<PAGE>
OFFICE OF THE COMPTROLLER OF THE CURRENCY
WASHINGTON, D.C. 20219
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
For Quarter Ended March 31, 1999 Commission file number 25979
------------------- ----------
WESTERN SIERRA BANCORP AND SUBSIDIARY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0390121
---------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4011 PLAZA GOLDORADO CIRCLE, CAMERON PARK, CALIFORNIA 95682
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (916) 677-5600
--------------
------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock - Issued and outstanding 994,423 shares at March 31, 1999.
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
Following are the financial statements of Western Sierra Bancorp and subsidiary
as of and for the quarter ended March 31, 1999. The financial statements are
unaudited. However, in the opinion of management, all adjustments have been made
for a fair presentation of the financial condition and results of operations of
Western Sierra Bancorp and subsidiary.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Registrant's 1998 Annual Report to Shareholders. The results of operations for
the three month period ended March 31, 1999 may not necessarily be indicative of
the operating results for the full year, especially in view of the Registrant's
acquisition of Roseville 1st Community Bancorp and Lake Community Bank that was
consummated on April 30, 1999.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for credit losses and the carrying value of
other real estate owned.
2
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,090,902 $ 5,185,475
Federal funds sold 13,500,000 22,670,000
Loans held for sale 1,182,000 3,208,300
Investment securities (market value of $35,679,827
in 1999 and $38,352,900 in 1998 (Note 1) 35,660,718 38,317,550
Loans and leases, less allowance for loan and
lease losses of $1,122,978 in 1999 and $1,055,213
in 1998 (Note 2) 76,984,166 72,231,441
Other real estate 1,162,172 1,162,172
Bank premises and equipment, net 4,350,591 4,232,446
Accrued interest receivable and other assets 3,166,833 3,105,642
------------- -------------
$ 142,097,382 $ 150,113,026
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 38,717,042 $ 47,757,624
Interest bearing 91,803,620 90,830,047
------------- -------------
Total deposits 130,520,662 138,587,671
Accrued interest payable and other liabilities 1,196,296 1,321,976
------------- -------------
Total liabilities 131,716,958 139,909,647
------------- -------------
Shareholders' equity:
Preferred stock - no par value; 10,000,000 shares authorized;
none issued - -
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding - 994,423 shares in 1999 and
981,448 shares in 1998 7,500,618 7,381,303
Retained earnings 3,031,241 2,786,410
Accumulated other comprehensive income (Note 4) (151,435) 35,666
------------- -------------
Total shareholders' equity 10,380,424 10,203,379
------------- -------------
$ 142,097,382 $ 150,113,026
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
WESTERN SIERRA NATIONAL BANK
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans and leases $ 1,734,592 $ 1,805,038
Interest on Federal funds sold 100,332 45,367
Interest on investment securities:
Taxable 381,951 322,683
Exempt from Federal income taxes 144,068 45,340
----------- -----------
Total interest income 2,360,943 2,218,428
----------- -----------
Interest expense:
Interest on deposits 848,441 828,457
Interest on short-term borrowings 3,114
----------- -----------
Total interest expense 851,555 828,457
----------- -----------
Net interest income 1,509,388 1,389,971
Provision for loan and lease losses (Note 2) 60,000 60,000
----------- -----------
Net interest income after provision for loan
and lease losses 1,449,388 1,329,971
----------- -----------
Non-interest income:
Service charges and fees 183,053 183,718
Gain on sale of residential mortgage and government-
guaranteed commercial loans 273,147 310,674
Other income 66,222 50,885
----------- -----------
Total non-interest income 522,422 545,277
----------- -----------
Other expenses:
Salaries and employee benefits 867,486 894,150
Occupancy 107,146 104,130
Equipment 164,129 129,830
Other expenses 506,649 397,551
----------- -----------
Total other expenses 1,645,410 1,525,661
----------- -----------
Income before income taxes 326,400 349,587
Income taxes (81,569) (126,281)
----------- -----------
Net income $ 244,831 $ 223,306
----------- -----------
----------- -----------
Basic earnings per share (Note 3) $ .25 $ .23
----------- -----------
----------- -----------
Diluted earnings per share (Note 3) $ .24 $ .22
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------------------ OTHER
SHAREHOLDERS' COMPREHENSIVE RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
EQUITY SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY INCOME
- ------------- -------------- ----------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 946,021 $ 7,000,846 $1,908,449 $ 89,177 $ 8,998,472
Comprehensive income:
Net income $ 877,961 877,961 877,961
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (53,511) (53,511) (53,511)
Total comprehensive income $ 824,450
---------
---------
Stock options exercised and related tax benefit 35,427 380,457 380,457
--------- ------------ ---------- ---------- -----------
Balance, December 31, 1998 981,448 7,381,303 2,786,410 35,666 10,203,379
Comprehensive income:
Net income $ 244,830 244,831 244,831
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (187,101) (187,101) (187,101)
---------
Total comprehensive income $ 57,730
---------
---------
Stock options exercised and related tax benefit 12,975 119,315 119,315
--------- ------------ ---------- ---------- -----------
Balance, March 31, 1999 994,423 $7,500,618 $3,031,241 $ (151,435) $10,380,424
--------- ------------ ---------- ---------- -----------
--------- ------------ ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 244,831 $ 223,306
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan and lease losses 60,000 60,000
Depreciation and amortization 114,652 104,195
Decrease in deferred loan origination fees and costs, net (3,479) (87,961)
Amortization of investment security premiums, net 43,061 11,038
Decrease (increase) in loans held for sale 2,026,300 (1,541,899)
Decrease in accrued interest receivable and other assets 94,371 154,357
Decrease in accrued interest payable and other liabilities (275,680) (454,790)
------------ ------------
Net cash provided by operating activities 2,304,056 (1,531,754)
------------ ------------
Cash flows from investing activities:
Proceeds from called available-for-sale investment securities 1,634,628 1,000,000
Purchases of available-for-sale investment securities (554,620) (3,824,604)
Proceeds from principal repayments from available-for-sale
SBA and mortgage-related securities 1,244,520 511,621
Proceeds from principal repayments from held-to-maturity
mortgage-related securities 3,395 920
Net increase in loans and leases (4,809,246) (2,547,643)
Additions to bank premises and equipment (232,797) (129,052)
------------ ------------
Net cash used in investing activities (2,714,120) (4,988,758)
------------ ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and savings deposits (5,438,128) (1,981,469)
Net increase in short-term borrowings (2,628,881) 2,487,002
Proceeds from exercise of stock options 62,500 87,540
------------ ------------
Net cash (used in) provided by financing activities (7,854,509) 593,073
------------ ------------
Decrease in cash and cash equivalents (8,264,573) (5,927,439)
Cash and cash equivalents at beginning of year 27,855,475 11,846,020
------------ ------------
Cash and cash equivalents at end of period $ 19,590,902 $ 5,918,581
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at March 31, 1999 and December 31, 1998 consisted of the following:
AVAILABLE-FOR-SALE:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 13,589,475 $ 59,345 $ (89,000) $ 13,559,820
Obligations of states
and political sub-
divisions 11,054,673 37,249 (231,927) 10,859,995
Government guaran-
teed mortgage-
backed securities 7,476,716 20,965 (30,161) 7,467,520
Corporate debt
securities 813,539 1,871 815,410
Federal Reserve
Bank stock 150,900 150,900
Federal Home Loan
Bank stock 422,700 422,700
Trust preferred 500,000 500,000
------------ ------------ ------------ ------------
$ 34,008,003 $ 119,430 $ (351,088) $ 33,776,345
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $(231,658) were recorded net of $80,223 in tax assets as
accumulated other comprehensive income within shareholders' equity.
There were no sales of available-for-sale investment securities during
the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 15,547,233 $ 141,209 $ (22,442) $ 15,666,000
Obligations of states
and political sub-
divisions 11,052,374 101,184 (146,558) 11,007,000
Government guaran-
teed mortgage-
backed securities 8,452,347 26,819 (44,166) 8,435,000
Corporate debt
securities 755,014 (1,014) 754,000
Federal Reserve
Bank stock 150,900 150,900
Federal Home Loan
Bank stock 417,000 417,000
------------ ------------ ------------ ------------
$ 36,374,868 $ 269,212 $ (214,180) $ 36,429,900
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
7
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
1. INVESTMENT SECURITIES (Continued)
AVAILABLE-FOR-SALE: (Continued)
Net unrealized gains on available-for-sale investment securities
totaling $55,032 were recorded net of $(19,366) in tax liabilities as
accumulated other comprehensive income within shareholders' equity.
HELD-TO-MATURITY:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $1,000,000 $ 6,332 $1,006,332
Obligations of states
and political sub-
divisions 835,053 10,758 845,811
Government guaran-
teed mortgage-
backed securities 49,320 2,019 51,339
------------ ------------ ------------ ------------
$1,884,373 $ 19,109 $ - $1,903,482
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $1,000,000 $ 13,000 $1,013,000
Obligations of states
and political sub-
divisions 834,935 20,065 855,000
Government guaran-
teed mortgage-
backed securities 52,715 2,285 55,000
------------ ------------ ------------ ------------
$1,887,650 $ 35,350 $ - $1,923,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
There were no sales or transfers of held-to-maturity investment
securities during the three months ended March 31, 1999 and 1998.
8
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
2. LOANS AND LEASES
Outstanding loans and leases are summarized below:
<TABLE>
<CAPTION>
March 31, December 31
1999 1998
------------ ------------
<S> <S> <S>
Commercial $ 17,082,723 $ 17,198,556
Real estate-mortgage 48,142,152 44,855,881
Real estate-construction 11,081,342 9,337,892
Lease financing 1,320,297 1,383,292
Installment 630,551 664,435
------------ ------------
78,257,065 73,440,056
Deferred loan and lease fees, net (149,921) (153,402)
Allowance for loan and lease losses (1,122,978) (1,055,213)
------------ ------------
$ 76,984,166 $ 72,231,441
------------ ------------
------------ ------------
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of year $ 1,055,213 $ 947,865
Provision charged to operations 60,000 60,000
Losses charged to allowance (1,810) (7,634)
Recoveries 9,575 150
------------ ------------
$ 1,122,978 $ 1,000,381
------------ ------------
------------ ------------
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $625,800 at March 31, 1999 and at December 31, 1998. The
related allowance for loan losses for these loans at March 31, 1999 and
December 31, 1998 was $243,400. The average recorded investment in
impaired loans was $625,800 for the three months ended March 31, 1999
and $793,000 for the year ended December 31, 1998. No interest income
on impaired loans was recognized during the three months ended March
31, 1999. Interest income on impaired loans totaling $51,733 was
recognized during the year ended December 31, 1998 on a cash basis.
At March 31, 1999 and December 31, 1998, nonaccrual loans totaled
$625,800. Interest foregone on nonaccrual loans totaled $14,333 for the
three months ended March 31, 1999, and $42,000 for the year ended
December 31, 1998.
Salaries and employee benefits totaling $70,113 and $58,250 have been
deferred as loan and lease origination costs during the three months
ended March 31, 1999 and 1998, respectively.
9
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
3. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of
Net Shares Per Share
For the Three Months Ended Income Outstanding Amount
------------------------------------ --------- ----------- ---------
<S> <C> <C> <C>
MARCH 31, 1999
Basic earnings per share $ 244,831 984,764 $ .25
-------
-------
Effect of dilutive stock options 47,892
--------- ---------
Diluted earnings per share $ 244,831 1,032,656 $ .24
--------- --------- -------
--------- --------- -------
MARCH 31, 1998
Basic earnings per share $ 223,306 962,622 $ .23
-------
-------
Effect of dilutive stock options 72,839
--------- ---------
Diluted earnings per share $ 223,306 1,035,461 $ .22
--------- --------- -------
--------- --------- -------
</TABLE>
4. COMPREHENSIVE INCOME
The Bank adopted Financial Accounting Standards Board Statement No. 130
(SFAS 130), REPORTING COMPREHENSIVE INCOME, on January 1, 1998. This
Statement requires the reporting of comprehensive income in addition to
net income for all periods presented. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of
other comprehensive income (loss) that historically has not been
recognized in the calculation of net income. SFAS 130 requires the
unrealized gains and losses on the Bank's available-for-sale investment
securities to be included in other comprehensive income (loss). Total
comprehensive income and the components of accumulated other
comprehensive income (loss) are presented in the Statement of Changes
in Shareholders' Equity.
At March 31, 1999 and December 31, 1998, the Bank held securities
classified as available-for-sale which had unrealized losses as
follows:
<TABLE>
<CAPTION>
Before Tax After
Tax Benefit Tax
---------- ---------- ---------
<S> <C> <C> <C>
For the Three Months Ended
March 31, 1999
-----------------------------------
Other comprehensive loss:
Unrealized holding losses $(286,690) $ 99,589 $(187,101)
--------- --------- ---------
--------- --------- ---------
For the Year Ended
December 31, 1998
-----------------------------------
Other comprehensive loss:
Unrealized holding losses $ (90,825) $ 37,314 $ (53,511)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
10
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
4. SUBSEQUENT EVENT
On March 23 and 22, 1999, respectively, the shareholders of Western
Sierra Bancorp (Bancorp), Roseville 1st Community Bancorp and Lake
Community Bank approved the merger of the companies. The mergers were
consummated on April 30, 1999 and, as a result, Western Sierra National
Bank, Roseville 1st National Bank and Lake Community Bank will
operate as wholly-owned subsidiaries under the Bancorp. Each share of
Roseville 1st Community Bancorp and Lake Community Bank common stock
was converted into the right to receive 1.2110 shares and .6905 shares,
respectively, of Bancorp common stock. The transaction will be
accounted for under the pooling of interests method of accounting.
11
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain matters discussed or incorporated by reference in the Quarterly Report
on form 10-Q are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, matters
described herein. Therefore, the information set forth therein should be
carefully considered when evaluating the business prospects of the Company.
FINANCIAL CONDITION
Total assets decreased by 5.64% to $142.1 million at March 31, 1999, from $150.1
million at December 31, 1998. Total deposits decreased by 6.17% to $130.5
million at March 31, 1999 from $138.6 million at December 31, 1998. This
decrease in deposits resulted in the corresponding decrease in total assets. The
decrease in deposits was primarily in demand deposits and due to unusually large
deposits for two title company customers as of December 31, 1998. Within total
assets, the funds from these decreased deposits were primarily divested from
Federal funds sold.
Net loans totaled $76.9 million at March 31, 1999, representing a 59% loan to
deposit ratio, compared to net loans of $72.2 million at December 31, 1998,
representing a 52% loan to deposit ratio. Loans are expected to grow during the
remainder of 1999. In Management's opinion, the allowance for loan losses,
totaling $1,122,978 at March 31, 1999 adequately provides for possible loan
losses. This allowance represents 1.43% of gross loans outstanding at the end of
the first quarter.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established the following capital levels for determining that a bank meets the
highest capital standards and is determined to be a "well capitalized"
institution:
<TABLE>
<CAPTION>
March 31, March 31, December 31,
1999 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Total Risk-Based Capital Ratio
Regulatory Requirement 10.0% 10.0% 10.0%
Bank Ratio 11.11% 11.27% 12.0%
Tier 1 Risk-Based Capital Ratio
Regulatory Requirement 6.0% 6.0% 6.0%
Bank Ratio 9.91% 10.03% 10.8%
Leverage Ratio
Regulatory Requirement 5.0% 5.0% 5.0%
Bank Ratio 7.41% 8.42% 8.1%
</TABLE>
As noted in the above schedule, Western Sierra Bancorp and subsidiary meets all
the regulatory capital requirements of a "well capitalized" institution.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999
Interest income increased 6.4% to $2,360,943 for the quarter ended March 31,
1999 from $2,218,428 for the quarter ended March 31, 1998. The increased
interest income on loans and investments was primarily due to an increase in the
amount of loans and investment securities outstanding during the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998.
12
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 (Continued)
Interest expense increased 2.7% to $851,555 for the quarter ended March 31, 1999
from $828,457 for the quarter ended March 31, 1998. The increase in interest
expense was the result of the significant increase in certificates of deposit in
1999 over the same period in 1998.
Non-interest income decreased 4.4% to $522,422 for the quarter ended March 31,
1999 from $545,277 for the quarter ended March 31, 1998. This decrease was due
to a decrease in the gains on the sale and packaging of loans by the mortgage
department.
The allocation to the Provision for Loan Losses for the first quarter of 1999
was $60,000 as compared to an allocation of $60,000 for the first quarter of
1998. Net recoveries for the quarter ended March 31, 1999 totaled $7,765 as
compared to net losses which totaled $7,484 for the same period in 1998.
Other expenses increased 7.8% to $1,645,410 for the quarter ended March 31, 1999
from $1,525,661 for the quarter ended March 31, 1998. These expenses represent
the operational and administrative expenses of the Bank and remained stable due
to Management's careful monitoring and control of all non-interest expenses.
Net income for the quarter ended March 31, 1999 totaled $244,831 as compared to
net income of $223,306 for the quarter ended March 31, 1998.
OTHER MATTERS
YEAR 2000 COMPLIANCE
The "Year 2000 issue" relates to the fact that many computer programs use only
two digits to represent a year, such as "98" to represent "1998," which means
that in the Year 2000 such programs could incorrectly treat the Year 2000 as the
year 1900. This issue has grown in importance as the use of computers and
microchips has become more pervasive throughout the economy, and
interdependencies between systems have multiplied. The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its effects could ripple through the economy. Western Sierra could be materially
and adversely affected either directly or indirectly by the Year 2000 issue.
This could happen if any of its critical computer systems or equipment
containing preprogrammed computer chips fail, if the local infrastructure
(electric power, phone system, or water system) fails, if its significant
vendors are adversely impacted, or if its borrowers or depositors are adversely
impacted by their internal systems or those of their customers or suppliers.
Failure of Western Sierra to complete testing and renovation of its critical
systems on a timely basis could have a material adverse effect on Western
Sierra's financial condition and results of operations, as could Year 2000
problems faced by others with whom Western Sierra does business.
Federal banking regulators have responsibility for supervision and examination
of banks to determine whether each institution has an effective plan for
identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's internal controls and to identify whether
further corrective action may be necessary to assure an appropriate level of
attention to Year 2000 processing capabilities.
13
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
OTHER MATTERS (Continued)
YEAR 2000 COMPLIANCE (Continued)
Western Sierra has a written plan to address Western Sierra's risks associated
with the impact of the Year 2000. The plan directs Western Sierra's Year 2000
compliance efforts under the framework of a five-step program mandated by the
Federal Financial Institutions Examination Council ("FFIEC"). The FFIEC's
five-step program consists of five phases; awareness, assessment, renovation,
validation and implementation. In the awareness phase, which Western Sierra has
completed, the Year 2000 problem is defined and executive level support for the
necessary resources to prepare Western Sierra for Year 2000 compliance is
obtained. In the assessment phase, which Western Sierra has also completed, the
size and complexity of the problem and details of the effort necessary to
address the Year 2000 issues are assessed. Although the awareness and assessment
phases are completed, Western Sierra continues to evaluate new issues as they
arise. In the renovation phase, which Western Sierra has substantially
completed, the required incremental changes to hardware and software components
are tested. In the validation phase, which Western Sierra has also substantially
completed, the hardware and software components are tested. In the
implementation phase changes to hardware and components are brought on line. The
implementation phase is 80% complete.
Western Sierra is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. Western
Sierra has identified 57 vendors and 52 software applications which management
believes are material to its operations. Based on information received from its
vendors and testing results, Western Sierra believes approximately 86% of such
vendors are Year 2000 compliant as of December 31, 1998. Testing of the critical
system applications for the core banking product provided by Western Sierra's
primary vendor was completed and the results were inconclusive because the
software version mismatched for testing purposes with the Year 2000 upgrade. It
was retested in January 1999 with success. The verification was completed by
February 5, 1999. The core banking product includes software solutions for
general ledger, accounts payable, automated clearing house, certificates of
deposit and individual retirement accounts, commercial, mortgage and installment
loans, checking and savings accounts, proof of deposit applications and
ancillary support products.
Western Sierra has identified 20 vendors which Western Sierra does not believe
are fully Year 2000 compliant as of December 31, 1998. Of the 20 vendors, 10 are
material to Western Sierra's operations. All 10 have Year 2000 plans in place
and are 50-80% completed. Western Sierra will make a decision if an alternate is
required. Each of these vendors has advised Western Sierra that it has completed
the evaluation and renovation stages of Year 2000 compliance and is schedule to
begin implementation and validation in January 1999 and to complete the final
validation phase by June 30, 1999.
14
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
OTHER MATTERS (Continued)
YEAR 2000 COMPLIANCE (Continued)
Western Sierra is also making efforts to ensure that its customers, particularly
its significant customers, are aware of the Year 2000 problem. Western Sierra
has sent Year 2000 correspondence to its significant deposit and loan customers.
A customer of Western Sierra is deemed significant if the customer possesses any
of the following characteristics:
- - Total indebtedness to Western Sierra National Bank of $250,000 or more.
- - The customer's business is dependent on the use of high technology
and/or the electronic exchange of information.
- - The customer's business is dependent on third party providers of data
processing services or products.
- - An average ledger deposit balance greater than $250,000.
- - Collateral taken by Western Sierra National Bank which could become
impaired by Year 2000 problems.
- - Unsecured lines of credit which borrowers can draw funds at will.
Western Sierra has amended its credit authorization documentation to include
consideration of the Year 2000 problem. Western Sierra assesses its significant
customer's Year 2000 readiness and assigns the customer an overall assessment of
"low," "medium" or "high" risk. Risk evaluation of Western Sierra's significant
customers was completed by December 31, 1998. Any depositor or lending customer
determined to have a high or medium risk is scheduled for an evaluation by
Western Sierra every 90 days until the customer can be assigned a low risk
assessment. Six loans totaling $470,546 are considered high risk and are
monitored closely for progress. All deposit customers are either low risk or
compliant with the exception of the six loan customers noted above.
Because of the range of possible issues and large numbers of variables involved,
it is impossible to quantify the total potential cost of Year 2000 problems or
to determine Western Sierra's worst-case scenario in the event Western Sierra's
Year 2000 remediation efforts or the efforts of those with whom it does business
are not successful. In order to deal with the uncertainty associated with the
Year 2000 problem, Western Sierra is developing a contingency plan to address
the possibility that efforts to mitigate the Year 2000 risk are not successful
either in whole or part. These plans include manual processing of information
for critical information technology systems and increased cash on hand. The
contingency plans were completed by March 31, 1999, after which the appropriate
implementation training was scheduled to take place.
As of December 31, 1998, Western Sierra has incurred $103,386 in Year 2000
costs, which have been expensed as incurred. Year 2000-related costs have been
funded from the continuing operations of Western Sierra and, as of December 31,
1998, have constituted approximately 43% of Western Sierra's information systems
budget for 1998. Western Sierra estimates that its costs to complete Year 2000
compliance will be approximately $258,795. This estimate includes the cost of
purchasing hardware and licenses for software programming tools, the cost of the
time of internal staff and the cost of consultants. The estimate does not
include the time that internal staff are devoting to testing programming
changes. Testing is not expected to add significant incremental costs.
15
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position or results of operations of the Bank.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter ended March 31, 1999.
16
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARY
FORM 10-Q
(Continued)
FOR THE QUARTER ENDED MARCH 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999
---------------------------
WESTERN SIERRA BANCORP AND SUBSIDIARY
/s/ Gary Gall
--------------------------------------
Gary Gall
President and
Chief Executive Officer
/s/ Lesa Fynes
--------------------------------------
Lesa Fynes
Chief Financial Officer
17
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