
------------ --------- --------- ---------- ------------
1998 833,977 2.5% 0.8% 1.3%
1998(1) 833,977 2.2 0.8 1.2
1997 717,099 2.4 0.8 1.3
1997(2) 717,099 2.4 0.8 1.2
1996 550,598 2.8 0.9 1.5
(1) Excludes merger costs of $3,971 thousand.
(2) Excludes merger costs of $433 thousand.
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The following table summarizes the principal elements of non-interest
expenses and discloses the increases (decreases) and percent of increases
(decreases) for 1998 and 1997 (amounts in thousands except percentage
amounts):
Increase (Decrease)
-----------------------------------------------
Year Ended December 31, 1998 over 1997 1997 over 1996
-------------------------------- ---------------------- ----------------------
1998 1997 1996 Amount Percentage Amount Percentage
------- ------- ------- -------- ---------- ------- ----------
Salaries and related benefits. . $19,832 $15,870 $15,054 $ 3,962 25.0% $ 816 5.4%
Bonuses. . . . . . . . . . . . . 994 1,015 374 (21) (2.1) 641 171.4
Occupancy and equipment. . . . . 6,466 5,653 4,852 813 14.4 801 16.5
Insurance. . . . . . . . . . . . 376 336 335 40 11.9 1 0.3
Postage. . . . . . . . . . . . . 573 476 438 97 20.4 38 8.7
Stationery and supplies. . . . . 669 619 639 50 8.1 (20) (3.1)
Telephone. . . . . . . . . . . . 589 539 461 50 9.3 78 16.9
Advertising. . . . . . . . . . . 1,062 774 721 288 37.2 53 7.4
Legal fees . . . . . . . . . . . 479 334 666 145 43.4 (332) (49.8)
Consulting fees. . . . . . . . . 1,243 1,113 671 130 11.7 442 65.9
Audit and accounting fees. . . . 415 370 229 45 12.2 141 61.6
Directors' fees and expenses . . 462 597 506 (135) (22.6) 91 18.0
Real estate. . . . . . . . . . . 305 377 300 (72) (19.1) 77 25.7
Sundry losses. . . . . . . . . . 733 580 839 153 26.4 (259) (30.9)
Other. . . . . . . . . . . . . . 4,070 2,957 2,393 1,113 37.6 564 23.6
------- ------- ------- ------- -------
$38,268 $31,610 $28,478 $ 6,658 21.1 $ 3,132 11.0
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Of the $6.7 million increase during 1998 in non-interest expense, $4.0
million relates to non-recurring merger expenses related to the Company's
acquisition of CCBC. Salaries and related benefits include merger costs of
$2.4 million and consulting includes merger costs of $629 thousand. Included
in 1997's non-interest expense is $433 thousand of merger expense of which
$250 thousand was in consulting costs, $95 thousand in legal costs and $88
thousand in audit and accounting fees. Excluding merger costs totaling $358
thousand, base salaries increased by $328 thousand or 2.8%. Savings related
to the consolidation of CCBC into SWB were partially offset by expansion of
the Company's operations, primarily its SBA operations. The largest single
increase in salaries and related benefits during 1998 was a $0.9 million
increase in commission and incentive payments, primarily related to SBA
lending activities.
The increase in base salary expense during 1997 relates to the Company's
growth including the downtown Sacramento branch and the government guaranteed
lending offices, and an increase in loan and deposit volumes. This was
partially offset by reductions in the Company's workforce related to an
outside consultant's review of the Company's operations. In total, base
salaries and wages increased by $168 thousand over 1996 levels. Commission
and incentive costs increased by $800 thousand from 1996 levels. The
increase in commission and incentive costs during 1997 was primarily related
to increased SBA lending activity including the 1997 securitization and an
expanded commission program designed for the Company's non-SBA lending
officers and business development officers. Consistent with an increase in
volume, commissions paid to the Company's noninsured product representatives
increased by $97 thousand in 1997 as compared to 1996.
The increase in bonus expense in 1997 relates to bonuses earned by the
Company's senior management. Bonuses are payable to non-commissioned Senior
Vice Presidents and above, exclusive of the CEO, Chief Counsel and Chief
Auditor, upon achieving certain predefined goals. Bonus expense related to
this plan totaled $422 thousand in 1997. No bonuses were paid under this
plan in 1996.
Bonus expense in 1998 related to the Company's senior management totaled $696
thousand. Of this amount, $331 thousand relates to costs under the Company's
bonus plan and $365 thousand relates to discretionary bonus payments made to
the Company's CEO, CFO, Chief Auditor and the Company's in house attorney.
The CEO, General Counsel and Chief Auditor are not included in the senior
management incentive plan. Their bonuses are determined by the Company's
Board of Directors. Bonus expense for these individuals totaled $200
thousand in 1997. This compares to $37 thousand in 1996 related to the Audit
and Legal departments.
-44-
Included in 1998's occupancy and equipment expenses is $164 thousand in merger
related costs.
The balance of the increase includes the upgrading of the Company's PC
network and growth in the Company, including the addition of Mercantile Bank
in June of 1997 and various SBA loan offices.
The rise in occupancy and equipment expense during 1997 is primarily
attributable to maintenance and repair costs on an expanded computer hardware
and data communications network, as well as depreciation on an increased base
of fixed assets. Specifically, $388 thousand relates to the acquisition of
Mercantile Bank and expansion of our branches in Reno and Carson City,
Nevada. In addition, 1997's occupancy costs includes the effect of the
Concord branch purchased in October, 1997. The increase in insurance expense
during 1998 was related to $42 thousand in merger costs. The increase in
postage primarily relates to the increase in size of the Company. Stationery
costs in 1998 included $17 thousand in merger related costs. Telephone costs
during 1997 and 1998 included the costs of an expanded branch system and an
upgrade and expansion of the Company's data communication telephone lines.
The increase in advertising costs in 1998 reflects an expanded advertising
budget to support the Company's growth.
The increase in legal expenses, consulting expense and accounting expense in
1998 relates primarily to merger costs. Legal expense includes merger costs
of $220 thousand. Consulting costs related to the CCBC acquisition in 1998
were $629 thousand and non-recurring merger related accounting costs were
$131 thousand. An additional component of the increase in consulting costs
in 1998 were costs related to the implementation of procedures and processes
required to document the Company's internal controls and compliance with law
as required under the FDIC Improvement Act of 1991.
The high level of legal expense during 1996 relates primarily to two
litigation matters. One matter went to trial in June 1996 and was decided in
the Company's favor. Increased costs were incurred in the second matter,
which is ongoing and relates to a property acquired by the Company through
foreclosure and subsequently sold.
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 increase in consulting
costs is primarily related to this engagement. Total consulting expense
related to this engagement in 1997 was $544 thousand. Additionally,
consulting costs in 1997 included $250 thousand related to the Company's
acquisition of CCBC. The increase in audit and accounting fees during 1997
primarily relates to merger costs and costs associated with the June 1997
securitization.
The decrease in Directors' expenses in 1998 and increase in 1997 relates to
the Company's Directors Deferred Compensation and Stock Award Plan. This
plan allows for the deferral of Director fees in the form of phantom shares
of common stock. As the market value of the Company stock increases, an
adjustment to reflect the increased value of this phantom stock is recorded
as Director Expense. Conversely, a decrease in value, as experienced in
1998, results in a credit to expense.
The increase in real estate expense during 1997 relates to a $59 thousand
write down of the carrying value of undeveloped property.
Sundry losses in 1998 include approximately $200 thousand in write downs in
the value of OREO properties and $139 thousand in merger related costs.
1997's sundry losses primarily relate to charges for a reduction in staffing.
1996's losses primarily relate to $352 thousand related to a reduction in
staffing and $114 thousand related to a servicing error on an SBA loan.
The increase in other expense in 1997 and 1996 primarily relates to the
Company's growth. The increase during 1998 includes growth in the Company, a
$300 thousand increase in costs related to an expansion of the Company's
non-interest bearing title company account relationships, $109 thousand
related to an increase in the amortization of intangibles recorded upon the
acquisition of Mercantile Bank, and approximately $140 thousand related to
the reclassification of certain data communication expenses from equipment
expense to other expense.
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
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provision for income taxes was $5,767 thousand, $5,673 thousand and $2,995
thousand for the years ended December 31, 1998, 1997 and 1996, respectively,
representing 42.9%, 38.8% and 38.0% of income before taxation for the
respective periods. The increase in the 1998 percentage primarily relates to
certain merger expenses which may not be deductible for federal and state
taxes.
LIQUIDITY
Liquidity refers to the Company's ability to maintain adequate cash flows to
fund operations and meet obligations and other commitments on a timely basis.
The Company's liquidity management policies are structured so as to maximize
the probability of funds being available to meet present and future financial
obligations and to take advantage of business opportunities. Financial
obligations arise from withdrawals of deposits, repayment on maturity of
purchased funds, extensions of loans or other forms of credit, purchase of
loans, payment of interest on deposits and borrowings, payment of operating
expenses, and capital expenditures.
The Company has various sources of liquidity. Increases in liquidity result
from the maturity or sale of assets. Other than cash itself, short-term
investments like federal funds sold and securities purchased under agreements
to resell are the most liquid assets. Also, investment securities available
for sale can be sold prior to maturity as part of prudent asset/liability
management in response to changes in interest rates and/or prepayment risk as
well as to meet liquidity needs. Additionally, liquidity is provided by loan
repayments and by selling loans in the normal course of business. At
December 31, 1998, the Company had $57.2 million in guaranteed portions of
SBA loans available for sale, most of which could be sold within a short
period of time compared to $49.1 million of SBA loans available for sale at
December 31, 1997. In management's view, these loans represent an available
source of liquidity. Deposits such as demand deposits, savings deposits and
retail time deposits also provide a source of liquidity. They tend to be
stable sources of funds except that they are subject to seasonal
fluctuations. The Company maintains an adequate level of cash and quasi-cash
items to meet its day-to-day needs and in addition, at December 31, 1998, the
Company had unsecured lines of credit totaling $32.4 million with its
correspondent banks.
During both 1998 and 1997 the Company completed a securitization of SBA
loans. The Company believes that it has now established the ability to
securitize and sell SBA loans and has incorporated the ability to securitize
nonguaranteed SBA loans into liquidity strategies.
Cash and due from banks, federal funds sold, and securities purchased under
agreements to resell as a percentage of total deposits were 8.7% at December
31, 1998 as compared to 11.5% at December 31, 1997. Although a decrease in
the percentage for 1998 was experienced this was offset by the additional
liquidity provided by the increase in SBA loans available for sale. Cash and
due from banks totaled $53.5 million at December 31, 1998 as compared to
$58.3 million at December 31, 1997, and federal funds sold and securities
purchased under agreements to resell totaled $14.4 million at December 31,
1998 as compared to $22.3 million at December 31, 1997. The uninsured
portion of federal funds sold together with the uninsured portion of cash
deposited with other institutions totaled $13.4 million as of December 31,
1998. In the event of a failure of any of these institutions, the Company
could lose all or part of its deposits. To mitigate this risk, the Company
periodically examines the financial statements of these institutions and
limits the amount it deposits with any single institution.
Total loans and leases, exclusive of the allowance for possible loan losses,
increased by $71.3 million from $553.7 million at December 31, 1997 to $625.0
million at December 31, 1998. The increase included $16.9 million in SBA
loans, $27.8 million in other commercial loans and $34.7 million in real
estate and equity lines of credit. Other loans decreased by $0.3 million and
leases decreased by $7.8 million. The increase in SBA loans relates to an
increase in lending directed towards the SBA's 504 program and to an increase
in the volume of new loan originations. The increase in other loans reflects
the Company's efforts to expand and diversify its non-SBA lending activities.
Exclusive of the 1998 securitization the increase in loans would have
totaled $147.7 million. The increase in the loan portfolio since December 31,
1997 was funded with increased deposits.
Deposits increased by $81.6 million from $701.0 million at December 31, 1997
to $782.6 million at December 31, 1998. This included increases of $35.0
million in interest-bearing transaction and money market accounts, $15.1
-46-
million in non-interest-bearing demand accounts, $31.1 million in time
deposits and $0.3 million in savings accounts. The Company has been
successful in expanding its deposits throughout its branch network, however
the largest increases during 1998 have been generated at its Northern Nevada
locations. Deposits at the Company's Reno, Nevada branch increased by $16.3
million and the Carson City, Nevada branch deposits increased by $20.5
million. During 1996 the Company moved its Reno, Nevada branch into an
enlarged facility. The Carson City branch was opened during 1995 and has
experienced strong deposit growth during each of its first three full years
of existence.
In part to mitigate the effect of seasonality of its deposit sources which is
due to the local tourist-based economy in part of the Company's service area
and in part to provide interim financing of loans the Company intends to
securitize, SierraWest Bank utilizes a "money desk" to solicit out-of-area
CDs. These CDs supplement its other deposit sources, provide additional
liquidity and additionally, help support its loan growth. These deposits,
which at December 31, 1996, 1997 and 1998 totaled $45.8 million, $10.1
million and $9.4 million, respectively, represented 8.0%, 1.4% and 1.2% of
total deposits as of December 31, 1996, 1997 and 1998, respectively.
To attract out-of-area CDs, SierraWest Bank subscribes to a listing service
which lists nationally the rate the Bank is prepared to pay. Customers call
SierraWest Bank directly and place deposits. Additionally, beginning in 1995
SierraWest Bank began accepting referrals by brokers which can result in a
slightly lower cost of those deposits. At December 31, 1998 $12.5 million of
CDs are classified as brokered deposits. To attract deposits, SierraWest
Bank pays a market rate which may at times be above the comparable rate
offered by SierraWest Bank to its local depositors. The overhead costs
associated with these out-of-area deposits is, however, lower than that for
local deposits since local deposits require the use of bank branch facilities
and hence the Company believes the cost of these funds does not normally
exceed the cost SierraWest Bank incurs to generate comparable deposits
through its branch system. While out-of-area deposits are acquired at an
acceptable cost, SierraWest Bank monitors the level of these deposits because
it is concerned that out-of-area deposits are more rate sensitive and
volatile and that there may be some exposure for increased costs in the
future should the supply tighten. If interest rates rise rapidly, the
Company's reliance on these deposits could have an adverse impact on net
interest income if the costs to retain those deposits rise faster than rates
charged on interest-earning assets.
CAPITAL RESOURCES
On February 25, 1999, the Company entered into an Agreement and Plan of
Merger with BancWest Corporation. Under the terms of the Plan BancWest will
acquire all the outstanding common stock of the Company in exchange for 0.82
shares of BancWest common stock. The merger, which is expected to close in
the third quarter of 1999 is subject to the approval of the Company's
shareholders, various regulatory agencies and certain other conditions. The
transaction is expected to be accounted for under the pooling-of-interests
accounting method.
Concurrently with the execution and delivery of the merger agreement,
BancWest and the Company entered into a stock option agreement. Under the
stock option agreement, the Company gave BancWest an option to purchase up to
1,059,490 shares of the Company common stock representing approximately 19.9%
of the outstanding shares of the Company common stock. BancWest has the
right to purchase the shares for $28.875 per share.
At December 31, 1998, the Company had shareholders' equity of $78.3 million
as compared to $69.4 million at December 31, 1997. The Company's growth
strategy has been to expand its banking business, internally and through
acquisitions. In connection with this objective, the Company established loan
production offices or agency relationships during 1997 in Oregon, Washington,
Colorado and Tennessee, and during 1998 in Florida, Oregon, Alabama, Georgia,
Texas and Tennessee.
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. On the acquisition date, CCBC had assets of $206 million,
deposits of $184 million and shareholders' equity of $15.4 million. No gain
or loss for tax purposes was recognized by CCBC shareholders, except with
respect to cash
-47-
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. See Note 20 of Notes to Consolidated Financial Statements.
Effective June 30, 1997 the Company acquired Mercantile Bank. Based in
Sacramento, Mercantile was a business bank primarily servicing the commercial
and real estate loan industry and had total assets of $42.8 million. Loans
and deposits acquired pursuant to the acquisition of Mercantile totaled $26.1
million and $37.7 million. Under the terms of the transaction, shareholders
of Mercantile received total compensation of $6.6 million on the acquisition
date. The compensation consisted of 170,790 shares of Company common stock
and $3.3 million in cash. Goodwill and other intangible assets recorded upon
the acquisition of Mercantile totaled $1.8 million. The transaction was
accounted for under the purchase method of accounting. See Note 20 of Notes
to Consolidated Financial Statements.
The Company has in the past issued convertible debentures to provide capital
resources to support its expansion. During 1997 a total of $9.7 million in
debentures were converted to common stock and in 1998 $2.4 million in
debentures were converted to common stock and $44 thousand were redeemed in
cash. At December 31, 1998 there were no debentures outstanding.
On December 21, 1995, the Company designated 200,000 shares of its 10,000,000
authorized preferred shares as Series A Junior Participating Preferred Stock.
These shares were created by the Company to facilitate a shareholder
protection rights plan. During January of 1996 a dividend of rights was made
to existing shareholders to acquire stock of the Company. This plan is
designed to protect the Company and its shareholders against abusive takeover
attempts and tactics. In essence, the rights plan would dilute the interests
of an entity attempting to take control of the Company if the attempt is not
deemed by the Board of Directors to be in the best interests of all
shareholders. If the Board of Directors determines that an offer is in the
best interests of the shareholders, the stock rights may be redeemed for
nominal value, allowing the entity to acquire control of the Company. During
February 1999 the rights plan was amended to exclude BancWest from the
provisions of the plan.
-48-
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, faces 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.
In June of 1996, the Federal Financial Institutions Examination Council (FFIEC)
released its first alert to the financial services industry concerning Year 2000
risks. This council is comprised of (1) the Board of Governors of the Federal
Reserve System(FRB); (2) the Federal Deposit Insurance Corporation; (3) the
Office of the Comptroller of the Currency; (4) the National Credit Union
Administration and (5) the Office of Thrift Supervision. On May 5, 1997, the
FFIEC issued Interagency Guidelines outlining Year 2000 Project Management Goals
and called for every financial institution to have a Year 2000 plan. This plan
required an inclusion of an assessment of the Year 2000 risk posed by "mission
critical" systems and required plans which ensured that testing was
substantially complete for mission critical systems by December 31, 1998. A
third set of guidelines was issued on December 22, 1997, further elaborating
regulatory expectations regarding the Year 2000 or "millennium bug" problem.
This release specifically included the requirement that each institution
determine the level of "portfolio risk", posed by borrowers with potential Year
2000 problems, which could lead to impaired performance on the part of the
borrower and, by implication, the financial institution as creditor. Since
December, 1997, there have been additional Interagency Statements released on
the topics of Impact on Customers, Vendor Readiness, Testing Guidance, Customer
Awareness Programs, Contingency Planning Guidance and Fiduciary Services
Guidance. In December 1998 a FFIEC guidance was released which addressed time
lines for the preparation of Remediation Contingency Plans and of Business
Resumption Contingency Plans. All financial institutions regulated by any of
the regulatory bodies of the FFIEC are required to follow the guidelines
outlined in each of the Interagency Statements. Examiners from the FFIEC member
agencies conducted first round supervisory reviews of all financial
institutions' Year 2000 conversion efforts during the first half of 1998.
During the 4th quarter of 1998 regulators began the Phase II exams addressing
all areas of Year 2000 compliance to date. Our Phase II exam was recently
conducted and our regulators have reviewed our plans and testing performed to
date and noted our progress. Examiners categorize an organization's efforts as
"Satisfactory", "Needs Improvement" or "Unsatisfactory". The FDIC intends to
mandate supervisory action for virtually all institutions assessed less than
satisfactory. In addition, the FDIC will consider a change in a component or
composite rating if identified deficiencies so warrant. Focusing on financial
institutions alone will not prevent Year 2000 disruptions. Consequently,
examiners will also be conducting supervisory reviews on data processing service
providers and third-party software vendors who provide services to federally
insured financial institutions.
THE COMPANY'S STATE OF READINESS
In 1997, the Company identified five steps to be accomplished for formulation of
an action plan:
(1) AWARENESS - Awareness of Year 2000 problems. The Company set up a Year 2000
Steering committee to oversee the progress in solving the problems associated
with Year 2000 issues. Progress is reported monthly at the Company's Board and
Committee meetings and documented in the committee and board minutes.
(2) ASSESSMENT - An inventory of affected systems has been performed, the
problem assessed, risks measured and an action plan formalized.
(3) RENOVATION - In this phase, modifications were made and vendors managed
according to the action plan. Detailed test plans and schedules were
developed. The entire project continues to be monitored and results are
documented.
(4) VALIDATION - Tests were conducted and results analyzed to confirm that the
changes made bring the affected system into compliance and no new problems have
surfaced as a result of the changes.
-49-
(5) IMPLEMENTATION - Replacement of the non-compliant systems occurred. The
systems were put into production and appropriately interfaced with one another.
Training also occurred and contingency plans were prepared as required. A
review by the end user and the Internal Audit Department will be conducted to
insure the accuracy of the test results.
The Company, with the help of consultants, began identifying 260 systems in
use throughout the Bank and performed preliminary assessment of the risk of
non-compliance associated with each one. Each system was given an overall
risk assessment of "high", "moderate", "low", "no risk" or "unknown" risk.
In deriving the overall risk rating, three separate components were
considered:
A.) CRITICALITY: How critical is the system to the organization?
B.) CONFIDENCE: How confident are we that the vendor will make their system
compliant?
C.) CONTROL: How much control do we have in the process?
The Company has identified eleven (11) Mission Critical A-Priority Systems
considered to be most critical regardless of the risk of non-compliance and the
degree of control the Company has over the renovation of these systems. They
are listed below:
(1) Core Application Software
(2) Customer Information System & Data Warehouse
(3) Operating System
(4) PC Server Based Application & Operating System
(5) Network Hardware
(6) Loan Document Processing
(7) ACH Processing
(8) Wire Transfer & Settlement
(9) ATM Processing
(10) Telephone Banking
(11) Disaster Recovery & Back-up
The Company established a test plan for its mission critical applications.
Testing of these items commenced in September 1998 and was substantially
completed by December 31, 1998. Monthly status reports continue to be presented
to the Board of Directors.
CORE APPLICATION SOFTWARE AND CUSTOMER INFORMATION SYSTEM & DATA WAREHOUSE
The current level of software has been certified as Year 2000 compliant by the
vendor as well as reviewed and assessed by FDIC. The Company performed an
independent test of the "Century Date Change" (CDC) at its disaster recovery
site during the first quarter of 1999. Early review of the test results
reaffirm the software is Year 2000 compliant.
OPERATING SYSTEM
The upgrade to the operating system software was installed on September 19, 1998
and is designed to work hand-in-hand with the major information technology
system. Testing of the system occurred with installation in September and was
found to have no Year 2000 compliance issues.
PC SERVER BASED APPLICATION & OPERATING SYSTEM AND NETWORK HARDWARE
The Network Department has completed the replacement of non-compliant system
hardware and software. Testing has been completed and certification has been
received by vendors. Individual applications, spreadsheets, etc. are scheduled
for review in early 1999.
-50-
LOAN DOCUMENT PROCESSING
Loan document processing software has been tested. The current version is
certified and is Year 2000 compliant with documentation on file with the Year
2000 Project Manager.
-51-
ACH PROCESSING AND WIRE TRANSFER & SETTLEMENT
Testing on the current version of the Fed-Line software is now complete.
Certification has been received from the Department Manager. Integration
testing of systems that reside in several different Departments is scheduled.
ATM PROCESSING
The Company has completed testing with the processor. Certification of Year
2000 compliance has been received.
TELEPHONE BANKING
The telephone banking system required an upgrade that was approved for purchase
in the 4th quarter of 1998. The compliant version is scheduled to be installed
in March 1999 and testing is scheduled to be completed in the 2nd quarter of
1999. The vendor has certified the upgrade as Year 2000 compliant.
DISASTER RECOVERY & BACK-UP
End-of-Year (1998) files were created by the Company's Data Processing
Department and forwarded to the Disaster Recovery Vendor in early January 1999.
Preliminary indications are that the CDC test was successful.
NON-INFORMATION TECHNOLOGY
A facility inspection worksheet was forwarded to each Office for inventory and
identification of all non-IT date sensitive systems. Systems such as vaults,
telephone systems, and HVAC systems have been identified and certification has
been or will be received soon.
YEAR 2000 PLAN MANAGEMENT
In order to effectively manage the Year 2000 Plan, the Company has grouped all
phases of the project into one of six categories as defined in the FFIEC
guidelines:
(1) Business Risk
(2) Due Diligence on Service Providers and Software Vendors Readiness
(3) Impact on Customers
(4) Testing
(5) Customer Awareness Programs
(6) Contingency Planning
With the identification of our A-Priority Mission Critical Systems, business
risk was measured for each application, process and vendor/customer
relationship. In general, the Company believes the business risk associated
with A-Priority Mission Critical systems to be low. As tests progressed and
non-compliant systems were identified, Remediation Contingency Plans were
created. Remediation Contingency Plans were created as required in regulatory
guidelines.
The Company's progress on due diligence and testing was previously discussed in
the section describing its eleven mission critical systems.
Guidance for Customer Awareness and Impact on Customers continues to be
addressed. Some of the on-going programs are education of the Company's staff,
community presentations by the Company's Legal Department and by the Year 2000
Project Manager and mailings to customers. Customers have been provided with a
toll-free number of the Year 2000 Project Manager to call for any questions.
-52-
The assessment of "high risk" borrowers and depositors is a continual
project. Customers are identified using the criteria established in the
Company's Policies on Year 2000 Borrower Risk and Year 2000 Depositor Risk.
The Credit Services Manager and the Operations Division Manager are
responsible for on-going evaluation.
COSTS TO ADDRESS THE YEAR 2000 ISSUES
Costs directly related to Year 2000 issues totaling $153,000 were incurred
through March 1, 1999. Incurred costs consist of the salary of a full-time Year
2000 Manager, travel and seminars for staff, customer education expenses,
computer hardware purchases of $19,000, telephone expenses of $23,000,
consultant costs of $22,000, and additional software purchases of $19,000.
These costs are being funded through operating cash flows. Additional estimated
costs relating to Year 2000 issues have been identified to be approximately
$165,000. As the project continues, the costs may prove to be significantly
higher. Of the estimated additional costs, $41,000 has been identified for
additional hardware and software purchases, $11,000 has been estimated for
testing of customer's credit card accounts, and an additional $113,000 has been
estimated for staff salaries and travel and seminar expenses.
The Year 2000 issue is pervasive and complex as virtually every computer system
will be affected in some way by the Year 2000 date change. Consequently, no
assurance can be given that Year 2000 compliance can be achieved without costs
and uncertainties that might have a material adverse effect on future financial
results or cause reported financial information not to be necessarily indicative
of future operating results or future financial condition. However it is
anticipated that any disruption of services would be partial and brief, and that
there will not be a material impact on revenues or earnings.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company has substantially completed testing on mission-critical
applications. Most tests were successful and those systems that were identified
as non-compliant have been upgraded or will soon be upgraded. The Company is
confident all mission-critical applications will function normally at all
critical dates. A Business Resumption Contingency Plan is currently in
development to address issues such as loss of power, loss of telephones or loss
of computers.
BUSINESS RESUMPTION CONTINGENCY PLAN
As mentioned previously the company is developing a Business Resumption
Contingency Plan as required by regulatory agencies to address possible
disruptions of core business functions. The purpose of the Business Resumption
Plan is to address the risks associated with the failure of systems on specific
critical dates. The Business Resumption Plan is intended to provide assurance
that the mission-critical functions will continue if one or more systems fail.
There are four phases of the Year 2000 Business Resumption Contingency Planning
process which include:
1. Establishing organizational planning guidelines that define the business
continuity planning strategy.
2. Completing a Business Impact Analysis where we are assessing the potential
impact of mission-critical system failures on core business functions.
3. Developing a Contingency Plan that establishes a timeline for
implementation and action, and trigger dates for activation.
4. Designing a method of Validation so that the Business Resumption Plan can
be tested for viability.
The Company expects to have completed all phases of its Business Resumption
Plan by the end of the second quarter of 1999. The Plan will be used
in-conjunction with the Company's current Disaster Recovery Plan. When the
Plan is complete the Company's Internal Audit Department will conduct an
independent review of the Plan.
-53-
B-Priority systems, defined as non-mission critical, are being identified and
testing is scheduled for completion by September 1999.
-54-
ITEM 7A. 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 negative cumulative gap
over the next twelve months. 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 interest rate sensitivity is the result of 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 interest rate sensitivity of
the Company. In 1998 and 1997, the Company added fixed rate loans and
increased the number of longer term investments. Also, in 1996, the Company
entered into a fixed for floating swap agreement for a notional amount of $20
million with a correspondent bank. The swap agreement requires the Company to
pay a floating rate tied to prime and receive a fixed rate. The swap agreement
expired in March, 1999. On April 15, 1998, the Company completed the
acquisition of California Community Bancshares Corporation and its wholly owned
subsidiary Continental Pacific Bank (CPB). CPB's net interest income was
expected to fall with increasing rates and rise with declining rates, which
helped offset the Company's interest rate sensitivity. CPB had two swap
agreements with a correspondent bank, with notional amounts of $10 million and
$0.9 million. The swap agreements were assumed by the Company at the time of
the acquisition. The swaps acquired from CPB increased the interest rate
sensitivity of the Company. 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 1998 and 1997, the Company securitized loans.
Securitization is an effective asset liability management tool because the asset
and liability cash flows and repricings are closely matched. The Company
intends to continue using securitization as a source of funding its loans in the
future.
-55-
The following table sets forth the distribution of repricing opportunities of
the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap and the cumulative gap as a percentage of total interest-earning assets, as
of December 31, 1998. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates. This table should,
therefore, be used only as a guide as to the possible effect changes in interest
rates might have on the net margins of the Company (dollars in thousands).
December 31, 1998
----------------------------------------------------------------------------
Next Day Over Three One Year
to Three Months Through Through Over
Immediately Months Twelve Months Five Years Five Years Total
----------- --------- -------------- ---------- ---------- ----------
Assets:
Federal funds sold . . . . . . . . . . $ 14,400 $ 0 $ 0 $ 0 $ 0 $ 14,400
Taxable investment securities. . . . . 0 63,140 22,401 21,973 4,551 112,065
Non-taxable investment securities. . . 0 0 0 2,056 19,861 21,917
Loans. . . . . . . . . . . . . . . . . 225,207 149,602 75,387 86,431 88,356 624,983
Other interest earning assets. . . . . 6,275 0 0 0 0 6,275
----------- --------- -------------- ---------- ---------- ----------
Total interest-earning assets. . . 245,882 212,742 97,788 110,460 112,768 779,640
----------- --------- -------------- ---------- ---------- ----------
Liabilities:
Savings deposits(1). . . . . . . . . . 290,986 0 0 0 0 290,986
Time deposits. . . . . . . . . . . . . 47 154,035 132,751 27,279 95 314,207
Other interest-bearing liabilities . . 0 99 306 3,782 223 4,410
----------- --------- -------------- ---------- ---------- ----------
Total interest-bearing liabilities 291,033 154,134 133,057 31,061 318 609,603
----------- --------- -------------- ---------- ---------- ----------
Net interest-earning assets (liabilities) $ (45,151) $ 58,608 $ (35,269) $ 79,399 $112,450 $170,037
----------- --------- -------------- ---------- ---------- ----------
----------- --------- -------------- ---------- ---------- ----------
Cumulative net interest earning assets
(liabilities) ("GAP"). . . . . . . . . $ (45,151) $ 13,457 $(21,812) $ 57,587 $170,037
----------- --------- -------------- ---------- ----------
----------- --------- -------------- ---------- ----------
Cumulative GAP as a percentage of
Total interest-earning assets. . . (5.8)% 1.7% (2.8)% 7.4% 21.8%
----------- --------- -------------- ---------- ----------
----------- --------- -------------- ---------- ----------
- ----------
(1) Savings deposits include interest-bearing transaction accounts.
(2) Includes loans which matured on or prior to December 31, 1998.
At December 31, 1998, the Company had $556.4 million in assets and $578.2
million in liabilities repricing within one year. This means that $21.8 million
more in interest rate sensitive liabilities than interest rate sensitive assets
will change to the then current rate (changes occur due to the instruments being
at a variable rate or because the maturity of the instrument requires its
replacement at the then current rate). Interest income is likely to be affected
to a greater extent than interest expense for any changes in interest rates
during the Immediately to Twelve Month periods. If rates were to fall during
this period, interest income would decline by a greater amount than interest
expense and net income would be reduced. Conversely, if rates were to rise, the
reverse would apply.
-56-
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 at December 31, 1998. 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 14%
per year. This rate is consistent with historical information on the Company's
SBA loan portfolio and the SBA industry. With respect to other loans the
Company has not tracked its historical prepay speed, but for the purposes of
this table has utilized an 8% rate. 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).
December 31, 1998
----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
-------- --------- ---------- --------- --------- ---------- -------- ----------
Federal funds sold. . . . . . . . $ 14,400 $ 0 $ 0 $ 0 $ 0 $ 0 $ 14,400 $ 14,400
Weighted average rate. . . . . . 4.54 0 0 0 0 0 4.54
Investment securities . . . . . . 44,804 25,242 15,812 13,096 3,778 31,250 133,982 133,982
Weighted average yield(3). . . . 6.05 5.63 5.86 5.61 6.08 5.45 5.77
Fixed rate loans. . . . . . . . . 41,612 18,535 15,163 10,138 10,627 59,567 155,642 157,202
Weighted average rate. . . . . . 8.61 9.33 9.18 9.12 8.94 8.66 8.83
Variable rate loans (1) . . . . . 178,588 65,228 42,736 40,447 32,913 109,429 469,341 480,727
Weighted average rate. . . . . . 9.22 9.58 9.53 9.48 9.66 9.96 9.52
Other interest-earning assets . . 6,275 0 0 0 0 0 6,275 6,275
Weighted average rate. . . . . . 5.27 0 0 0 0 0 5.27
-------- --------- ---------- --------- --------- ---------- -------- ----------
Total Interest-earning assets . . $285,679 $109,005 $ 73,711 $ 63,681 $ 47,318 $200,246 $779,640 $792,586
-------- --------- ---------- --------- --------- ---------- -------- ----------
-------- --------- ---------- --------- --------- ---------- -------- ----------
Savings deposits(2) . . . . . . . $290,986 $ 0 $ 0 $ 0 $ 0 $ 0 $290,986 $290,986
Weighted average rate. . . . . . 2.39 0 0 0 0 0 2.39
Time Deposits . . . . . . . . . . 283,112 20,763 3,516 4,228 2,315 273 314,207 315,941
Weighted average rate. . . . . . 5.09 5.54 5.84 6.08 5.85 5.99 5.15
Other interest-bearing liabilities 405 465 1,283 117 1,917 223 4,410 4,556
Weighted average yield . . . . . 13.78 13.83 9.53 14.20 6.96 11.23 9.46
-------- --------- ---------- --------- --------- ---------- -------- ----------
Total interest-bearing liabilities $574,503 $ 21,228 $ 4,799 $ 4,345 $4,232 $ 496 $609,603 $611,483
-------- --------- ---------- --------- --------- ---------- -------- ----------
-------- --------- ---------- --------- --------- ---------- -------- ----------
- ----------
(1) Of the total variable rate loans 89% reprice in one year or less.
(2) Savings deposits include interest-bearing transaction accounts.
(3) Interest on tax-exempt obligations has not been tax effected to include the
related tax benefits in calculating the weighted average yield.
The Company's $20 million notional amount interest rate swap matures in March,
1999. Under this agreement the other party to the swap pays a fixed rate of
8.17% and receives from the Company the prime rate. The swap had an estimated
fair value of a positive $75 thousand at December 31, 1998. The Company's $10
million notional amount interest rate swap matures in May, 2001. Under this
agreement the other party to the swap pays a floating ratio equal to the United
States Treasury Bill rate and the Company pays a floating rate equal to the
Eleventh District Cost of Funds plus 65 basis points. The Company's $0.9
million notional amount interest rate swap matures in January, 2004. Under this
agreement the other party to the swap pays a floating rate equal to the one year
constant maturity Treasury rate adjusted weekly, and the Company pays a fixed
rate of 6.74%. The $10 million swap had an estimated fair value of a negative
$167 thousand at December 31, 1998 and the $0.9 million swap had an estimated
fair value of a negative $75 thousand at this date.
-57-
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. This table excludes information with
respect to CCBC. CCBC was not required to provide this data and it is
impracticable to gather the information required to accurately prepare a table
for 1997 which includes CCBC. Expected maturities are based on contractual
payments adjusted for the estimated effect of prepayments. Loans have been
assumed to prepay at an average rate of 8% per year. This rate is consistent
with historical information on the Company's SBA loan portfolio. With respect
to other loans the Company has not tracked its historical prepay speed; but for
the purposes of this table has utilized an 8% rate. 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).
December 31, 1997
--------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
--------- --------- ---------- --------- --------- ---------- --------- ----------
Federal funds sold. . . . . . $ 13,500 $ 0 $ 0 $ 0 $ 0 $ 0 $ 13,500 $ 13,500
Weighted average rate. . . . 5.32 5.32
Interest-bearing deposits . . 396 0 0 0 0 0 396 396
Weighted average rate. . . . 5.79 5.79
Mutual Funds. . . . . . . . . 733 0 0 0 0 0 733 733
Weighted average yield . . . 6.35 6.35
Investment securities . . . . 13,014 27,125 1,319 1,110 3,766 12,777 59,111 59,111
Weighted average yield(3). . 5.92 6.07 6.72 6.74 7.35 5.73 6.07
Fixed rate loans. . . . . . . 24,353 16,379 13,330 9,386 8,203 24,677 96,328 97,041
Weighted average rate. . . . 9.24 9.77 9.63 9.58 9.54 8.38 9.22
Variable rate loans (1) . . . 122,129 39,207 27,942 27,906 24,106 95,531 336,821 340,193
Weighted average rate. . . . 9.97 10.36 10.18 10.23 10.34 10.24 10.16
--------- --------- ---------- --------- --------- ---------- --------- ----------
Total Interest-earning assets $174,125 $82,711 $42,591 $38,402 $36,075 $132,985 $506,889 $510,974
--------- --------- ---------- --------- --------- ---------- --------- ----------
--------- --------- ---------- --------- --------- ---------- --------- ----------
Savings deposits(2) . . . . . $172,910 $ 0 $ 0 $ 0 $ 0 $ 0 $172,910 $172,910
Weighted average rate. . . . 2.88 2.88
Time Deposits . . . . . . . . 201,493 16,473 2,645 1,109 1,432 85 223,237 223,932
Weighted average rate. . . . 5.75 5.98 6.13 6.19 6.19 6.80 5.78
Lease Obligations . . . . . . 9 10 12 13 14 239 297 297
Weighted average yield . . . 11.23 11.23 11.23 11.23 11.23 11.23 11.23
--------- --------- ---------- --------- --------- ---------- --------- ----------
Total interest-bearing
liabilities $374,412 $16,483 $ 2,657 $ 1,122 $ 1,446 $ 324 $396,444 $397,139
--------- --------- ---------- --------- --------- ---------- --------- ----------
--------- --------- ---------- --------- --------- ---------- --------- ----------
- ----------
(1) Of the total variable rate loans 92% reprice in one year or less.
(2) Savings deposits include interest-bearing transaction accounts.
(3) Interest on tax-exempt obligations has not been tax effected to include the
related tax benefits in calculating the weighted average yield.
-58-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . .60
Consolidated Financial Statements of SierraWest Bancorp
Consolidated Statements of Financial Condition . . . . . . . . . . . . . .61
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . .63
Consolidated Statements of Shareholders' Equity. . . . . . . . . . . . . .65
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . .67
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .70
-59-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SierraWest Bancorp
Truckee, California
We have audited the accompanying consolidated statements of financial
condition of SierraWest Bancorp and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of SierraWest Bancorp and
subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Sacramento, California
January 29, 1999 (February 25, 1999 as to the first paragraph of Note 20 to
the consolidated financial statements).
-60-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31,
-----------------------
1998 1997*
-------- --------
(in thousands)
Cash and cash equivalents:
Cash and due from banks . . . . . . . . . . . . . $ 53,481 $ 58,345
Federal funds sold and securities
purchased under agreements to resell . . . . . . 14,400 22,275
-------- --------
Total Cash and Cash Equivalents . . . . . . . . . 67,881 80,620
Investment securities and investments in mutual
funds:
Mutual funds available for sale . . . . . . . . . 0 733
Held to maturity, market value $0 and $1,000. . . 0 1,000
Available for sale. . . . . . . . . . . . . . . . 133,982 106,576
Loans held for sale. . . . . . . . . . . . . . . . 114,247 17,061
Loans and leases, net of unearned lease income,
deferred loan fees/costs and allowance for
possible loan and lease losses . . . . . . . . . 502,027 528,761
Interest-only strips receivable. . . . . . . . . . 22,125 17,076
Bank premises, leasehold improvements
and equipment, net . . . . . . . . . . . . . . . 13,482 12,829
Accrued interest receivable and other assets . . . 25,425 22,090
-------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . $879,169 $ 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.
See notes to consolidated financial statements.
-61-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
-----------------------
1998 1997*
-------- --------
(in thousands except share amounts)
Deposits:
Non-interest-bearing demand . . . . . . . . . . . $177,359 $162,242
Savings . . . . . . . . . . . . . . . . . . . . . 24,523 24,259
Interest bearing transaction and
money market accounts. . . . . . . . . . . . . . 266,463 231,424
Time . . . . . . . . . . . . . . . . . . . . . . 314,207 283,076
-------- --------
Total Deposits. . . . . . . . . . . . . . . . . . 782,552 701,001
Other liabilities and interest payable . . . . . . 18,347 13,894
Convertible debentures . . . . . . . . . . . . . . 0 2,468
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . 800,899 717,363
Shareholders' equity:
Preferred stock, no par value;
9,800,000 shares authorized;
none issued. . . . . . . . . . . . . . . . . . . 0 0
Preferred stock series A, no par value; 200,000
shares authorized, none issued . . . . . . . . . 0 0
Common stock, no par value; 10,000,000 shares
authorized; 5,301,756 and 5,019,254 shares
issued and outstanding at December 31, 1998
and 1997, respectively . . . . . . . . . . . . . 45,983 42,148
Retained earnings . . . . . . . . . . . . . . . . 32,230 26,598
Accumulated other comprehensive income, net of
tax of $40 and $445. . . . . . . . . . . . . . . 57 637
-------- --------
Total Shareholders' Equity. . . . . . . . . . . . 78,270 69,383
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . $879,169 $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.
See notes to consolidated financial statements.
-62-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------
1998 1997* 1996*
------- -------- -------
(in thousands, except per share amounts)
Interest income:
Loans and leases . . . . . . . . . . . $54,593 $50,383 $41,210
Federal funds sold . . . . . . . . . . 3,990 1,960 1,121
Securities:
Taxable . . . . . . . . . . . . . . . 5,375 5,420 3,383
Exempt from federal taxes . . . . . . 881 620 544
Other assets . . . . . . . . . . . . . 263 182 113
------- -------- -------
Total Interest Income. . . . . . . . . 65,102 58,565 46,371
Interest expense:
Savings deposits . . . . . . . . . . . 503 504 484
Transaction and money market accounts. 7,385 6,551 4,781
Time deposits. . . . . . . . . . . . . 17,052 15,442 11,427
Convertible debentures . . . . . . . . 50 283 1,072
Other. . . . . . . . . . . . . . . . . 630 441 196
------- -------- -------
Total Interest Expense . . . . . . . . 25,620 23,221 17,960
------- -------- -------
Net Interest Income. . . . . . . . . . 39,482 35,344 28,411
Provision for possible loan and lease
losses . . . . . . . . . . . . . . . 2,370 2,799 1,421
------- -------- -------
Net Interest Income After Provision for
Possible Loan and Lease Losses . . . 37,112 32,545 26,990
* 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.
See notes to consolidated financial statements.
-63-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(continued)
Year Ended December 31,
---------------------------------
1998 1997* 1996*
------- ------- -------
(in thousands, except per share amounts)
Non-interest income:
Net servicing and interest-only
strip income . . . . . . . . . . . . . . $ 4,230 $ 4,595 $ 4,100
Net gain on sale and securitization
of loans . . . . . . . . . . . . . . . . 2,910 3,320 479
Service charges on deposit accounts . . . 3,475 3,207 2,565
Other . . . . . . . . . . . . . . . . . . 3,986 2,564 2,226
------- ------- -------
Total Non-interest Income. . . . . . . . 14,601 13,686 9,370
Non-interest expense:
Salaries and related benefits . . . . . . 20,826 16,885 15,428
Net occupancy and equipment expense . . . 6,466 5,653 4,852
Other expense . . . . . . . . . . . . . . 10,976 9,072 8,198
------- ------- -------
Total Non-interest Expense. . . . . . . . 38,268 31,610 28,478
------- ------- -------
Income before provision for income taxes. 13,445 14,621 7,882
Provision for income taxes. . . . . . . . 5,767 5,673 2,995
------- ------- -------
Net Income. . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887
------- ------- -------
------- ------- -------
Basic Earnings per share . . . . . . . . $ 1.49 $ 1.96 $ 1.35
------- ------- -------
------- ------- -------
Weighted average shares used to calculate
basic earnings per share. . . . . . . . . 5,151 4,566 3,622
------- ------- -------
------- ------- -------
Diluted Earnings per share. . . . . . . . $ 1.41 $ 1.73 $ 1.10
------- ------- -------
------- ------- -------
Weighted average shares used to calculate
diluted earnings per share. . . . . . . . 5,474 5,280 5,014
------- ------- -------
------- ------- -------
* 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.
See notes to consolidated financial statements.
-64-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Common Stock Comprehensive
------------------- Comprehensive Retained Income,
Shares Amounts Income Earnings Net of Taxes Total
------- ------- ------ -------- ------------ -----
Balance at January 1, 1996*. . . . . . 3,392 $21,523 $20,644 $ (72) $42,095
Comprehensive Income
Net Income . . . . . . . . . . . . . . . . 0 0 $4,887 4,887 0 4,887
Other comprehensive income,
net of tax of $168 . . . . . . . . . . .
Unrealized gain(loss)
on available for sale securities,
net of reclassification adjustment of $75 0 0 (233) (233) (233)
-----
Total Comprehensive Income . . . . . . . . . 4,654
-----
-----
Stock options exercised. . . . . . . . . . . 32 226 0 0 226
Common stock issued on
conversion of debentures . . . . . . . . . 170 1,677 0 0 1,677
Cash dividends paid. . . . . . . . . . . . . 0 0 (1,367) 0 (1,367)
----- ------ ------- --- -------
Balance at December 31, 1996*. . . . . . . . 3,594 23,426 24,164 (305) 47,285
----- ------ ------- --- -------
Comprehensive Income
Net Income . . . . . . . . . . . . . . . . 0 0 8,948 8,948 0 8,948
Other comprehensive income,
net of tax of $665 . . . . . . . . . . .
Unrealized gain(loss) on
interest-only strips receivable and
available for sale securities,
net of reclassification adjustment of $51 0 0 942 0 942 942
-----
Total comprehensive income . . . . . . . . . 9,890
-----
-----
Stock options exercised. . . . . . . . . . . 129 1,081 0 0 1,081
Tax benefit derived from the
exercise of stock options. . . . . . . . . 0 547 0 0 547
Common stock issued on
conversion of debentures . . . . . . . . . 931 9,084 0 0 9,084
Cash dividends paid. . . . . . . . . . . . . 0 0 (1,810) 0 (1,810)
Common stock issued for
acquisition. . . . . . . . . . . . . . . . 171 3,317 0 0 3,317
Stock dividend on common stock . . . . . . . 194 4,693 (4,693) 0 0
Cash paid in lieu of
fractional shares. . . . . . . . . . . . . 0 0 (11) 0 (11)
----- ------ ------ --- ------
Balance at December 31, 1997*. . . . . . . . 5,019 42,148 26,598 637 69,383
----- ------ ------ --- ------
(Continued)
* 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.
-65-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Concluded)
Accumulated
Other
Common Stock Comprehensive
------------------- Comprehensive Retained Income,
Shares Amounts Income Earnings Net of Taxes Total
------- ------- ------ -------- ------------ -----
Balance at December 31, 1997* (forward). . . 5,019 $42,148 $26,598 $ 637 $69,383
Comprehensive income
Net Income . . . . . . . . . . . . . . . . 0 0 $7,678 7,678 0 7,678
Other comprehensive income,
net of tax of $406. . . . . . . . . . .
Unrealized gain(loss) on interest-only
strips receivable and
available for sale securities,
net of reclassification adjustment of $326 0 0 (580) (580) (580)
------
Total Comprehensive Income $7,098
------
------
Stock options exercised. . . . . . . . . . . 126 1,094 0 0 1,094
Tax benefit derived from the
exercise of stock options. . . . . . . . . 0 460 0 0 460
Common stock issued on
conversion of debentures . . . . . . . . . 157 2,281 0 0 2,281
Cash dividend paid . . . . . . . . . . . . . 0 0 (2,046) 0 (2,046)
----- -------- ------- ---- -------
Balance at December 31, 1998 . . . . . . . . 5,302 $ 45,983 $32,230 $ 57 $78,270
----- -------- ------- ---- -------
----- -------- ------- ---- -------
* 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.
See notes to consolidated financial statements.
-66-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------
1998 1997* 1996*
-------- ---------- --------
(in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization. . . . . . . . . . . . . 2,322 1,925 1,628
Provision for possible loan and lease losses . . . . . 2,370 2,799 1,421
Amortization of servicing asset and interest-only
strips receivable . . . . . . . . . . . . . . . . . . 3,460 1,718 0
Amortization of excess servicing . . . . . . . . . . . 0 0 1,315
Amortization of purchased mortgage servicing
rights. . . . . . . . . . . . . . . . . . . . . . . . 0 0 172
Gain on sale of government loans . . . . . . . . . . . (5,658) (3,748) (392)
Loans originated or purchased for sale . . . . . . . . (138,397) (87,282) (7,672)
Loans sold . . . . . . . . . . . . . . . . . . . . . . 126,134 80,558 9,214
Effect of changes in assets and liabilities-net
of effects from acquisition:
Interest receivable . . . . . . . . . . . . . . . . . 321 (1,023) (737)
Interest payable. . . . . . . . . . . . . . . . . . . (140) (54) 299
Prepaid expenses. . . . . . . . . . . . . . . . . . . 86 57 (171)
Other assets. . . . . . . . . . . . . . . . . . . . . 1,517 (383) (342)
Accrued expenses. . . . . . . . . . . . . . . . . . . 24 979 572
Current taxes payable . . . . . . . . . . . . . . . . 533 479 210
Deferred taxes. . . . . . . . . . . . . . . . . . . . (2,489) (266) 441
Other . . . . . . . . . . . . . . . . . . . . . . . . (596) (282) (503)
-------- ---------- --------
Total adjustments . . . . . . . . . . . . . . . . . . (10,513) (4,523) 5,455
-------- ---------- --------
Net cash (used in) provided by operating activities . (2,835) 4,425 10,342
-------- ---------- --------
* 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.
See notes to consolidated financial statements.
-67-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended December 31,
------------------------------------
1998 1997* 1996*
------- --------- -------
(in thousands)
Cash flows from investing activities:
Proceeds from:
Sales of mutual funds . . . . . . . . . . . . . . . . . . 2,816 2,697 0
Maturities of investment securities held to maturity. . . 1,000 1,012 1,378
Maturities of investment securities available for
sale. . . . . . . . . . . . . . . . . . . . . . . . . . 33,159 21,662 15,374
Sales of investment securities available for sale . . . . 7,025 6,015 14,874
Purchase of investment securities -
available for sale . . . . . . . . . . . . . . . . . . . . (67,904) (45,819) (60,523)
Purchase of mutual funds -
available for sale . . . . . . . . . . . . . . . . . . . . (2,000) (2,000) 0
Loans and leases made net of principal collections. . . . . (61,990) (84,480) (87,878)
Capital expenditures. . . . . . . . . . . . . . . . . . . . (2,099) (931) (5,128)
Proceeds from sale of assets. . . . . . . . . . . . . . . . 0 1,574 119
Net cash received in acquisition. . . . . . . . . . . . . . 0 8,570 0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 159 124
------- ------- --------
Net cash used in investing activities . . . . . . . . . . . (89,871) (91,541) (121,660)
Cash flows from financing activities:
Net increase in demand, interest bearing,
and savings accounts . . . . . . . . . . . . . . . . . . . 50,420 70,941 63,060
Net increase in time deposits . . . . . . . . . . . . . . . 31,131 22,365 71,546
Net change in securities sold under
repurchase agreements. . . . . . . . . . . . . . . . . . . (589) (404) 327
Net change in notes payable and debentures. . . . . . . . . (44) 0 2,650
Cash dividends paid . . . . . . . . . . . . . . . . . . . . (2,045) (1,810) (1,367)
Cash paid in lieu of fractional shares. . . . . . . . . . . 0 (11) 0
Cash received for stock options exercised . . . . . . . . . 1,094 1,081 226
------- ------- --------
Net cash provided by financing activities . . . . . . . . . 79,967 92,162 136,442
------- ------- --------
Net (decrease) increase in cash and cash equivalents. . . . (12,739) 5,046 25,124
Cash and cash equivalents - beginning of period . . . . . . 80,620 75,574 50,450
------- ------- --------
Cash and cash equivalents - end of period . . . . . . . . . $ 67,881 $80,620 $75,574
------- ------- --------
------- ------- --------
* 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.
See notes to consolidated financial statements.
-68-
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
SUPPLEMENTAL DISCLOSURES (in thousands) 1998 1997* 1996*
------- --------- -------
(in thousands)
Cash Paid For Income Taxes. . . . . . . . . . . . . . . . . 7,999 5,453 2,378
Cash Paid For Interest Payments . . . . . . . . . . . . . . 25,760 23,251 17,735
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 $2,281,000, $9,084,000 and
$1,677,000 of convertible debentures in 1998, 1997 and 1996, respectively.
These amounts are net of debenture offering costs of $143,000, $658,000 and
$138,000 in 1998, 1997 and 1996.
For the years ended December 31, 1998, 1997 and 1996, $853,000,
$1,798,000 and $546,000 of loans, respectively, were transferred to other
real estate owned.
On August 20, 1997, the Company issued a 5% stock dividend totaling
approximately $4.7 million.
In 1998, 1997 and 1996, $17.8 million, $35.4 million and $15.7 million
of unguaranteed SBA loans were transferred to held for sale status. In
addition, $32.3 million, $9.6 million and $9.2 million 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 $1,248,000 in loans were transferred to other assets.
See notes to consolidated financial statements.
-69-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The accompanying consolidated financial statements include the accounts
of SierraWest Bancorp ("Bancorp") and its subsidiary, SierraWest Bank
(collectively referred to as the "Company"). The Bancorp is a one-bank
holding company headquartered in Truckee, California. The Company operates as
one business segment providing services to the Company's clients in Northern
California and Northern Nevada through its 20 branches and various loan
production offices. The Company's principal business consists of attracting
deposits from the general public and using the funds to originate SBA, real
estate and other commercial loans to customers who are primarily small
businesses and individuals. Its primary source of revenue is interest on
loans and investments. The Company is not dependent on any single customer
for more than 10% of the Company's revenues.
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and general practices within the
banking industry. The more significant accounting and reporting policies not
described elsewhere in these notes to financial statements are discussed
below. Significant intercompany transactions have been eliminated in
consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents in the
consolidated statements of cash flows include cash and due from banks,
interest-bearing deposits in other banks, federal funds sold and securities
purchased under agreements to resell.
INVESTMENTS IN MUTUAL FUNDS. Investments in mutual funds consist of
mutual funds whose assets are invested primarily in U.S. Government
securities. At December 31, 1997 all mutual fund investments are classified
as available for sale and carried at market value. Unrealized gains and
losses on mutual funds are reported, net of tax, as a separate component of
shareholders' equity. Interest income on mutual funds is recorded as earned.
The Company did not hold any investments in mutual funds at December 31, 1998.
INVESTMENT SECURITIES. In accordance with Statement of Financial
Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES, the Company has classified its investment securities
and mutual funds as held to maturity or available for sale. Securities held
to maturity are carried at cost adjusted by the accretion of discounts and
amortization of premiums. The Company's policy of carrying such investment
securities at amortized cost is based upon its ability and management's
intent to hold these investment securities to maturity. Securities available
for sale may be sold to implement the Company's asset/liability management
strategies and in response to changes in interest rates, prepayment rates and
similar factors. These securities are recorded at their market values.
Unrealized gains or losses are included as a separate component of
shareholders' equity, net of tax. Gains or losses on sales of investment
securities are based on the specific identification method.
LOANS HELD FOR SALE. Loans held for sale are valued at the lower of
cost or market value. Valuation adjustments, if any, are charged through the
income statement. In practice, the adjustment is charged against the gain
(loss) on sale of loans. At December 31, 1998, loans held for sale consist
of the unguaranteed portion of loans which the Company intends to sell on a
securitized basis, guaranteed portions of SBA loans it intends to sell in
1999 and the guaranteed portions of Business and Industry ("B&I") loans that
are available for sale.
-70-
At December 31, 1997 loans held for sale consist of the unguaranteed portion
of loans which the Company intends to sell on a securitized basis and the
guaranteed portions of B &I loans that are available for sale.
-71-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
LOANS AND LOAN FEES. Loans receivable that Management has the intent
and ability to hold for the foreseeable future or until maturity or payoff
are reported at their outstanding principal balances reduced by any
charge-offs and net of any deferred fees or costs and unamortized premiums
and discounts on purchased loans. Interest income on loans and leases is
recognized as earned. When a loan is 90 days past due with respect to
principal or interest, and in the opinion of Management, interest or
principal is not collectible, or at such earlier time as Management
determines that the collectibility of such principal or interest is unlikely,
the accrual of interest is discontinued and all accrued but uncollected
interest income is reversed. Cash payments subsequently received on
nonaccrual loans are recognized as income only where the future collection of
the recorded value of the loan is considered by management to be probable.
Loan fees net of certain related direct costs to originate loans are deferred
and amortized over the contractual life of the loan using a method that
approximates a level yield method.
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES. The allowance for
possible loan and lease losses is maintained at a level considered adequate
to provide for losses inherent in the portfolio. The allowance is increased
by provisions and reduced by charge-offs (net of recoveries). The Company's
provision is based on Management's overall evaluation of the inherent risks
in the loan and lease portfolio and detailed evaluations of the
collectibility of specific loans. This evaluation process requires the use of
current estimates, which may vary from the ultimate collectibility
experienced in the future. The estimates used are reviewed periodically, and,
as adjustments become necessary, they are charged to operations in the period
in which they become known.
The Company accounts for impaired loans in accordance with SFAS No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN and SFAS No. 118, ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURE.
SFAS No. 114 requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient at the loan's observable market
rate or the fair value of the collateral if the loan is collateral dependent.
The Company's impaired loans are collateral dependent and therefore measured
using the fair value of the collateral. SFAS No. 114 also requires that
impaired loans for which foreclosure is probable should be accounted for as
loans. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans and requires
certain information to be disclosed. Interest is recognized on impaired
loans when cash is received and the future collection of principal is
considered by management to be probable.
A loan is impaired when, based upon current information and events, it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans are measured
for impairment as part of the Company's normal loan review process.
Impairment losses are included in the allowance for possible loan and lease
losses through a charge to provision for loan and lease losses.
LEASE RECEIVABLES. Leases are accounted for as direct financing leases
and are carried net of unearned income. Income from these leases is
recognized on a basis which produces a level yield on the outstanding net
investment in the lease.
SALES AND SERVICING OF SBA 7(A) LOANS. The Company originates loans to
customers under a Small Business Administration ("SBA") program that
generally provides for SBA guarantees of up to 80% of each loan. Prior to
1995, the Company sold the guaranteed portion of each loan to a third party
and retained the unguaranteed portion in its own portfolio. Beginning in
1995 and continuing through 1997, the Company retained both the guaranteed
and unguaranteed portions of most of the loans generated in its portfolio.
During 1998 the Company began selling a significant portion of the guaranteed
portions of loans it originates. For the guaranteed portion of SBA loans
sold, the Company may be required to refund the sales premium received on
such sales, if the borrower defaults or the loan prepays within 90 days of
the settlement date. A gain is recognized on the sale of SBA loans through
collection on sale of a premium over the adjusted carrying value, through
retention
-72-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
of an ongoing rate differential less a normal service fee (excess servicing
fee) between the rate paid by the borrower to the Company and the rate paid
by the Company to the purchaser, or both.
The Company accounts for loan sales and securitizations in accordance
with SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES. The statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on consistent
application of a financial-component approach that focuses on control. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Adoption of SFAS 125 has not had
a significant impact on the financial condition or operations of the Company.
To calculate the gain (loss) on sale of SBA 7(a) loans, the Company's
investment in an SBA loan is allocated among the retained portion of the
loan, the servicing retained, the interest-only strip and the sold portion of
the loan, based on the relative fair market value of each portion. The gain
(loss) on the sold portion of the loan is recognized at the time of sale
based on the difference between the sale proceeds and the allocated
investment. As a result of the relative fair value allocation, the carrying
value of the retained portion is discounted, with the discount accreted to
interest income over the life of the loan. That portion of the excess
servicing fees that represent contractually specified servicing fees
(contractual servicing) are reflected as a servicing asset which is amortized
over an estimated life using a method approximating the level yield method;
in the event future prepayments exceed Management's estimates and future
expected cash flows are inadequate to cover the unamortized servicing asset,
additional amortization would be recognized. The portion of excess servicing
fees in excess of the contractual servicing fees are reflected as
interest-only (I/O) strips receivable which are classified as interest-only
strips receivable available for sale and are carried at fair value. Prior to
the adoption of SFAS No. 125 the excess servicing fees were reflected as
excess servicing assets which were amortized over an estimated life using a
method approximating the level yield method. In its calculation of excess
servicing fees the Company has used 0.4% as its estimate of a normal
servicing fee.
The Company accounts for the sales of the guaranteed portion of Business
and Industry loans in a similar manner.
BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT. Premises,
leasehold improvements and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets, which
are: buildings, 30 years; leasehold improvements, 1 to 10 years; furniture
and equipment, 3 to 5 years. Fixed assets are assessed for impairment
whenever there is an indication that the carrying amount of an asset may not
be recoverable.
INVESTMENT IN REAL ESTATE. The Company owns a 32,000 sq. ft. office
building located in Vacaville, California. The building was partially
occupied by the corporate offices of California Community Bancshares
Corporation ("CCBC") and currently approximately 84% of the building is
occupied by third party tenants. Assets related to the building are included
in other assets. Income and expenses are included in other non-interest
income and other non-interest expense. The Company does not anticipate
retaining future ownership of this building.
OTHER REAL ESTATE OWNED. Property acquired by the Company through
foreclosure is initially recorded in the consolidated statements of
financial condition at the lower of estimated fair value less the cost to
sell or cost at the date of foreclosure. At the time a property is acquired,
if the fair value is less than the loan amounts outstanding, any difference
is charged against the allowance for possible loan and lease losses. After
acquisition, valuations are periodically performed and, if the carrying value
of the property exceeds the fair value, less estimated costs to sell, a
valuation allowance is established by a charge to operations.
-73-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Operating costs on foreclosed real estate are expensed as incurred.
Costs incurred for physical improvements to foreclosed real estate are
capitalized if the value is recoverable through future sale.
STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. No compensation expense has been recognized in the financial
statements for employee stock arrangements. The Company presents the
required pro forma disclosures of the effect of stock based compensation on
net income and earnings per share using the fair value method in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
INCOME TAXES. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
EARNINGS PER SHARE. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, EARNINGS PER SHARE. This Statement
replaces previous earnings per share reporting requirements. Earnings per
share under the new methods must be dually presented on the Statement of
Income for all periods presented. In addition, the Statement requires a
reconciliation of the numerators and denominators of basic and diluted
per-share computations. SFAS No. 128 is effective for interim and annual
periods ending after December 15, 1997. All earnings per share information
has been restated in accordance with SFAS No. 128.
Basic earnings per share excludes dilution and is computed by dividing
net income by the weighted average of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised
or converted into common stock. Reconciliation of the numerators and
denominators is presented in Note 14.
DERIVATIVE FINANCIAL INSTRUMENTS. As described below, during 1996 and
1997, the Company entered into interest rate swap agreements with a major
bank and with the FHLB to reduce its exposure to fluctuations in interest
rates. The Company accounts for these activities as matched swaps in
accordance with settlement accounting. An interest rate swap is considered
to be a matched swap if it is linked through designation with an asset or
liability, or both, that is on the balance sheet, provided that it has the
opposite interest characteristics of such balance sheet items.
-74-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Original
Notional Issue Original Company Company
Amount Date Term Pays Receives
$20,000,000 1-5-1996 Three years Prime 8.17%
(variable rate) (fixed rate)
$10,000,000 5-24-1996 Five years COFI plus .65% Three month
(variable rate) treasury bill
(variable rate)
$ 900,000 1-24-1997 Seven years 6.74% One year constant
(fixed rate) maturity treasury
index (variable rate)
Net interest income or expense resulting from the rate differential is
recorded under settlement accounting on a current basis. The related amount
payable to or receivable from the other bank or the FHLB is included in other
liabilities or assets. The fair value of the swaps are not recognized in the
financial statements. The net interest expense recognized in 1998, 1997 and
1996 was approximately $130,000, $105,000 and $32,000, respectively.
COMPREHENSIVE INCOME. On January 1, 1998, the Company adopted SFAS 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. Comprehensive income includes net
income and other comprehensive income. The Company's only source of other
comprehensive income is derived from unrealized gains and losses on
investment securities held-for-sale. Reclassification adjustments result
from gains or losses on investment securities that were realized and included
in net income of the current period that also had been included in other
comprehensive income as unrealized holding gains or losses in the period in
which they arose. They are excluded from comprehensive income of the current
period to avoid double counting. Annual financial statements for all prior
periods have been restated.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE. On January 1, 1998, the
Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. This statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. Management evaluates the Company's performance as
a whole and does not allocate resources based on the performance of different
lending or transaction activities and reports its operations on the basis of
a single business segment.
ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued 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 is in the process of determining the impact of SFAS No.
133 on the Company's financial statements, which is not expected to be
material.
RECLASSIFICATIONS. Certain items in the 1996 and 1997 financial
statements have been reclassified to conform to the 1998 presentation.
-75-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. INVESTMENT SECURITIES AND INVESTMENTS IN MUTUAL FUNDS:
The amortized cost and estimated market values of investments in securities
and mutual funds are as follows (amounts in thousands):
Estimated
Gross Gross -------------------------
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
----------- ------------ ----------- ------------ ---------
DECEMBER 31, 1998
Available for Sale:
U.S. Treasury securities . . . . . . . . $ 29,293 $ 168 $ 0 $ 29,461 $ 29,461
Securities of U.S.
government agencies. . . . . . . . . . 38,240 19 70 38,189 38,189
Securities of states and
political subdivisions . . . . . . . . 21,019 898 0 21,917 21,917
Mortgage-backed securities . . . . . . . 44,042 101 491 43,652 43,652
FHLB Stock . . . . . . . . . . . . . . . 763 0 0 763 763
----------- ------------ ----------- ------------ ---------
Total available for sale . . . . . . . . $ 133,357 $ 1,186 $ 561 $ 133,982 $ 133,982
----------- ------------ ----------- ------------ ---------
----------- ------------ ----------- ------------ ---------
DECEMBER 31, 1997
Held to Maturity:
U.S. Treasury securities . . . . . . . . $ 1,000 $ 0 $ 0 $ 1,000 $ 1,000
Available for Sale:
U.S. Treasury securities . . . . . . . . $ 46,384 $ 262 $ 0 $ 46,646 $ 46,646
Securities of U.S.
government agencies. . . . . . . . . . 14,379 15 45 14,349 14,349
Securities of states and
political subdivisions . . . . . . . . 13,604 499 33 14,070 14,070
Mortgage-backed securities . . . . . . . 31,131 118 330 30,919 30,919
FHLB Stock . . . . . . . . . . . . . . . 592 0 0 592 592
----------- ------------ ----------- ------------ ---------
Total available for sale . . . . . . . . $ 106,090 $ 894 $ 408 $ 106,576 $ 106,576
----------- ------------ ----------- ------------ ---------
----------- ------------ ----------- ------------ ---------
Mutual funds available for sale. . . . . $ 812 $ 0 $ 79 $ 733 $ 733
----------- ------------ ----------- ------------ ---------
----------- ------------ ----------- ------------ ---------
-76-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Scheduled maturities of investment securities at December 31, 1998 were as
follows (amounts in thousands):
Available for Sale
------------------------
Amortized Fair
Cost Value
----------- ---------
Within 1 year . . . . . . . . . . . . . . . . . . $ 34,678 $ 34,848
After 1 year but within 5 years . . . . . . . . . 29,819 29,846
After 5 years but within 10 years . . . . . . . . 4,021 4,214
After 10 years. . . . . . . . . . . . . . . . . . 20,034 20,659
FHLB Stock. . . . . . . . . . . . . . . . . . . . 763 763
Mortgage-backed securities. . . . . . . . . . . . 44,042 43,652
----------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . $133,357 $133,982
----------- ---------
----------- ---------
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. In addition, such
factors as prepayments and interest rates may affect the yield and the
carrying value of mortgage-backed securities. At December 31, 1998, the
Company held high-risk collateralized mortgage obligations with an amortized
cost of $1,344,000 and a fair value of $1,275,000 as defined by regulatory
agencies. At December 31, 1997, the Company had no high-risk collateralized
mortgage obligations as defined by regulatory agencies.
Assets pledged to secure public deposits and borrowings and for other
purposes required by law or contract include investment securities at
December 31, 1998 of approximately $36,455,000 and at December 31, 1997, of
approximately $46,168,000.
Proceeds from the sale of investments in debt securities were
$7,025,000, $6,015,000 and $14,986,000 during 1998, 1997 and 1996,
respectively. The Company recorded gross realized gains of $313,000, $42,000
and $88,000 thousand on the sales of investments in debt securities during
1998, 1997 and 1996, respectively. Gross realized losses on the sales of
investment in debt securities were $13,000 during 1996. Proceeds from the
sales of mutual funds were $2,816,000 during 1998 and $2,697,000 in 1997.
Gains on sales of mutual funds were approximately $4,000 in 1998 and $9,000
in 1997. No mutual funds were sold in 1996.
3. LOANS, LEASES, ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES AND LOANS
HELD FOR SALE:
The Company's customers are located throughout its service areas
covering primarily the whole of Northern California, including San Francisco
and Sacramento, and Reno and Carson City, Nevada. Approximately 29% of the
Company's loans at December 31, 1998, have been generated through the
Company's SBA lending activities. Of these loans, the SBA guarantee extends
to approximately 37% of the outstanding balance. $24.4 million of the
Company's loan portfolio represents the retained portion of SBA loans for
which the SBA guaranteed portion has been sold to investors. Approximately
80% of these loans are collateralized by commercial real estate and the
balance by other business assets. The Company's loans are not concentrated in
any particular industry segment.
-77-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At December 31, 1998 and 1997, the loan portfolio consisted of the
following (amounts in thousands):
1998 1997
---------- ---------
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 216,045 $ 240,599
Real estate--mortgage. . . . . . . . . . . . . . . . . . . . . . . 210,376 203,001
Real estate--construction. . . . . . . . . . . . . . . . . . . . . 68,922 70,193
Individual and other . . . . . . . . . . . . . . . . . . . . . . . 9,578 9,938
Lease receivables. . . . . . . . . . . . . . . . . . . . . . . . . 6,338 16,055
---------- ---------
Total gross loans and leases . . . . . . . . . . . . . . . . . . . 511,259 539,786
Unearned income on leases. . . . . . . . . . . . . . . . . . . . . 991 2,941
Net deferred loan fees . . . . . . . . . . . . . . . . . . . . . . (468) 193
Allowance for possible loan and lease losses . . . . . . . . . . . 8,709 7,891
---------- ---------
Total loans and leases, net of unearned income on leases, net
deferred fees and allowance for possible loan and lease losses. $ 502,027 $ 528,761
---------- ---------
---------- ---------
Loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . $ 114,247 $ 17,061
---------- ---------
---------- ---------
Included in commercial loans and loans held for sale are SBA loans
totaling $183,768,000 and $167,321,000 at December 31, 1998 and 1997,
respectively. The guaranteed portion of SBA loans in process of disbursement
totaled $8,796,000 and $8,897,000 at December 31, 1998 and 1997,
respectively. When these loans are fully disbursed, they will be available
for sale. Loans and portions of loans guaranteed by the federal government
were approximately $72 million and $62 million at December 31, 1998 and 1997,
respectively. Approximately $40 million and $2.5 million of those loans were
included in loans held for sale at December 31, 1998 and 1997, respectively.
The following schedule provides a summary of the future minimum lease
receivable payments to be received over the next five years (in thousands).
1999 $ 2,609
2000 1,953
2001 1,277
2002 358
2003 141
-------
Total $ 6,338
-------
-------
There are no contingent rentals included in income for each of the three
years in the period ended December 31, 1998.
Of total gross loans and leases at December 31, 1998, $8.7 million were
considered to be impaired. The allowance for possible loan and lease losses
included $1.1 million related to these loans. The amount of interest
received and recognized on these impaired loans in 1998 was $419,000. The
average recorded investment in impaired loans during 1998 was $7.3 million.
Of total gross loans and leases at December 31, 1997, $6.9 million were
considered to be impaired. The allowance for possible loan and lease losses
included $867,000 related to these loans. The amount of
-78-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
interest received and recognized on these impaired loans in 1997 was
$416,000. The average recorded investment in impaired loans during 1997 was
$6.8 million.
The changes in the allowance for possible loan and lease losses for the
years ended December 31, 1998, 1997, and 1996 were as follows (amounts in
thousands):
Year Ended
December 31,
---------------------------
1998 1997 1996
------- ------- -------
Balance, beginning of year . . . . . . . . . . $ 7,891 $ 5,647 $ 5,003
Provision for possible loan and lease losses . 2,370 2,799 1,421
Loans charged off. . . . . . . . . . . . . . . (2,067) (1,714) (1,089)
Recoveries . . . . . . . . . . . . . . . . . . 515 295 312
Acquisition. . . . . . . . . . . . . . . . . . 0 864 0
------- ------- -------
Balance, end of period . . . . . . . . . . . . $ 8,709 $ 7,891 $ 5,647
------- ------- -------
------- ------- -------
As of December 31, 1998 and 1997, loans totaling $8,664,000 and
$6,949,000, respectively, were on nonaccrual status. Forgone interest on
loans that were on nonaccrual status for the years ended December 31, 1998,
1997 and 1996, approximated $501,000, $311,000 and $327,000, respectively.
Cash collections of interest on nonaccrual loans for the same periods of
$419,000, $416,000, and $320,000, respectively, were included in interest on
loans in the Consolidated Statements of Income. The principal balance of
loans where scheduled payments are 90 days or more past their due date and
where interest has been accrued totaled $3,156,000, $1,576,000, and
$2,199,000, as of December 31, 1998, 1997 and 1996, respectively. Management
believes these loans are adequately secured and interest recorded on these
loans will be collected.
At December 31, 1998 there were no commitments to lend additional funds to
borrowers whose loans were classified as nonaccrual or who had restructured
loans.
Other real estate owned was $1,059,000 and $1,534,000 at December 31, 1998,
and 1997, respectively, and is recorded in other assets. At December 31, 1998
and 1997 the balance in the allowance for losses on other real estate owned was
zero. During the years ended December 31, 1998 and 1997, there was no
significant activity in the allowance for losses on other real estate owned.
-79-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. SALES AND SERVICING OF SBA LOANS:
Prior to January 1, 1997 the Company's excess servicing fees were
recorded as excess servicing assets which were amortized over the estimated
life of the related loans. Effective January 1, 1997, under provisions of
SFAS 125, excess servicing assets of $12.0 million recognized on SBA loans
and $0.15 million on B&I loans sold prior to January 1, 1997 and mortgage
servicing assets of $0.6 million, were reclassified to interest-only strips
receivable. The balance of excess servicing assets at January 1, 1997 were
reclassified to servicing assets. These assets are amortized as an offset to
loan servicing income and I/O strip income over the estimated life of the
related loans.
Interest-only strips receivable are classified as interest-only strips
receivable available for sale and are carried at fair value. On a quarterly
basis the Company reviews its servicing assets, stratified by loan type, for
impairment. The amount of impairment recognized is the amount by which the
carrying amount of the servicing assets exceeds their fair value. This
amount is recorded as a valuation allowance. There was no activity in the
valuation allowance during 1997. During 1998 the valuation allowance was
increased by $420,000 which was recorded as a charge to income. The ending
balance at December 31, 1998 in the valuation allowance was $420,000. The
fair value of the Company's servicing assets at December 31, 1998 based on
the current quoted market prices for similar instruments was estimated at
$2.0 million. The carrying amount net of valuation allowance, at this same
date was also $2.0 million.
During 1998, the Company changed its estimates regarding the prepayment
speeds of SBA loans it originates and services for investors. The net effect
on income before provision for income taxes for 1998 was a decrease of
approximately $1 million.
A summary of the activity in SBA loans for the years ended December 31,
1998, 1997 and 1996, is as follows (amounts in thousands):
December 31,
--------------------------------------
1998 1997 1996
-------- -------- -------
Excess servicing retained on January 1,. . . . . . . . . . . $ 0 $ 14,188 $14,813
Reclassification to servicing assets . . . . . . . . . . . . 0 2,180 0
Reclassification to I/O strips (1) . . . . . . . . . . . . . 0 12,758 0
Servicing assets at January 1, . . . . . . . . . . . . . . . 2,021 0 0
I/O strips at January 1, . . . . . . . . . . . . . . . . . . 16,401 0 0
Additions to excess servicing assets at sale . . . . . . . . 0 0 690
Additions to servicing assets at sale. . . . . . . . . . . . 685 114 0
Additions to I/O strips at sale (2). . . . . . . . . . . . . 9,031 5,089 0
Amortization charged against earnings -
servicing assets/excess servicing . . . . . . . . . . . . . 261 273 1,315
Amortization charged against earnings - I/O strips . . . . . 2,779 1,446 0
Balance of excess servicing retained at December 31. . . . . 0 0 14,188
Balance of servicing assets at December 31 . . . . . . . . . 2,445 2,021 0
Balance of I/O strips at December 31 . . . . . . . . . . . . 22,653 16,401 0
Unrealized (loss)/gain on I/O strips at December 31. . . . . (528) 675 0
Servicing assets valuation allowance at December 31. . . . . (420) 0 0
(1) Includes $600 thousand in purchased mortgage servicing rights and $150
thousand in excess servicing on B&I loans.
(2) Includes $367 thousand related to B&I loan sales during 1997.
-80-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
-81-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Included in the fair value of I/O strips at December 31, 1998 and 1997,
respectively is $464 thousand and $512 thousand related to B&I loans of which
$11 thousand and $15 thousand represents the unrealized gain on these assets.
Excess servicing retained at December 31, 1996 includes $150 thousand
generated on the sale of B&I loans.
Sales of guaranteed portions of SBA loans totaled $32.3 million, $9.6
million and $6.9 million for the years ended December 31, 1998, 1997 and
1996, respectively.
In 1998 the Company completed a securitization of $85 million in SBA 504
and similar loans and recorded a gain of $890 thousand on this transaction.
Related to this transaction the Company recorded a recourse obligation of
$2.8 million, representing the present value of projected future losses, and
interest-only strips receivable totaling $8.8 million.
In June, 1997 $51.3 million of unguaranteed portions of SBA loans were
securitized. A gain of $2.6 million was recorded upon securitization and
approximately $4 million in additional interest-only strips receivable was
recorded. A recourse obligation of $3,272 thousand was recorded at
securitization of which $250 thousand in 1997 and $455 thousand in 1998 was
subsequently credited to expense related to the paydown of loans included in
the securitization.
For the years ended December 31, 1998, 1997 and 1996, $96.3 million,
$78.1 million and $7.3 million of unguaranteed portions of SBA and similar
loans, respectively, were originated for sale.
5. BANK PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Bank premises, leasehold improvements and equipment at December 31, 1998
and 1997, consisted of the following (amounts in thousands):
December 31, 1998
------------------------------------------
Accumulated
Depreciation/ Net
Cost Amortization Book Value
-------- -------------- ----------
Land . . . . . . . . . . . . . . . . . . $ 1,475 $ 0 $ 1,475
Buildings. . . . . . . . . . . . . . . . 8,848 1,682 7,166
Leasehold improvements . . . . . . . . . 3,865 2,246 1,619
Furniture and equipment. . . . . . . . . 11,283 8,061 3,222
-------- -------------- ----------
Total. . . . . . . . . . . . . . . . . . $ 25,471 $ 11,989 $ 13,482
-------- -------------- ----------
-------- -------------- ----------
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SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
December 31, 1997
------------------------------------------
Accumulated
Depreciation/ Net
Cost Amortization Book Value
-------- -------------- ----------
Land . . . . . . . . . . . . . . . . . . $ 1,080 $ 0 $ 1,080
Buildings. . . . . . . . . . . . . . . . 8,749 1,361 7,388
Leasehold improvements . . . . . . . . . 3,604 1,982 1,622
Furniture and equipment. . . . . . . . . 9,822 7,083 2,739
-------- -------------- ----------
Total. . . . . . . . . . . . . . . . . . $ 23,255 $ 10,426 $ 12,829
-------- -------------- ----------
-------- -------------- ----------
Depreciation and amortization amounts included in net occupancy and
equipment expenses were $1,951,000, $1,816,000 and $1,576,000, for the years
ended December 31, 1998, 1997 and 1996, respectively.
6. DEPOSITS:
The aggregate amount of certificates of deposit with balances of
$100,000 or more, was $159,905,000 and $107,141,000 at December 31, 1998 and
1997, respectively.
Maturities of certificates of deposit at December 31, 1998 were as
follows (amounts in thousands):
Year
----
1999 . . . . . . . . . . . . . 283,291
2000 . . . . . . . . . . . . . 20,762
2001 . . . . . . . . . . . . . 3,517
2002 . . . . . . . . . . . . . 4,227
2003 . . . . . . . . . . . . . 2,315
Thereafter . . . . . . . . . . 95
---------
$ 314,207
---------
---------
7. CONVERTIBLE DEBENTURES:
Convertible subordinated debentures, which totaled $2,468 thousand at
December 31, 1997, were originally issued by Continental Pacific Bank during
1993. These debentures were variable rate with a minimum rate of 8%.
Balances outstanding at December 31, 1997, and during 1998 carried an
interest rate of 8%. During 1998, the Company called these debentures for
redemption effective August 31, 1998, if not converted by August 31, 1998. A
total of $2,424 thousand of debentures were converted to Company common stock
at the conversion rate of $15.39 per share. The balance of $44 thousand were
redeemed at 100% of the principal value.
8. SALARY CONTINUATION PLAN:
The Company has a Salary Continuation Plan covering certain of its
senior officers and directors. Under this plan, the officers and directors
or their beneficiaries will receive monthly payments after retirement or, if
earlier, death. Certain officers' and directors' agreements provide for an
acceleration of benefits such that
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SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
the full amount due under the agreement would become payable in the case of a
change of control of the Company. The Company recognized $95,000, $114,000
and $105,000 as compensation expense in 1998, 1997 and 1996, respectively,
under this plan. To protect the Company in the event of death prior to
retirement, the Company has secured life insurance on the lives of the
covered officers and directors.
CCBC had a Salary Continuation Plan covering certain of its senior
officers. Upon the acquisition of CCBC by the Company an acceleration of
benefits under this plan was activated resulting in a 1998 charge to
compensation expense, including normal accruals, of $2,054,000. Charges
accrued under this plan were $55,000 in 1997 and $41,000 in 1996. Amounts
due by the Company under the plan have been transferred to a third party
trust.
9. COMMITMENTS AND CONTINGENT LIABILITIES:
LEASE PAYMENTS. The Company is obligated for rental payments under
certain operating lease, capitalized lease and contract agreements, some of
which contain renewal options. Total rental expense included in net occupancy
and equipment expense amounted to $1,895,000, $1,728,000 and $1,642,000, for
the years ended December 31, 1998, 1997 and 1996, respectively. At December
31, 1998, future minimum rentals to be received under noncancellable
subleases were approximately $303,000.
At December 31, 1998, future minimum payments, by year and in the
aggregate, under the capital leases and noncancellable operating leases with
initial or remaining terms of one year or more consisted of the following (in
thousands):
Capital Operating
Year Leases Leases
---- -------- ---------
1998 . . . . . . . . . . . . . . . . . . $ 42 $ 1,954
1999 . . . . . . . . . . . . . . . . . . 42 1,774
2000 . . . . . . . . . . . . . . . . . . 42 1,416
2001 . . . . . . . . . . . . . . . . . . 42 1,389
2002 . . . . . . . . . . . . . . . . . . 42 999
Thereafter . . . . . . . . . . . . . . . 342 2,833
-------- ---------
Total minimum lease payments . . . . . . 552 $10,365
---------
---------
Less amount representing interest. . . . (263)
--------
Present value of net minimum
lease payments . . . . . . . . . . . . $ 289
--------
--------
COMMITMENTS TO LEND. 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 consolidated financial statements. As of December 31, 1998 and 1997,
the Company had outstanding $222,066,000 and $169,235,000, respectively, in
commitments to extend credit and $4,337,000 and $5,312,000, respectively, in
standby letters of credit. At December 31, 1998, no losses are anticipated as
a result of these commitments.
Loan commitments are typically contingent upon the borrower meeting
certain financial and other covenants, and such commitments typically have
fixed expiration dates and sometimes require payment of fees. Approximately
$62,188,000 of the commitments at December 31, 1998, relate to SBA loans
which may require a construction phase, generally lasting less than 12
months. The remainder relate primarily to
-84-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
commercial lines of credit, construction loans, equity lines of credit, and
commercial loans. The Company evaluates each potential borrower and the
necessary collateral on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities, or business
assets.
Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a client to a third party. These
guarantees are issued to the Company's commercial clients, and are typically
short-term in nature. Credit risk is similar to that involved in extending
loan commitments to customers, and the Company accordingly uses evaluation
and collateral requirements similar to those for loan commitments. Most such
commitments are collateralized.
LEGAL ACTIONS. During 1987, 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 adjacent to the tanks but
was aware of the existence of the tanks and disclosed this to the purchaser.
A formal settlement agreement has been executed by the parties and is
awaiting final court approval by the Eastern California District of the U. S.
District Court where an action was filed in the summer of 1995. Under the
terms of the formal settlement, the Bank will pay a small sum to a common
fund for remediation of the property and the Bank further agrees to refinance
on behalf of the existing owner of the property two senior liens and to
consolidate certain other debt securing the property into a new deed of trust
contingent upon remediation of the contamination by a licensed contractor and
approval by the appropriate governmental agencies.
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 effect on the
Company's financial position or results of operations.
RESERVES. The Company is required to maintain reserves with the Federal
Reserve Bank of San Francisco equal to a percentage of its reservable
deposits. The reserve requirement at December 31, 1998 and 1997 was $0 and
$11,102,000, respectively. As compensation for check-clearing services,
additional compensating balances of $3,438,000 and $3,175,000 at December 31,
1998 and 1997, respectively, were required to be maintained with the Federal
Reserve Bank. In addition, at December 31, 1998 and 1997, the Company had
restricted access to approximately $3.7 million and $2.2 million of on
balance sheet cash balances which are required to be maintained pursuant to
its securitizations.
10. NOTES PAYABLE:
Included in other liabilities at December 31, 1998 and 1997 are amounts
borrowed from the FHLB. Borrowings require monthly interest payments with
the principal payable at maturity. Amounts consist of the following:
Borrowing from the FHLB, matures March 26, 2001,
interest at 6.44% $ 750,000
Borrowing from the FHLB, matures April 23, 2003,
interest at 6.92% 1,900,000
-------------
-85-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Total $ 2,650,000
-------------
-------------
-86-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
INCOME TAXES:
The current and deferred amounts of the tax provision for the years ended
December 31, 1998, 1997 and 1996 are as follows (amounts in thousands):
December 31,
-------------------------------------
1998 1997 1996
-------- -------- -------
Federal Currently payable. . . . . . . $ 6,668 $ 4,631 $ 1,921
Deferred . . . . . . . . . . . (2,218) (255) 332
State Currently payable. . . . . . . 1,588 1,308 633
Deferred . . . . . . . . . . . (271) (11) 109
-------- -------- -------
$ 5,767 $ 5,673 $ 2,995
-------- -------- -------
-------- -------- -------
Total Currently payable. . . . . . . $ 8,256 $ 5,939 $ 2,554
Deferred . . . . . . . . . . . (2,489) (266) 441
-------- -------- -------
$ 5,767 $ 5,673 $ 2,995
-------- -------- -------
-------- -------- -------
-87-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Deferred income taxes reflect the net tax effects of temporary differences
in the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
net deferred tax liability as of December 31, 1998 and 1997 are as follows
(amounts in thousands):
December 31,
----------------------
Deferred Tax Assets: 1998 1997
------- -------
Book loan loss allowance in excess of tax loan loss allowance $ 3,401 $ 2,862
State taxes paid or accrued 378 396
Accrued personal leave 298 232
Deferred compensation 1,391 418
Accrued expenses 586 502
Other 571 454
------- -------
6,625 4,864
------- -------
Deferred Tax Liabilities:
Unamortized book gain in excess of unamortized tax gain
on sale of SBA loans $ 888 $ 2,217
Deferred loan costs 1,468 1,104
Loans and securities marked to market 590 748
Unrealized gain on investment securities and I/O strips receivable 39 444
Other 716 321
------- -------
3,701 4,834
------- -------
Net deferred tax asset $ 2,924 $ 30
------- -------
------- -------
The total tax provision differs from the statutory federal income tax
rates for the reasons shown in the following table:
December 31,
------------------------------
1998 1997 1996
----- ---- -----
Tax at statutory federal rate. . . . . . . . . . . 35.0% 35.0% 35.0%
State taxes, net of federal benefit. . . . . . . . 4.8 5.4 5.0
Income exempt from federal taxation. . . . . . . . (2.1) (1.0) (1.6)
Increase in cash surrender value
of life insurance policies . . . . . . . . . . . (0.4) (0.3) (0.5)
Nondeductible merger expenses. . . . . . . . . . . 2.8 0.9 0
Other, net . . . . . . . . . . . . . . . . . . . . 2.8 (1.2) 0.1
----- ----- -----
Effective tax rate . . . . . . . . . . . . . . . . 42.9% 38.8% 38.0%
----- ----- -----
----- ----- -----
-88-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. PREFERRED STOCK:
On December 21, 1995, the Company designated 200,000 shares of its
10,000,000 authorized preferred shares as Series A Junior Participating
Preferred Stock (Series A stock). One share of Series A stock has the same
voting and participation rights as one hundred shares of common stock. On
this same date, the Company's Board of Directors adopted a shareholder rights
protection plan (the Plan) and declared a dividend of one stock right for
each share of common stock outstanding on January 16, 1996. Upon the
occurrence of certain events, the right is convertible into one one-hundredth
of a share of Series A stock for an exercise price of $40. As the rights are
not convertible at the option of the holder and there is no assurance that
they will become convertible, the Company has not assigned a value to the
rights. The Plan became effective March 3, 1996. On January 29, 1998, the
Company amended the Plan and increased the exercise price of the stock rights
from $40 to $100. On February 25, 1999, the Company amended the Plan to
exclude BancWest Corporation from the provisions of the Plan. See Note 20.
13. OTHER EXPENSE:
Other expense for the years ended December 31, 1998, 1997 and 1996 include
the following (amounts in thousands):
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- -------- --------
Advertising. . . . . . . . . . . . $ 1,062 $ 774 $ 721
Audit and accounting fees. . . . . 415 370 229
Consulting . . . . . . . . . . . . 1,243 1,113 671
Directors' fees and expenses . . . 462 597 506
Insurance(1) . . . . . . . . . . . 376 336 335
Legal fees . . . . . . . . . . . . 479 334 666
Postage. . . . . . . . . . . . . . 573 476 438
Real estate expenses . . . . . . . 305 377 300
Stationery and supplies. . . . . . 669 619 639
Telephone. . . . . . . . . . . . . 589 539 461
Sundry losses. . . . . . . . . . . 733 580 839
Other. . . . . . . . . . . . . . . 4,070 2,957 2,393
--------- -------- --------
$ 10,976 $ 9,072 $ 8,198
--------- -------- --------
--------- -------- --------
- ---------------
(1) Excludes medical insurance and workers' compensation premiums which are
included in salaries and related benefits.
14. EARNINGS PER SHARE:
During the fourth quarter of 1998, the Company adopted SFAS No. 128,
EARNINGS PER SHARE. This statement replaces previous earnings per share
reporting requirements and requires presentation of both basic and diluted
earnings per share. All earnings per common and equivalent share information
has been restated to give effect to the adoption of SFAS No. 128. Basic
earnings per share is computed by dividing net income by the weighted average
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common
stock.
-89-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
-90-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 years ended December 31:
1998 1997 1996
------- ------- -------
(in thousands, except per share data)
CALCULATION OF BASIC EARNINGS PER SHARE
Numerator - net income $7,678 $8,948 $4,887
Denominator - weighted average common shares
outstanding 5,151 4,566 3,622
------- ------- -------
Basic Earnings Per Share $ 1.49 $ 1.96 $ 1.35
------- ------- -------
------- ------- -------
CALCULATION OF DILUTED EARNINGS PER SHARE
Numerator:
Net Income $7,678 $8,948 $4,887
Effect of convertible debentures 29 164 626
------- ------- -------
Net Income and assumed conversions $7,707 $9,112 $5,513
Denominator:
Weighted average common shares outstanding 5,151 4,566 3,622
Dilutive effect of options 233 266 165
Dilutive effect of convertible debentures 90 448 1,227
------- ------- -------
5,474 5,280 5,014
------- ------- -------
Diluted Earnings Per Share $ 1.41 $ 1.73 $ 1.10
------- ------- -------
------- ------- -------
15. EMPLOYEE STOCK OPTION PLAN:
Under the Company's 1988 stock option plan, 519,750 shares of stock were
reserved for employee stock options. Options under this plan could be
granted to full-time salaried officers and employees and to directors of
Bancorp and its subsidiary at the fair market value of the stock on the date
of grant. With the exception of non-employee director options granted after
August 16, 1995, options granted under the 1988 plan are exercisable for a
period of five years, with 20% of the options vesting each year. Options
granted to non-employee directors after August 16, 1995 are fully vested upon
grant and have a term and exercise period of ten years. The 1988 plan was
terminated in 1996 and replaced by a new plan, under which 472,500 shares are
available for issuance. Options under this plan may be granted to full-time
salaried officers and employees at the fair market value of the stock on the
date of the grant. The options have a term of ten years and vesting
provisions are determined by a committee of the Board of Directors, with a
minimum of 20% of the options vesting each year.
CCBC had two stock option plans. No options are currently issuable
under these plans and the Company is currently in the process of terminating
the plans. Outstanding options were adjusted for the exchange ratio as
defined in the merger agreement. The following tables include activity in
the CCBC plans as adjusted for the exchange ratio.
-91-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following is a summary of stock option activity:
(Adjusted to reflect the 5% stock dividend paid August 29, 1997)
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding, January 1, 1996. . . . . . . . . . . . . . 502,306 $ 9.06
Granted . . . . . . . . . . . . . . . . . . . . . . . 82,063 13.80
Terminated. . . . . . . . . . . . . . . . . . . . . . (27,021) 7.61
Exercised . . . . . . . . . . . . . . . . . . . . . . (33,990) 6.65
--------
Outstanding, December 31, 1996 (325,650 exercisable
at a weighted average price of $10.29) . . . . . . . . 523,358 10.05
Granted . . . . . . . . . . . . . . . . . . . . . . . 68,277 18.71
Terminated. . . . . . . . . . . . . . . . . . . . . . (16,578) 10.86
Exercised . . . . . . . . . . . . . . . . . . . . . . (132,947) 8.14
--------
Outstanding, December 31, 1997 (271,419 exercisable
at a weighted average price of $11.09) . . . . . . . . 442,110 11.92
Granted . . . . . . . . . . . . . . . . . . . . . . . 33,190 28.13
Terminated. . . . . . . . . . . . . . . . . . . . . . (8,748) 7.67
Exercised . . . . . . . . . . . . . . . . . . . . . . (128,829) 9.25
--------
Outstanding, December 31, 1998. . . . . . . . . . . . . 337,723 14.41
--------
--------
Additional information regarding options outstanding as of December 31,
1998 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------------
Weighted Average
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (Yrs) Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ 8.81 - 9.29 74,220 5.2 $ 9.20 67,920 $ 9.23
10.71 - 11.47 68,139 1.7 10.75 42,519 10.75
12.50 - 14.76 102,874 6.0 13.37 87,124 13.30
16.19 - 19.77 57,540 8.0 17.54 12,197 17.39
22.86 - 36.50 34,950 9.3 30.55 1,990 24.65
------- -------
337,723 211,750
------- -------
------- -------
At December 31, 1998, 304,200 shares were available for future grants
under the 1996 plan.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of 1995. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The fair value of the options granted
-92-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
during 1998, 1997 and 1996 is estimated as $343,000, $397,000 and $352,000 on
the date of grant using a binomial options pricing model with the following
assumptions: For grants made in 1998: expected life, seven and one-half
years; average risk free interest rate 5.38% and stock volatility 34%. For
employee grants made in 1997: expected life, seven and one-half years;
average risk free interest rate 6.19% and stock volatility 25%. For fully
vested grants made in 1996: expected life, seven years; risk free interest
rate, 5.97%. For all other employee grants made in 1996: expected life,
four years; risk free interest rates, 5.76%. For all grants made in 1996,
stock volatility was assumed to be 30%.
Dividends were assumed to be payable at 1.3% during 1998 and 2.5% during
1997 and 1996. The weighted average per share fair value of the 1998, 1997
and 1996 awards was $14.97, $6.15 and $4.69, respectively. The Company's
calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. Had compensation cost for the
grants been determined based upon the fair value method, the Company's net
income and earnings per share would have been adjusted to the pro forma
amounts indicated below.
1998 1997 1996
------- ------- -------
(in thousands)
Net income
As reported. . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887
Pro forma-basic. . . . . . . . . . 7,542 8,866 4,692
Pro forma-diluted. . . . . . . . . 7,572 9,030 5,318
Basic earnings per share
As reported. . . . . . . . . . . . $ 1.49 $ 1.96 $ 1.35
Pro forma. . . . . . . . . . . . . 1.47 1.95 1.30
Diluted earnings per share
As reported. . . . . . . . . . . . $ 1.41 $ 1.73 $ 1.10
Pro forma. . . . . . . . . . . . . 1.39 1.71 1.06
The impact of outstanding non-vested stock options granted prior to 1995
has been excluded from the pro forma calculation; accordingly, the pro forma
adjustments are not indicative of future period pro forma adjustments, when
the calculation will apply to all applicable stock options.
16. EMPLOYEE STOCK OWNERSHIP PLAN:
Officers and other employees of Bancorp and its subsidiary are eligible
for participation in the "SierraWest Bancorp KSOP Plan" (the "KSOP") which
provides for a qualified cash or deferred arrangement and discretionary
employer matching and profit sharing contributions. The Company contributes
to the plan at the discretion of the Board of Directors. Contributions can
take the form of cash contributions or Bancorp common stock. Contributions of
$448,000, $317,000, and $238,000 were made to the KSOP in 1998, 1997 and
1996, respectively. The CCBC profit sharing plan is currently in the process
of being terminated.
CCBC had a profit sharing plan for its employees under which annual
contributions were made at the discretion of its Board of Directors.
Contributions of approximately $185,000, $143,000 and $132,000 were made to
this plan in 1998, 1997 and 1996, respectively.
17. CAPITAL REQUIREMENTS AND REGULATORY RESTRICTIONS:
-93-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company is regulated by the Federal Reserve Board and is limited as to
the payment of dividends by California corporate law to the amount of its
retained earnings. SierraWest Bank is regulated by the Federal Deposit
Insurance Corporation (the "FDIC"), whose regulations generally do not limit the
payment of dividends. In addition to the FDIC, SierraWest Bank is also regulated
by the California State Banking Department. California banking laws limit cash
dividends to the lesser of retained earnings or net income for the last three
years, net of the amount of distributions made to shareholders during such
period. At December 31, 1998, in accordance with statutory restrictions, $15.4
million of Bancorp's retained earnings were restricted as to the payment of
dividends; however, banking regulations also require that each bank maintain
certain capital ratios. These requirements may further act to limit the payment
of dividends.
The Company and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and,
possibly, additional discretionary - actions by regulators that, if undertaken,
could have a material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company's and the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and the Bank's capital
amounts and the Bank's prompt corrective action classification are also subject
to qualitative judgements by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1998, that the Company and the Bank meet all capital adequacy requirements
to which they are subject.
The most recent notifications from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1998 and 1997 categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
-94-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company's and the Bank's actual capital amounts (in thousands) and
ratios are also presented, respectively, in the following tables.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $ 84,684 12.4% $ 54,632 8.0% N/A N/A
SierraWest Bank 76,277 11.1% 54,802 8.0% 68,502 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 76,146 11.2% 27,316 4.0% N/A N/A
SierraWest Bank 67,712 9.9% 27,401 4.0% 41,101 6.0%
Tier I Capital (to Average Assets):
Consolidated 76,146 8.8% 34,801 4.0% N/A N/A
SierraWest Bank 67,712 7.8% 34,784 4.0% 43,480 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $ 75,826 12.7% $ 47,855 8.0% N/A N/A
SierraWest Bank 72,087 12.0% 47,942 8.0% 59,928 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 66,377 11.1% 23,928 4.0% N/A N/A
SierraWest Bank 61,419 10.2% 23,971 4.0% 35,957 6.0%
Tier I Capital (to Average Assets):
Consolidated 66,377 8.6% 30,802 4.0% N/A N/A
SierraWest Bank 61,419 8.0% 30,785 4.0% 38,482 5.0%
18. RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Company makes loans to directors,
senior officers and shareholders on substantially the same terms, including
interest rates and collateral, as comparable transactions with unaffiliated
persons.
Summary of the activity for the years ended December 31, 1998 and 1997 is
as follows (renewals are not reflected as either new loans or repayments):
1998 1997
------------- -------------
Balance at beginning of year $ 4,413,441 $ 3,493,092
Borrowings 1,014,729 1,331,000
Principal repayments (1,097,722) (410,651)
Other Changes* (2,877,505) 0
------------- -------------
Balance at end of year $ 1,452,943 $ 4,413,441
------------- -------------
------------- -------------
*Represents loans to former directors and executive officers who are no longer
related parties.
-95-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Company disclose the fair value of financial instruments for
which it is practicable to estimate that value. Although Management uses its
best judgment in assessing fair value, there are inherent weaknesses in any
estimating technique that may be reflected in the fair values disclosed. The
fair value estimates are made at a discrete point in time based on relevant
market data, information about the financial instruments and other factors.
Estimates of fair value of instruments without quoted market prices are
subjective in nature and involve various assumptions and estimates that are
matters of judgment. Changes in the assumptions used could significantly affect
these estimates. Fair value has not been adjusted to reflect changes in market
condition for the period subsequent to December 31, 1998 and 1997. Therefore,
estimates presented herein are not necessarily indicative of amounts which could
be realized in a current transaction.
The following estimates and assumptions were used at December 31, 1998 and
1997, to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS. For cash and cash equivalents, the carrying
amount is estimated to be fair value.
INVESTMENT SECURITIES AND MUTUAL FUNDS. For investment securities and
mutual funds, fair values are based on quoted market prices or dealer quotes.
If a quoted price is not available, fair value is estimated using quoted market
prices for similar securities.
LOAN RECEIVABLES. The fair value of non-SBA loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of loans held or available for sale is
estimated using quoted market prices for similar loans or the expected gain in
the case of loans being pooled for securitization. SBA loans in process which
will become available for sale after final disbursement are valued at cost plus
the estimated gain on sale but excluding any gain allocable to the undisbursed
portion of the loans. In assigning current market rates, it has been assumed
that these reflect future losses and that no additional provision for loan and
lease losses is required. The unguaranteed portion of SBA loans not being
pooled for securitization have been valued at book value, which approximates
fair value. Loans on nonaccrual or work out status have been valued at an
estimated average realization value for the underlying collateral based on past
experience in liquidation of comparable loans or by discounting estimated future
cash flows using current interest rates with an additional risk adjustment
reflecting the individual characteristics of the loans.
EXCESS SERVICING/SERVICING ASSET/I/O STRIPS RECEIVABLE. The servicing
spread net of normal servicing is valued at the current rate paid by the market
for SBA interest strips at December 31, 1998 and 1997. A discount to the SBA
strip pricing is applied to reflect a reduction in marketability for servicing
spread included in the Company's June, 1997 securitization.
CASH SURRENDER VALUE OF LIFE INSURANCE. The carrying amount is estimated
to be the fair value.
DEPOSIT LIABILITIES. The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
-96-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTES PAYABLE. The fair value of notes payable is estimated by discounting
the contractual cash flows using the current interest rate at which similar
borrowings for the same remaining maturities could be made.
-97-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
CONVERTIBLE DEBENTURES. Fair value is based on quoted market prices at
December 31, 1997.
COMMITMENTS TO FUND LOANS. The Company's commitments to fund loans are
primarily for adjustable rate loans indexed to the prime rate. For these
commitments, there is no difference between the committed amount and fair value.
At December 31, 1998 and 1997, the Company's commitments to fund fixed rate
loans were at rates which approximated market. The unrealized gain from the
subsequent sale of the commitment portion of government loans in process at
December 31, 1998 and 1997 is estimated to be $409 thousand and $334 thousand,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS. Based on quoted market prices at
December 31, 1998 and December 31, 1997, the interest rate swaps had a negative
fair value of $167 thousand and $286 thousand, respectively.
LETTERS OF CREDIT. The Company's standby letters of credit have been
valued based on the fees charged for such instruments at December 31, 1998 and
1997. The difference between the letter of credit amounts and the fair value of
such amounts is immaterial.
The Company did not hold any commitments to sell loans at December 31, 1998
or 1997.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
December 31, 1998
-------------------------
Carrying Fair
Amount Value
---------- ----------
Financial Assets:
Cash and cash equivalents. . . . . . . . . $ 67,881 $ 67,881
Investment securities. . . . . . . . . . . 133,982 133,982
Loans receivable . . . . . . . . . . . . . 616,274 637,929
I/O strips receivable. . . . . . . . . . . 22,125 22,125
Servicing asset. . . . . . . . . . . . . . 2,025 2,025
Cash surrender value of life insurance . . 2,461 2,461
---------- ----------
$ 844,748 $ 866,403
---------- ----------
---------- ----------
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . 782,552 784,286
Notes payable. . . . . . . . . . . . . . . 2,650 2,796
---------- ----------
$ 785,202 $ 787,082
---------- ----------
---------- ----------
-98-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
December 31, 1997
------------------------
Carrying Fair
Amount Value
--------- ---------
Financial Assets:
Cash and cash equivalents. . . . . . . . . $ 80,620 $ 80,620
Mutual funds . . . . . . . . . . . . . . . 733 733
Investment securities. . . . . . . . . . . 107,576 107,576
Loans receivable . . . . . . . . . . . . . 545,822 555,620
I/O strips receivable. . . . . . . . . . . 17,076 17,076
Servicing asset. . . . . . . . . . . . . . 2,021 2,021
Cash surrender value of life insurance . . 2,437 2,437
--------- ---------
$ 756,285 $ 766,083
--------- ---------
--------- ---------
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . $ 701,001 $ 701,647
Notes payable. . . . . . . . . . . . . . . 2,650 2,533
Convertible debentures . . . . . . . . . . 2,468 2,468
--------- ---------
$ 706,119 $ 706,648
--------- ---------
--------- ---------
20. MERGERS AND ACQUISITION:
On February 25, 1999, the Company entered into an Agreement and Plan of
Merger ("Plan") with BancWest Corporation ("BancWest"). Under the terms of the
Plan, BancWest will acquire all the outstanding common stock of the Company in
exchange for 0.82 shares of BancWest common stock. The merger, which is
expected to close in the second or third quarter of 1999, is subject to the
approval of the Company's shareholders, various regulatory agencies and certain
other conditions.
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 928 thousand 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 closing price for Bancorp's stock from
March 11, 1998 to April 7, 1998. The value of the acquisition, based upon an
average price of $37.94 per share totaled approximately $44.7 million.
-99-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following presents a combined summary of operations of the Company and
CCBC for the quarter ended March 31, 1998 and the years ended December 31, 1997
and 1996, and it is presented as if the merger had been effective on January 1,
1996.
SWB CCBC COMBINED
---------- ---------- ----------
(in thousands, except per share data)
Three months ended March 31, 1998 (unaudited)
Net interest income. . . . . . . . . . . . . . $ 7,703 $ 2,090 $ 9,793
Net income . . . . . . . . . . . . . . . . . . 1,755 264 2,019
Basic Earnings Per Share . . . . . . . . . . . 0.43 0.24 0.40
Diluted Earnings Per Share . . . . . . . . . . 0.40 0.21 0.37
Year ended December 31, 1997
Net interest income. . . . . . . . . . . . . . $ 27,211 $ 8,133 $ 35,344
Net income . . . . . . . . . . . . . . . . . . 7,509 1,439 8,948
Basic Earnings Per Share . . . . . . . . . . . 2.03 1.36 1.96
Diluted Earnings Per Share . . . . . . . . . . 1.82 1.15 1.73
Year ended December 31, 1996
Net interest income. . . . . . . . . . . . . . $ 20,774 $ 7,637 $ 28,411
Net income . . . . . . . . . . . . . . . . . . 3,328 1,559 4,887
Basic Earnings Per Share . . . . . . . . . . . 1.18 1.59 1.35
Diluted Earnings Per Share . . . . . . . . . . 0.96 1.32 1.10
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
On June 30, 1997, SierraWest Bancorp and its subsidiary SierraWest Bank
acquired Mercantile Bank (Mercantile), a California Banking Corporation
headquartered in Sacramento, California. The results of operations of
Mercantile are included in the Statements of Income from date of acquisition.
The transaction was accounted for under the purchase method of accounting.
This method requires that the purchase price be allocated to the acquired
assets and liabilities of Mercantile on the basis of their estimated fair
values.
The purchase price totaled $6,618,000 comprised of $3,301,000 of cash
compensation and $3,317,000 of stock including costs to issue the stock. At the
merger date, the fair value of assets acquired totaled approximately $42.8
million including net loans of approximately $26.1 million and investment
securities of approximately $3.5 million. The fair value of the liabilities
assumed approximated $37.9 million including deposits of $37.7 million. The
Company recorded goodwill of $1,072,000 which is being amortized over 15 years
and core deposit intangibles of $737,000 which is being amortized over 5 years,
both on a straight-line basis.
-100-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following unaudited pro-forma combined Summary of Operations presents a
pro-forma combined summary of operations of both companies for the years end
December 31, 1997 and 1996 and it is presented as if the merger had been
effective on January 1, 1997 and January 1, 1996. This pro-forma reflects
adjustments for amortization of purchase accounting adjustments. The unaudited
pro-forma of the Combined Summary of Operations data is intended for information
purposes only and is not necessarily indicative of future results of operations
of the Company or the results of operations that would have actually occurred
had the merger been effected during the periods presented.
Unaudited Pro-Forma Combined Summary of Operations
(In thousands, except per share data)
For the Years Ended December 31,
--------------------------------
1997 1996
---------- ----------
Interest income. . . . . . . . . . . . . . . . . . . . . . . $ 60,365 $ 50,248
Interest Expense . . . . . . . . . . . . . . . . . . . . . . 23,945 19,649
---------- ----------
Net interest income. . . . . . . . . . . . . . . . . . . . . 36,420 30,599
Provision for loan losses. . . . . . . . . . . . . . . . . . 2,940 1,849
---------- ----------
Net interest income after provision for loan losses. . . . . 33,480 28,750
Other operating income . . . . . . . . . . . . . . . . . . . 13,880 9,794
Other operating expense. . . . . . . . . . . . . . . . . . . 32,923 30,355
---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . 14,437 8,189
Provision for income taxes . . . . . . . . . . . . . . . . . 5,600 3,153
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,837 $ 5,036
---------- ----------
---------- ----------
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . $ 1.90 $ 1.33
Weighted average common shares used
to calculate basic earnings per share. . . . . . . . . . . 4,652 3,793
Net income adjusted for effect of convertible debentures . . $ 9,001 $ 5,662
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . $ 1.68 $ 1.09
Weighted average common shares adjusted for dilutive
effect of options and convertible debentures . . . . . . . 5,365 5,185
-101-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
21. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS:
SIERRAWEST BANCORP STATEMENTS OF FINANCIAL CONDITION
December 31, (in thousands except for share amounts)
1998 1997*
--------- ---------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 8,439 $ 3,571
Investment in subsidiary . . . . . . . . . . . . . . . . . . 69,858 64,588
Due from subsidiary. . . . . . . . . . . . . . . . . . . . . 0 73
Note receivable from subsidiary. . . . . . . . . . . . . . . 0 3,669
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 598
--------- ---------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 78,730 $ 72,499
--------- ---------
--------- ---------
LIABILITIES
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . $ 283 $ 481
Due to subsidiary. . . . . . . . . . . . . . . . . . . . . . 31 8
Convertible debentures . . . . . . . . . . . . . . . . . . . 0 2,468
Deferred Income. . . . . . . . . . . . . . . . . . . . . . . 146 159
--------- ---------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 460 3,116
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 9,800,000 shares
authorized; none issued. . . . . . . . . . . . . . . . . . 0 0
Preferred stock series A, no par value; 200,000
shares authorized; none issued . . . . . . . . . . . . . . 0 0
Common stock, no par value; 10,000,000 shares authorized;
5,301,756 and 5,019,254 shares issued and outstanding. . . 45,983 42,148
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 32,230 26,598
Accumulated other comprehensive income,
net of tax of $40 and $445. . . . . . . . . . . . . . . . . 57 637
--------- ---------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 78,270 69,383
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY . . . . . . . . . $ 78,730 $ 72,499
--------- ---------
--------- ---------
* 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.
-102-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SIERRAWEST BANCORP STATEMENTS OF INCOME AND COMPRENSIVE INCOME
For the Years Ended December 31, (in thousands):
1998 1997* 1996*
------- ------- -------
INCOME
Service fees . . . . . . . . . . . . . . . . $ 0 $ 0 $1,185
Dividends from subsidiary. . . . . . . . . . 2,014 2,904 1,710
Interest income. . . . . . . . . . . . . . . 350 424 417
Other income . . . . . . . . . . . . . . . . 0 194 283
------- ------ -------
Total Income. . . . . . . . . . . . . . . 2,364 3,522 3,595
------- ------ -------
EXPENSE
Salaries and related benefits. . . . . . . . 11 (17) 1,553
Interest expense . . . . . . . . . . . . . . 87 298 982
Other expense. . . . . . . . . . . . . . . . 489 756 1,597
------- ------ -------
Total Expense . . . . . . . . . . . . . . 587 1,037 4,132
------- ------ -------
Gain (Loss) Before Income Tax Benefit
and Equity in Undistributed Income
of Subsidiary. . . . . . . . . . . . . . . 1,777 2,485 (537)
Applicable income tax benefit. . . . . . . . 51 38 892
------- ------ -------
Income Before Equity in Undistributed
Income of Subsidiary . . . . . . . . . . . 1,828 2,523 355
Equity in Undistributed Income of
Subsidiary . . . . . . . . . . . . . . . . 5,850 6,425 4,532
------- ------ -------
NET INCOME . . . . . . . . . . . . . . . . . $7,678 $8,948 $4,887
------- ------ -------
Other Comprehensive Income, net of tax . . . $ (580) $ 942 $ (233)
------- ------ -------
TOTAL COMPREHENSIVE INCOME . . . . . . . . . $7,098 $9,890 $4,654
------- ------ -------
------- ------ -------
* 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.
-103-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SIERRAWEST BANCORP STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (in thousands):
1998 1997* 1996*
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . $ 7,678 $ 8,948 $ 4,887
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense. . . . . . . . 21 150 280
Effect of changes in:
Due from subsidiary. . . . . . . . . . . . . . . . 72 22 (95)
Due to subsidiary. . . . . . . . . . . . . . . . . 23 (43) 51
Other assets . . . . . . . . . . . . . . . . . . . 11 103 (205)
Accrued expenses . . . . . . . . . . . . . . . . . (63) (556) (175)
Taxes payable. . . . . . . . . . . . . . . . . . . 302 213 206
Dividend from subsidiary . . . . . . . . . . . . . . (2,014) (2,904) (1,710)
Equity in undistributed income of
subsidiaries. . . . . . . . . . . . . . . . . . . . (5,850) (6,425) (4,532)
-------- -------- --------
Total Adjustments. . . . . . . . . . . . . . . . . . (7,498) (9,440) (6,180)
-------- -------- --------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . 180 (492) (1,293)
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . 0 (72) (1,131)
Proceeds from sale of building. . . . . . . . . . . 0 1,523 0
Dividend received . . . . . . . . . . . . . . . . . 2,014 2,904 1,710
Acquisition . . . . . . . . . . . . . . . . . . . . 0 (3,301) 0
-------- -------- --------
Net cash provided by investing activities. . . . . . 2,014 1,054 579
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . 1,110 1,081 212
Dividend paid . . . . . . . . . . . . . . . . . . . (2,045) (1,810) (1,247)
Cash paid - fractional shares . . . . . . . . . . . (16) (11) 0
Change in note receivable from subsidiary . . . . . 3,669 0 (3,669)
Convertible debentures. . . . . . . . . . . . . . . (44) 0 4,025
Other . . . . . . . . . . . . . . . . . . . . . . . 0 0 (24)
-------- -------- --------
Net cash provided by (used in) financing activities. 2,674 (740) (703)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . . . . 4,868 (178) (1,417)
Cash and cash equivalents beginning of year. . . . . 3,571 3,749 5,166
-------- -------- --------
Cash and cash equivalents end of year. . . . . . . . $ 8,439 $ 3,571 $ 3,749
-------- -------- --------
-------- -------- --------
* 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.
-104-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
-105-
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
SUPPLEMENTAL DISCLOSURES
1998 1997 1996
---- ---- ----
(in thousands)
Interest Payments 136 625 960
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1997, $530,000 of I/O strips receivable were transferred to the
Bancorp's Subsidiary.
-106-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements on accounting disclosures with
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR FIRST
APPOINTED POSITION AND PRINCIPAL OCCUPATION
NAME AGE DIRECTOR DURING THE PAST FIVE YEARS
- ----------------- --- ---------- -------------------------------------------------------------------------
CURRENT DIRECTORS
David W. Clark 61 1990 Chairman/CEO of Clark and Sullivan Constructors, Inc. since January 1977.
Ralph J. Coppola 64 1996 Self-employed physician and auto dealer.
William T. Fike 51 1992 President/CEO and Director of the Bancorp since July 1992. President/CEO of
SierraWest Bank since October 1996. Executive Vice President and Chief
Operating Officer of the Bancorp from May 1991 to July 1992.
Richard S. Gaston 65 1995 Chairman and Director of Gaston & Wilkerson Management Group, real estate
investments and management.
Jerrold T. Henley 61 1986 Chairman of the Bancorp since July 1992. President/CEO of the Bancorp from
its inception to June 1992.
John J. Johnson 65 1996 Retired. Owner, Johnson's Sporting World, Reno, Nevada until April 1992.
Ronald A. Johnson 58 1996 Self-employed CPA and financial consultant.
A. Morgan Jones 67 1986 Attorney. President and director of Truckee River Associates, (commercial
real estate management, development and sales).
Jack V. Leonesio 55 1986 Owner of a restaurant/bar in Truckee, California since 1973 and co-owner of a
bar in Reno, Nevada since April 1994.
William W. McClintock 53 1986 Self-employed CPA and financial consultant.
-107-
YEAR FIRST
APPOINTED POSITION AND PRINCIPAL OCCUPATION
NAME AGE DIRECTOR DURING THE PAST FIVE YEARS
- ----------------- --- ---------- -------------------------------------------------------------------------
CURRENT DIRECTORS
Bernard E. Moore 69 1998 President of Bernard Moore, Inc., d.b.a. Moore Tractor, Inc., which sells
farm and industrial equipment. Between 1983 and April 1998, Director of
Continental Pacific Bank. Continental Pacific Bank's Chairman of the Board
from 1986 until it merged with SierraWest Bank in April 1998. Between 1995
and April 1998, Chairman of the Board of Directors of California Community
Bancshares Corporation, Continental Pacific Bank's holding company.
Gary E. Stein 53 1998 Physician in Vacaville, California, formerly with UC Davis Medical Group,
now retired. Director of California Community Bancshares Corporation
since its inception in 1995 and a Director of Continental Pacific Bank
since 1983 until its merger with SierraWest Bank in April 1998.
Thomas M. Watson 55 1986 Managing Officer, Truckee River Associates, (commercial real estate
management, development and sales).
EXECUTIVE OFFICERS
William T. Fike 51 President/CEO and Director of the Bancorp since July 1992. President/CEO of
SierraWest Bank since October, 1996. Executive Vice President and Chief
Operating Officer of the Bancorp, from May 1991 to July 1992.
David C. Broadley 55 Executive Vice President and Chief Financial Officer of the Bancorp since
February 1994. Executive Vice President and Chief Financial Officer of
SierraWest Bank since February 1995. Senior Vice President and Chief
Financial Officer of the Bancorp, from 1985 to 1994.
Patrick S. Day 49 Executive Vice President and Chief Credit Officer of the Bancorp and
SierraWest Bank since July 1995. Executive Vice President and Chief
Operating Officer of Business & Professional Bank from January through June
1995. Principal of PSD Associates, a bank consulting company, from 1993 to
1995. Executive Vice President and Chief Credit Officer of Bank of San
Francisco from 1991 to 1993.
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POSITION AND PRINCIPAL OCCUPATION
NAME AGE DURING THE PAST FIVE YEARS
- ----------------- --- -------------------------------------------------------------------------
Robert C. Silver 56 Senior Vice President, manager of Administration Division for SierraWest
Bank since November, 1995. Senior Vice President and Director of Human
Resources for SierraWest Bank from July, 1991 through October, 1995.
Richard L. Belstock 42 Senior Vice President, Controller and Chief Accounting Officer for the
Bancorp since August 1997. Senior Vice President and Controller of the
Bancorp from July 1994 through September 1996. Senior Vice President and
Controller of SierraWest Bank since June, 1994. Vice President and
Assistant Controller for the Bancorp from August,1990 through June, 1994.
Mary Jane Posnien 55 Senior Vice President, Manager of Operations Division for SierraWest Bank
since March 1998. Senior Vice President of Operations Division for
SierraWest Bank from November 1995 to August 1997. Senior Vice President
of Operations for Sierra Bank of Nevada from March 1995 to November 1995.
Vice President of Operations for Sierra Bank of Nevada from December 1993
to March 1995. Manager of Gotcha Covered, a carpet/window covering store
from 1991 through 1993.
Except as described above, none of the directors or nominees were selected
pursuant to any arrangement or understanding other than with the directors of
the Bancorp acting within their capacities as such. There are no family
relationships between any of the directors and executive officers of the
Bancorp.
COMPENSATION OF DIRECTORS
Directors' fees for board and committee meetings are as follows:
BOARD MEETINGS COMMITTEE MEETINGS
------------------------- ------------------------
RETAINER ATTENDANCE RETAINER ATTENDANCE
-------- ---------- -------- ----------
Chairman of the Board $3,383/month $0 $0 $0
Director $1,500/month $0 (1) $0 $150/meeting(2)
Committee Chairman N/A N/A $100/month $150/meeting(2)
(1) Compensation for attendance at special board meetings is $150 per director
per meeting.
(2) Fee for attendance at Directors' Loan Committee is $250 per meeting.
In addition to the above fees, an educational allowance is determined
annually by the Board. The Chairman of the Board allocates funds for
educational expenses pursuant to requests submitted by each director until
the allowance is exhausted.
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The Bancorp's Deferred Compensation and Stock Award plan is provided to
members of the Board of Directors who are not employees of SWB or of its
subsidiary ("Outside Directors"). Under this plan Outside Directors are
required to take on a deferred basis one-third of their directors' fees for
regular board meetings in the form of promised shares of SWB common stock.
The remaining amount of director fees for regular board meetings may also be
deferred and paid in SWB common stock at the election of the director. The
purpose of this plan is to enable Outside Directors to defer receipt of
compensation for their services to later years and to provide part of the
compensation for their services in promised shares of SWB common stock in
order to better align the interest of Outside Directors with those of the
Bancorp's Shareholders.
Expenses for the directors and their spouses related to attendance at the
Company's annual weekend directors' retreat are paid for by the Company.
Directors are eligible for coverage under the Company's group health
insurance plan. Premiums for health insurance coverage are shared between
the director and the Company on the same basis as that for Company employees.
Additionally, the Company pays for premiums covering the first $25,000 of
accidental death benefits and the administration of KEOGH plans for
directors, if they elect to participate.
The Company maintains a salary continuation plan (see "Salary Continuation
Plan" on page 113) for its executive officers, certain senior officers and
its directors. As of December 31, 1998, the Bancorp's non-employee directors
were credited with $201,097 in accrued benefits under the directors' salary
continuation plan. The Company allocated $113,075 to the Salary Continuation
Plan in 1998 on behalf of its non-employee directors.
SECTION 16(a) BENEFICIAL OWNERSHIP AND COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Bancorp's
directors, certain officers and persons who own more than ten percent of a
registered class of the Bancorp's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Directors, certain officers and greater than ten-percent
shareholders ("Reporting Persons") are required by SEC regulation to furnish
the Bancorp with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Bancorp believes that from January 1, 1998,
to December 31, 1998, all filing requirements applicable to its Reporting
Persons were complied with, except that Mr. R. Johnson was late in filing a
Form 4 covering one transaction.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ---------------------- -------------------
# OF
SHARES # OF
NAME AND OTHER RESTRICTED SHARES LTIP ALL
PRINCIPAL ANNUAL STOCK OPTIONS/ PAY- OTHER
POSITION YEAR SALARY BONUS COMP. AWARDS SARS(2) OUTS COMP.
- ---------- ---- -------- --------- ------ ---------- -------- ----- -------
William T. Fike 1998 $260,417 $ 225,000 $4,428 0 0 0 $21,709
President/CEO of 1997 $247,760 $ 135,000 $3,394 0 0 0 $21,005
the Bancorp 1996 $230,384(1) $ 0 $4,643 0 52,500 0 $17,351
and the Bank
David C. Broadley 1998 $156,917 $ 60,000 $4,721 0 0 0 $23,594
Executive Vice 1997 $140,376 $ 73,870 $3,668 0 0 0 $20,902
President/CFO of 1996 $131,256 $ 0 $ 106 0 0 0 $20,154
the Bancorp and
the Bank
Patrick S. Day 1998 $134,333 $ 47,726 $5,399 0 0 0 $ 5,376
Executive Vice 1997 $129,167 $ 67,972 $3,395 0 0 0 $ 4,391
President of the 1996 $126,519 $ 0 $3,858 0 0 0 $ 2,245
Company and
the Bank
Robert C. Silver 1998 $100,347 $ 35,653 $ 138 0 0 0 $ 8,422
Senior Vice 1997 $ 98,078 $ 49,780 $ 0 0 2,750 0 $ 6,333
President of 1996 $ 87,369 $ 0 $ 0 0 0 0 $ 4,423
the Bank
Richard L. Belstock 1998 $ 87,362 $ 31,086 $ 0 0 0 0 $ 6,052
Senior Vice 1997 $ 83,202 $ 43,783 $ 0 0 0 0 $ 4,440
President/Controller 1996 $ 81,101 $ 15,000 $ 0 0 0 0 $ 3,114
of the Bancorp
and the Bank
Notes:
- ------
(1) Includes payment of accrued vacation pay of $30,384.
(2) Adjusted for 5% stock dividend paid August 29, 1997.
BONUS - Bonuses are generally paid in the year after they are earned. For
purposes of this table, bonuses have been reflected in the year earned, not
the year paid.
OTHER ANNUAL COMPENSATION - Includes value of personal use of Company
provided automobiles and reimbursements for the personal portion of club dues
and spousal travel expenses.
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ALL OTHER COMPENSATION - Includes the following:
COMPANY CONTRIBUTIONS TO 401(k) PLAN FOR: 1998 1997 1996
-------- --------- ----------
Mr. Fike $ 5,000 $ 4,750 $ 4,652
Mr. Broadley $ 5,000 $ 4,145 $ 3,896
Mr. Day $ 3,035 $ 1,938 $ 938
Mr. Silver $ 4,504 $ 2,779 $ 2,566
Mr. Belstock $ 3,934 $ 2,946 $ 2,383
COMPANY CONTRIBUTIONS TO ESOP PLAN FOR:
Mr. Fike $ 2,028(1) $ 2,715 $ 1,240
Mr. Broadley $ 2,028(1) $ 2,382 $ 1,085
Mr. Day $ 2,028(1) $ 2,192 $ 1,046
Mr. Silver $ 2,028(1) $ 1,664 $ 722
Mr. Belstock $ 2,028(1) $ 1,412 $ 671
(1) Amount estimated for 1998, pending final plan accounting for the 1998 plan year.
ALLOCATIONS TO SALARY CONTINUATION PLAN FOR:
Mr. Fike $12,031 $10,890 $ 9,858
Mr. Broadley $14,226 $12,877 $ 13,675
COST OF LIFE INSURANCE PROVIDED BY COMPANY OF WHICH THE BENEFIT EXCEEDED $50,000 FOR:
Mr. Fike $ 2,650 $ 2,650 $ 1,601
Mr. Broadley $ 2,340 $ 1,498 $ 1,498
Mr. Day $ 313 $ 261 $ 261
Mr. Silver $ 1,890 $ 1,890 $ 1,135
Mr. Belstock $ 90 $ 82 $ 60
OPTION/SAR GRANTS DURING 1998 FISCAL YEAR
No stock options were issued during 1998 to those individuals listed in the
summary table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUE
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END-#SHARES FY END-$
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------- ----------- -------------- --------------- --------------------
Mr. Fike 45,987 $ 926,560 47,200 / 6,300 $ 589,530 / 92,712
Mr. Broadley 5,280 $ 127,900 2,835 / 2,520 $ 40,146 / 35,685
Mr. Day 0 $ 0 6,720 / 5,880 $ 103,160 / 91,265
Mr. Silver 2,362 $ 58,488 1,180 / 3,460 $ 9,331 / 19,481
Mr. Belstock 2,257 $ 49,332 1,680 / 3,360 $ 23,290 / 46,580
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The value of unexercised In-the-money options and the value realized on exercise
of stock options is calculated by subtracting the exercise price from the fair
market value at December 31, 1998 or the date of exercises, respectively, of the
securities underlying the options. All share amounts have been adjusted for the
5% stock dividend paid August 29, 1997.
SALARY CONTINUATION PLAN
The Company has entered into agreements with certain directors of the Bancorp
and the Bank and certain executive officers of the Bank, to provide for salary
continuation benefits upon the retirement or earlier death of the directors and
executive officers. The benefits pursuant to this plan are: $50,000 per year
for Mr. Fike and $40,000 per year for Mr. Broadley payable for a period of 20
years following retirement at age 65 or earlier death. Benefits for the
participating directors are $4,000 per year for 15 years, beginning 15 years
after their respective plan commencement dates.
In the event of earlier death, the benefits are payable to the officer's or
director's designated beneficiary. The Company has secured life insurance
policies for the purpose of protecting it from loss in the event of earlier
death. In the event of earlier retirement or early termination of office or
employment of the officer or director, a reduced benefit is payable. At the
option of the officer or director a reduced benefit may be received in a lump
sum based on a discounting formula. Accrued benefits for both officers and
directors vest 20% per year over a five-year period from the date of association
with the Company. Additionally, there are restrictions on the covered individual
from engaging in any competing occupation upon retirement and provisions
requiring the covered individual to perform advisory services, for compensation,
for a period of five (5) years following retirement or early termination of
office or employment.
During 1996 the agreements of Messrs. Fike and Broadley and certain directors of
SWB were modified to provide for an acceleration of benefits such that the full
amount due under the agreement would become payable in the case of a change of
control of the Company. For the Directors' plan this would be in the form of a
lump sum payment based on a discounting formula. The plan for Messrs. Fike and
Broadley provided for this payment in the form of 240 equal monthly
installments. The agreements were further modified to eliminate the
restrictions described above related to engaging in a competing occupation and
the performance of advisory services upon a change in control.
As of December 31, 1998, executive officers were credited with the following
accrued benefits under this Plan:
David C. Broadley $ 120,491
William T. Fike 67,772
EMPLOYMENT AGREEMENTS
Effective October 1, 1994, the Company entered into an employment agreement
with Mr. Fike covering the terms of his employment, compensation, and
conditions of termination. Unless employment is terminated or the agreement
is extended, Mr. Fike's employment will continue until December 31, 2000. His
base salary was set initially at $200,000 per year and he is eligible for
bonuses and participation in all employee benefit programs. He will be
considered for periodic increases in base salary at the discretion of the
Board of Directors. He will continue to participate in the Salary
Continuation Plan and be provided with a Company car and a country club
membership. In the event of termination without cause, Mr. Fike will receive
all amounts owing to him at the date of termination, a lump-sum severance
payment equal to eighteen months' base salary, direct payment of the premiums
necessary to continue then existing medical coverage for 18 months at the
rate equivalent to Company employees and retention of his Company-provided
automobile and country club membership. During the month of February 1997
Mr. Fike's base salary was increased to $250,000 per year and during February
1998 Mr. Fike's base salary was increased to $262,500 per year.
In January 1999, Mr. Fike's employment agreement was amended to allow for a
scale back of payments to be made to Mr. Fike if any payment to be made, or
benefit to be provided, pursuant to the agreement would constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986, as
-113-
amended. The payments to be made, or benefits to be provided, shall be reduced
so that the aggregate present value of all parachute payments does not exceed
299% of Mr. Fike's "annualized includible compensation for the base period" (as
such term is defined in Section 280G(d)(1) of the Code).
-114-
In 1996, Messrs. Broadley, Day, Silver and Belstock entered into Senior Manager
Separation Benefits Agreements. Under the terms of these agreements as amended
during 1997 and 1998, certain benefits would become payable to the manager in
the event of the termination of employment for any reason, other than a material
violation of the Company's personnel policies and procedures. Ms. Posnien
entered into her agreement in 1998. The benefit includes one year's base salary
(as to Messrs. Broadley and Day) or nine months' base salary (as to Mr. Silver
and Ms. Posnien) or six months base salary (as to Mr. Belstock) paid as a lump
sum or in 24 equal semi-monthly payments (as to Messrs. Broadley and Day) or 18
equal semi-monthly payments (as to Mr. Silver and Ms. Posnien) or twelve equal
semi-monthly payments (as to Mr. Belstock) at the election of the executive
officer. If the semi-monthly payments are chosen, health benefits continue to
be provided on the same terms as during active employment.
For Mr. Broadley, in the event of a change in control or reorganization of the
Company, the executive officer may, within a nine month period, resign from the
Company and receive the same benefits as would be payable upon involuntary
termination. Additionally, as to Mr. Broadley, upon termination of service for
any reason, except for cause, he is entitled to receive the Company-provided
automobile in use by him at the time of his termination. For Messrs. Day and
Silver and Ms. Posnien, resignation in response to and reasonably promptly
following a material reduction in job duties and responsibilities and/or
material reduction in compensation which reduction in job duties,
responsibilities and/or compensation occurs within six months following a change
in control would result in benefits the same as would be payable upon
involuntary termination.
PERSONNEL/COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With the exception of Jerrold Henley and William Fike, no member of the
Personnel/Compensation Committee is a former or current officer or employee of
the Company. Mr. Henley retired as President and CEO of the Bancorp in June
1992. Mr. Fike succeeded Mr. Henley as President and CEO of the Bancorp. There
are no compensation committee interlocks between the Bancorp and other entities
involving Company executive officers and Company directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of the Company knows of no person who owns, beneficially or of
record, either individually or together with associates, five percent (5%) or
more of the outstanding shares of the Bancorp's common stock, except as set
forth in the table on the following page. This table sets forth, as of March
15, 1999 the number and percentage of shares of Company's outstanding common
stock beneficially owned, directly or indirectly, by each of Company's current
directors, the Bancorp's CEO, the four next most highly compensated executive
officers of the Bancorp whose salary and bonus exceeded $100,000 during 1998
("named executive officers") and principal shareholders, and by the directors
and executive officers of the Bancorp as a group. The shares "beneficially
owned" are determined under Securities and Exchange Commission Rules, and do not
necessarily indicate ownership for any other purpose. In general, beneficial
ownership includes shares over which a director, principal shareholder, or
executive officer has sole or shared voting or investment power and shares which
such person has the right to acquire within sixty (60) days of March 15, 1999.
Management is not aware of any arrangements which may, at a subsequent date,
result in a change of control of the Company.
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SHARES SHARES
OWNED OWNED
WITH WITH
SOLE VOTING SHARED SHARES
AND VOTING AND ACQUIRABLE PERCENT
NAME AND ADDRESS INVESTMENT INVESTMENT WITHIN OF TOTAL
OF BENEFICIAL OWNER (1) POWER POWER (3) 60 DAYS (2)(4) TOTAL SHARES
- ------------------------------ ----------- ----------- -------------- ----------- -----------
Directors and Nominees
and Named Executive Officers
Richard L. Belstock 3,308 0 1,680 4,988 *
David C. Broadley 26,220 8,350 2,835 37,405 *
David W. Clark 9,985 5,864 7,095 22,944 *
Ralph J. Coppola 7,430 0 2,017 9,447 *
Patrick S. Day 1,914 0 6,720 8,634 *
William T. Fike 51,401 9,112 47,200 107,713 2.1%
Richard Gaston 3,866 0 2,335 6,201 *
Jerrold T. Henley 47,725 0 9,381 57,106 1.1%
John J. Johnson 2,388 1,155 2,383 5,926 *
Ronald A. Johnson 3,931 100 671 4,702 *
A. Morgan Jones 1,727 650 9,334 11,711 *
Jack V. Leonesio 16,688 0 671 17,359 *
William W. McClintock 7,820 105 9,334 17,259 *
Bernard E. Moore 7,648 0 263 7,911 *
Robert C. Silver 754 8,350 1,180 10,284 *
Gary E. Stein 17,912 1,704 263 19,879 *
Thomas M. Watson 8,102 0 10,733 18,835 *
Total for Directors
and Executive Officers
(numbering 18) 219,752 35,390 118,507 373,649 7.1%
Principal Shareholders
Investors of America, L. P.
39 Glen Eagles Drive
St. Louis, MO 63124 297,045 297,045 5.6%
(1) The address for all Directors, Nominees and Named Executive Officers is
c/o SierraWest Bancorp, P.O. Box 6100, Truckee, CA 96160.
(2) Includes shares that can be purchased through Bancorp's stock option plan.
For non-employee directors, includes 671 shares earned under the Directors
Deferred compensation and Stock Award Plan for all but Mr. Clark
(688 shares), Mr. Henley (718 shares), Mr. Watson (2,070 shares), Mr. Stein
(159 shares), Mr. Moore (159 shares) and Mr. Coppola (2,017 shares).
(3) Mssrs. Fike, Broadley and Silver have voting authority for 8,350 shares of
unallocated SWB common stock held by the SWB ESOP plan.
(4) Upon completion of the proposed merger, all unvested options will become
vested. Unvested options granted to the above listed total 27,609.
*less than one percent
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors of the Bancorp and the companies with which they are
associated are customers of, or have had banking transactions with, the Bank in
the ordinary course of its business and the Bank expects to have banking
transactions with these persons in the future. In Management's opinion, since
January 1, 1998, all loans and commitments to lend included in such transactions
were made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar credit worthiness and, in the opinion
of Management, did not involve more than a normal risk of collectability or
present other unfavorable features.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 59 through 106:
(i) Consolidated Statements of Financial Condition as of
December 31, 1998, and 1997.
(ii) Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996.
(iii) Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1998, 1997
and 1996.
(iv) Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.
(v) Notes to Consolidated Financial Statements for the
years ended December 31, 1998, 1997 and 1996.
(vi) Report of Independent Auditor.
2. Financial Schedules:
None required.
Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
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Exhibits
Exhibit
Number Description
- ------- -----------
2.1 Plan of Acquisition and Merger by and between SierraWest Bancorp,
SierraWest Bank and Mercantile Bank, filed as Exhibit 2 to
Registrant's Form 8-K dated January 24, 1997, and by this reference
incorporated herein.
2.2 Merger Agreement between SierraWest Bank and Mercantile Bank dated
June 26, 1997, filed as Exhibit 2.1 on the Registrant's Form 8-K dated
June 30, 1997, and by this reference incorporated herein.
2.3 Plan of Acquisition and Merger by and between SierraWest Bancorp,
SierraWest Bank and California Community Bancshares, Continental
Pacific Bank, filed as Exhibit 2 to Registrant's Form 8-K dated
November 14, 1997, and by this reference incorporated herein.
2.4 Agreement and Plan of and Merger between SierraWest Bancorp,
SierraWest Bank and California Community Bancshares and Continental
Pacific Bank, filed as Exhibit 2.1 to Registrant's Form 8-K dated
April 15, 1998 and by this reference incorporated herein.
2.5 Agreement and Plan of Merger dated February 25, 1999, among BancWest
Corporation, Bank of the West and SierraWest Bancorp, (incorporated
herein by reference to Exhibit 2 to Bank West Corporation's Current
Report on Form 8-K filed with the Commission on February 26, 1999),
filed as Exhibit 2.1 to the Registrant's Form 8-K dated February 25,
1999 and by this reference incorporated herein.
3.1 Articles of Incorporation and by-laws, filed as Exhibit 3.1 to
Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
3.2 Amendment to Articles of Incorporation and by-laws, filed as Exhibit
3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and by this reference incorporated herein.
3.3 Amended Bylaws of SierraWest Bancorp.
4.1 Form of Indenture between the Registrant and American Stock
Transfer & Trust Company, as Trustee, relating to the issuance of
the 8.5% Subordinated Convertible Debentures due 2004, filed as
Exhibit 4.1 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO. 33-72498), and by this
reference incorporated herein.
4.2 Form of Debenture (included in Exhibit 4.1).
4.3 Rights Agreement between Sierra Tahoe Bancorp and American Stock
Transfer & Trust Co., dated January 16, 1996, filed as Exhibit 4 to
Registrant's Form 8-A dated January 3, 1996, as amended by Amendment
No. 1 filed January 30, 1998, and by reference incorporated herein.
4.4 Amendment to Rights Agreement dated as of February 25, 1999 between
SierraWest Bancorp and American Stock Transfer and Trust Co., as
Rights Agent, including the Summary of Rights to Purchase Preferred
Shares filed as Exhibit 4.3 of the Registrant's Form 8-K dated
February 25, 1999 and by this reference incorporated herein.
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10.1 Interest Rate Swap Agreement between Truckee River Bank and Sanwa
Bank California, dated March 1, 1996, filed as Exhibit 10.3 to
Registrant's 1995 Annual Report on Form 10-K and by this reference
incorporated herein.
10.2 Sublease Agreement between Truckee River Bank and Pacific
Pawnbrokers, effective February 1, 1996, filed as Exhibit 10.4 to
Registrant's 1995 Annual Report on Form 10-K and by this reference
incorporated herein.
10.3 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Mary Jane Posnien, dated January 10, 1996, filed as
Exhibit 10.7 to Registrant's 1996 Annual Report on Form 10-K, and by
this reference incorporated herein.
10.4 Three Agreements re Deferred Compensation for Executives, filed as
Exhibit 10(d) to the Registrant's 1986 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.5 Stock Plan Agreement, Incentive Stock Option Agreement and a
Non-Qualified Stock Option Agreement for the Registrant, filed as
Exhibit 10(b) to Registrant's 1988 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.6 Employment Agreement between Registrant and William T. Fike, dated
December 22, 1994, filed as Exhibit 10.14 to Registrant's 1994 Annual
Report on Form 10-K, and by this reference incorporated herein.
10.7 Sierra Tahoe Bancorp 1996 Stock Appreciation Rights Plan, filed as
Exhibit C to Registrant's Proxy Statement for its July 23, 1996
annual meeting of shareholders, and by this reference incorporated
herein.
10.8 Employee Stock Ownership Plan, filed as Exhibit 9 to Registrant's
Registration Statement on Form S-4, (Registration No. 33-3915), and
by this reference incorporated herein.
10.9 Directors' Agreement, filed as Exhibit 2.3 to Registrant's
Registration Statement on Form S-4, (Registration No. 33-34954), and
by this reference incorporated herein.
10.10 Sierra Tahoe Bancorp 1988 Stock Option Plan, filed as Exhibit 28 to
Registrant's Registration Statement on Form S-8, dated April 10, 1989
(Registration No. 33-28004), and by this reference incorporated
herein.
10.11 Lease Agreement "Gateway at Donner Pass Limited" between Truckee
River Bank (Tenants) and Gateway at Donner Pass Limited
(Landlords), dated May 21, 1991, filed as Exhibit 28(G) to
Registrant's September 30, 1991 Quarterly Report on Form 10-Q, and
by this reference incorporated herein.
10.12 Sierra Tahoe Bancorp 1996 Stock Option Plan, filed as Exhibit A to
Registrant's Proxy Statement for its July 23, 1996 annual meeting of
shareholders, and by this reference incorporated herein.
10.13 Director's remuneration continuation agreement between Sierra Tahoe
Bancorp and David Clark, dated October 1, 1993, filed as Exhibit
10.39 to Registrant's 1993 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.14 First Amendment to Senior Management Benefits Agreement between
Sierra Tahoe Bancorp and David C. Broadley, dated April 2, 1996,
filed as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, and by this reference
incorporated herein.
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10.15 Deferred Fee Agreement between Sierra Tahoe Bancorp and Thomas M.
Watson, dated June 19, 1996, filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.16 Deferred Fee Agreement between Sierra Tahoe Bancorp and R. Coppola,
dated June 12, 1996, filed as Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and by this
reference incorporated herein.
10.17 Sierra Tahoe Bancorp Amended 1988 Stock Option Plan, filed as Exhibit
A to Registrant's Proxy Statement for its August 16, 1995 annual
meeting of shareholders, and by this reference incorporated herein.
10.18 Deferred Fee Agreement between Sierra Tahoe Bancorp and Ronald A.
Johnson, dated May 23, 1996, filed as Exhibit 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.19 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and David C. Broadley dated January 17, 1996, filed as
Exhibit 10.71 to Registrant's 1995 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.20 Deferred Fee Agreement between Sierra Tahoe Bancorp and David W.
Clark, dated May 28, 1996, filed as Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.21 Deferred Fee Agreement between Sierra Tahoe Bancorp and Richard S.
Gaston, dated June 19, 1996, filed as Exhibit 10.6 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.22 Deferred Fee Agreement between Sierra Tahoe Bancorp and A. Morgan
Jones, dated June 7, 1996, filed as Exhibit 10.7 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.23 Deferred Fee Agreement between Sierra Tahoe Bancorp and John J.
Johnson, dated June 20, 1996, filed as Exhibit 10.8 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.24 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jack V.
Leonesio, dated June 19, 1996, filed as Exhibit 10.9 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.25 Deferred Fee Agreement between Sierra Tahoe Bancorp and William
McClintock, dated June 13, 1996, filed as Exhibit 10.10 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996, and by this reference incorporated herein.
10.26 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jerrold T.
Henley, dated May 29, 1996, filed as Exhibit 10.11 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.27 Amendment No. 1 to Employment Agreement between SierraWest Bancorp
and William T. Fike, dated June 27, 1996, filed as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and by this reference incorporated herein.
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10.28 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and William T. Fike, dated June 27, 1996, filed
as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and by this reference
incorporated herein.
10.29 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and David C. Broadley, dated June 27, 1996, filed
as Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and by this reference incorporated
herein.
10.30 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and William W. McClintock, dated June
27, 1996, filed as Exhibit 10.6 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.31 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Jerrold T. Henley, dated June 27,
1996, filed as Exhibit 10.7 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.32 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and A. Morgan Jones, dated June 27,
1996, filed as Exhibit 10.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.33 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Jack V. Leonesio, dated June 27,
1996, filed as Exhibit 10.9 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and by this
reference incorporated herein.
10.34 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Thomas M. Watson, dated June 27,
1996, filed as Exhibit 10.10 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.35 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and David W. Clark, dated June 27, 1996,
filed as Exhibit 10.11 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.36 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Richard S. Gaston, dated June 27,
1996, filed as Exhibit 10.12 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.37 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and John J. Johnson, dated June 27,
1996, filed as Exhibit 10.13 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.38 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Ralph J. Coppola, dated June 27,
1996, filed as Exhibit 10.14 to Registrant's
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Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, and by this reference incorporated herein.
10.39 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Ronald A. Johnson, dated June 27,
1996, filed as Exhibit 10.15 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.40 Sierra Tahoe Bancorp Board of Directors Deferred Compensation and
Stock Award Plan, filed as Exhibit B to Registrant's Proxy Statement
for its July 23, 1996 annual meeting of shareholders, and by this
reference incorporated herein.
10.41 Loan commitment agreement between Union Bank of California and
SierraWest Bancorp dated February 25, 1997, filed as Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and by this reference incorporated herein.
10.42 The Pooling and Servicing Agreement between SierraWest Bank, as
Seller and Servicer, and Marine Midland Bank, as Trustee, dated
April 30, 1997, filed as Exhibit 28.1 on the Registrant's Form 8-K
filed June 20, 1997, and by this reference incorporated herein.
10.43 Certificate Purchase Agreement between SierraWest Bank and Prudential
Securities regarding $51.4 million SBA loan-backed adjustable rate
certificates dated June 13, 1997, filed as Exhibit 28.2 on the
Registrant's Form 8-K filed June 20, 1997, and by this reference
incorporated herein.
10.44 Agreement for Purchase and sale of Carson City property, dated June
24, 1997, filed as Exhibit 10.1 on the Registrant's Form 10-Q for the
quarter ended June 30, 1997, and by this reference incorporated
herein.
10.45 Expression of Interest between Sanwa Bank California and SierraWest
Bank, filed as Exhibit 10-97 to Registrant's 1997 Annual Report on
Form 10-K and by this reference incorporated herein.
10.46 Financial Institutions Credit Agreement between Sanwa Bank and
SierraWest Bank, filed as Exhibit 10-98 to Registrant's 1997 Annual
Report on Form 10-K and by this reference incorporated herein.
10.47 Revolving Credit and Collateral Loan Agreement dated as of May 1,
1997 by and between SierraWest Bank and Imperial Bank, filed as
Exhibit 10-99 to Registrant's 1997 Annual Report on Form 10-K and
by this reference incorporated herein.
10.48 The Pooling and Servicing Agreement between SierraWest Bank, as
Seller and Servicer, and Marine Midland Bank, as Trustee, dated
March 31, 1998, filed on the Registrant's Form 8-K dated May 8,
1998, and by this reference incorporated herein.
10.49 Stock Option Agreement, dated as of February 25, 1999, between
SierraWest Bancorp and BancWest Corporation (incorporated herein by
reference to Exhibit 10 to BancWest Corporation's Current Report on
Form 8-K filed with the Commission on February 26, 1999) filed on the
Registrant's Form 8-K dated February 25, 1999 and by this reference
incorporated herein.
10.50 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Richard L. Belstock dated January 10, 1996.
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10.51 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Robert C. Silver dated January 10, 1996.
10.52 Amended and Restated Employment Agreement dated August 28, 1998,
between SierraWest Bank and William T. Fike.
10.53 Restated and Amended Senior Manager Separation Benefits Agreement
dated September 21, 1998, between Sierra West Bank and Robert C.
Silver.
10.54 Restated and Amended Senior Manager Separation Benefits Agreement
dated September 21, 1998, between SierraWest Bank and Mary Jane
Posnien.
10.55 Amendment No. 1 to the Senior Manager Separation Benefits Agreement
between Sierra Tahoe Bancorp and David C. Broadley dated November 9,
1998.
10.56 Second Amendment to Senior Manager Separation Benefits Agreement
between SierraWest Bancorp and Patrick S. Day.
10.57 First Amendment to Amended and Restated Employment Agreement dated
August 28, 1998 between SierraWest Bank and William T. Fike dated
January 8, 1999.
10.58 Board Policy Regarding Taxation of Nonqualified Option Exercise Upon
And After Change of Control.
21.1 Significant Subsidiaries of the Registrant
SierraWest Bank, a California Corporation.
Conpac Development Corporation, a California Corporation
23.1 Consent of Deloitte & Touche LLP, independent auditors.
27.1 Financial Data Schedule - 1998
27.2 Financial Data Schedule - 1997
99.1 Press Release of SierraWest Bancorp issued February 25, 1999,
regarding the merger of BancWest Corporation, Bank of the West and
SierraWest Bancorp filed on the Registrant's Form 8-K dated February
25, 1999 and by this reference incorporated herein.
Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 1999 By:/s/ William T. Fike
----------------------------------
William T. Fike
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the date indicated.
/s/ William T. Fike President and Chief Executive Officer March 25, 1999
- -------------------------- Director
William T. Fike
/s/ David C. Broadley Executive Vice President/ March 25, 1999
- ------------------------- Principal Financial Officer
David C. Broadley
/s/ Richard L. Belstock Senior Vice President/ March 25, 1999
- ------------------------- Principal Accounting Officer
Richard L. Belstock
/s/ Jerrold T. Henley Chairman of the Board March 25, 1999
- -------------------------
Jerrold T. Henley
/s/ David W. Clark Director March 25, 1999
- -------------------------
David W. Clark
/s/ A. Morgan Jones Director and Corporate Secretary March 25, 1999
- -------------------------
A. Morgan Jones
Director
- -------------------------
Jack V. Leonesio
/s/ William W. McClintock Director March 25, 1999
- -------------------------
William W. McClintock
/s/ Richard Gaston Director March 25, 1999
- -------------------------
Richard Gaston
/s/ Thomas M. Watson Director March 25, 1999
- -------------------------
Thomas M. Watson
/s/ Ralph J. Coppola Director March 25, 1999
- -------------------------
Ralph J. Coppola
/s/ John J. Johnson Director March 25, 1999
- -------------------------
John J. Johnson
/s/ Ronald A. Johnson Director March 25, 1999
- -------------------------
Ronald A. Johnson
/s/ Bernard E. Moore Director March 25, 1999
- -------------------------
Bernard E. Moore
/s/ Gary E. Stein Director March 25, 1999
- -------------------------
Gary E. Stein