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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
WESTERN SIERRA BANCORP
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(Name of small business issuer in its charter)
California 68-0390121
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3350 Country Club Drive, Cameron Park, California 95682
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(Address or principal executive offices) (Zip code)
Issuer's telephone number (530) 677-5600
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 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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Check if no disclosure of delinquent fliers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $24,617,000
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State the aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of
March 28, 2000: $21,225,341.
State the number of shares of Common Stock outstanding as of March 28, 2000:
2,522,409.
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Documents Incorporated by Reference: Part of Form 10-KSB
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NONE
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Transitional Small Business Disclosure Format (Check one): YES NO X
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TABLE OF CONTENTS
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Page
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS 1-5
ITEM 2 - DESCRIPTION OF PROPERTY 5-6
ITEM 3 - LEGAL PROCEEDINGS 6
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 6-7
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7-23
ITEM 7 - FINANCIAL STATEMENTS 24
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 25
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 25-27
ITEM 10 - EXECUTIVE COMPENSATION 28-31
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 32-33
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K 34
SIGNATURES 35-36
INDEX OF EXHIBITS 37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Western Sierra Bancorp (Western Sierra) was incorporated under the laws
of the State of California on July 11, 1996. Western Sierra was organized
pursuant to a plan of reorganization for the purpose of becoming the parent
corporation of Western Sierra National Bank, and on December 31, 1996, the
reorganization was effected and shares of Western Sierra Common Stock were
issued to the shareholders of Western Sierra National Bank for the common shares
held by Western Sierra National Bank's shareholders. In April 1999, Western
Sierra acquired Roseville 1st National Bank and Lake Community Bank in a stock
for stock exchange. Western Sierra is a registered bank holding company under
the Bank Holding Company Act. Western Sierra conducts its operations at 3350
Country Club Drive, Suite 202, Cameron Park, California 95682.
Western Sierra National Bank was organized under national banking laws and
commenced operations as a national bank on January 4, 1984. Western Sierra
National Bank is a member of the Federal Reserve System and its deposits are
insured to the maximum amount permitted by law by the FDIC. Western Sierra
National Bank's head office is located at 4011 Plaza Goldorado Circle, Cameron
Park, California and its branch offices are located at 2661 Sanders Drive,
Pollock Pines, 3970 J Missouri Flat Road, Placerville, 1450 Broadway,
Placerville, 3919 Park Drive, El Dorado Hills, 571 5th Street, Lincoln, and 1900
Point West Way, Suite 270, Sacramento. Western Sierra National Bank does not
have any affiliates or subsidiaries, other than Roseville 1st National Bank and
Lake Community Bank.
Roseville 1st National Bank was founded in 1983 as Countryside Thrift and Loan
(Countryside). Countryside operated as an industrial loan company until its
conversion to a national bank in 1992. On July 1, 1992, Countryside converted to
a national bank. Roseville 1st National Bank is a member of the Federal Reserve
System and its deposits are insured to the maximum amount permitted by law by
the FDIC. Roseville 1st National Bank's head office is located at 1801 Douglas
Boulevard, Roseville, California and its branch office is located at 6951
Douglas Boulevard, Granite Bay, California. Roseville 1st National Bank does not
have any affiliates or subsidiaries, other than Western Sierra National Bank and
Lake Community Bank. Western Sierra has filed an application to merge Roseville
1st National Bank into Western Sierra National Bank.
Lake Community Bank was incorporated as a banking corporation under the laws of
the State of California on March 9, 1984. Lake Community Bank commenced
operations as a California state-chartered bank on November 15, 1984. Lake
Community Bank is an insured bank under the Federal Deposit Insurance Act and is
not a member of the Federal Reserve System. Lake Community Bank engages in the
general commercial banking business in Lake County in the State of California
from its headquarters banking office located at 805 Eleventh Street, Lakeport,
California, and its branch located at 4280 Main Street, Kelseyville, California.
Lake Community Bank does not have any affiliates or subsidiaries, other than
Western Sierra National Bank and Roseville 1st National Bank.
BANKING SERVICES. Western Sierra is a locally owned and operated bank holding
company, and its primary service area is the Northern California communities of
Cameron Park, Pollock Pines, Placerville, El Dorado Hills, Lincoln, Sacramento,
Roseville, Granite Bay, Lakeport and its surrounding communities. Western
Sierra's primary business is servicing the banking needs of these communities
and its marketing strategy stresses its local ownership and commitment to serve
the banking needs of individuals living and working in Western Sierra's primary
service areas and local businesses, including retail, professional and real
estate-related activities in those service areas.
Western Sierra offers a broad range of services to individuals and businesses in
its primary service area with an emphasis upon efficiency and personalized
attention. Western Sierra provides a full line of consumer services and also
offers specialized services, such as courier services to small businesses,
middle market companies and professional firms. Each of Western Sierra's
subsidiary banks offers personal and business checking and savings accounts
(including individual interest-bearing negotiable orders of withdrawal ("NOW"),
money market accounts and/or accounts combining checking and savings accounts
with automatic transfer), IRA accounts, time certificates of deposit and direct
deposit of social security, pension and payroll checks and computer cash
management with plans to institute PC Banking during 2000. Western Sierra's
subsidiary banks also make available commercial, construction, accounts
receivable, inventory, automobile, home improvement, real estate, commercial
real estate, single family mortgage, Small Business Administration, office
equipment, leasehold improvement and installment loans (as well as overdraft
protection lines of credit), issue drafts and standby letters of credit, sell
travelers' checks (issued by an independent entity), offer ATMs tied in with
major statewide and national networks, extend special considerations to senior
citizens and offers other customary commercial banking services.
Most of Western Sierra's deposits are obtained from commercial businesses,
professionals and individuals. At December 31, 1999, Western Sierra National
Bank had a total of 6,642 accounts consisting of demand deposit, NOW
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and money market accounts with an average balance of approximately $8,902; 3,133
savings accounts with an average balance of approximately $2,623; time
certificates of $100,000 or more with an average balance of approximately
$208,022; and other time deposits with an average balance of approximately
$22,262. At December 31, 1999, Roseville 1st National Bank had a total of 1,759
accounts consisting of demand deposit, NOW and money market accounts with an
average balance of approximately $20,566; 907 savings accounts with an average
balance of approximately $1,106; time certificates of $100,000 or more with an
average balance of approximately $191,872; and other time deposits with an
average balance of approximately $25,027. At December 31, 1999, Lake Community
Bank had a total of 4,215 accounts consisting of demand deposit, NOW and money
market accounts with an average balance of approximately $5,951; 2,861 savings
accounts with an average balance of approximately $4,045; time certificates of
$100,000 or more with an average balance of approximately $113,903; and other
time deposits with an average balance of approximately $23,220. None of Western
Sierra's subsidiary banks has obtained any deposits through deposit brokers and
there is no present intention of using brokered deposits. There is no
concentration of deposits or any customer with 5% or more of any of the
subsidiary banks' deposits other than one locally-owned title company which
represents 5.85% of Western Sierra National Bank's deposits.
Other special services and products include economy personal and business
checking products, computer cash management products and mortgage products and
services.
EMPLOYEES. At December 31, 1999, Western Sierra and its subsidiaries employed
155 persons on a full-time equivalent basis. Western Sierra believes its
employee relations are excellent.
LEGAL PROCEEDINGS. From time to time, Western Sierra and/or it subsidiary banks
is a party to claims and legal proceedings arising in the ordinary course of
business. Western Sierra's management is not aware of any material pending
litigation proceedings to which either it or any of its subsidiary banks is a
party or has recently been a party, which will have a material adverse effect on
the financial condition or results of operations of Western Sierra taken as a
whole.
SUPERVISION AND REGULATION. Western Sierra is a bank holding company within the
meaning of the Bank Holding Company Act of 1956, as amended (BHCA), and is
registered as such with and is subject to the supervision of the Board of
Governors of the Federal Reserve System (the FRB). Generally, a bank holding
company is required to obtain the approval of the FRB before it may acquire all
or substantially all of the assets of any bank, or ownership or control of the
voting shares of any bank if, after giving effect to such acquisition of shares,
the bank holding company would own or control more than 5% of the voting shares
of such bank. The FRB's approval is also required for the merger or
consolidation of bank holding companies.
Western Sierra is required to file reports with the FRB and provide such
additional information as the FRB may require. The FRB also has the authority to
examine Western Sierra and each of its subsidiaries, as well as any arrangements
between Western Sierra and any of its subsidiaries, with the cost of any such
examination to be borne by Western Sierra.
Banking subsidiaries of bank holding companies are also subject to certain
restrictions imposed by federal law in dealings with their holding companies and
other affiliates. Subject to certain restrictions set forth in the Federal
Reserve Act, a bank can loan or extend credit to an affiliate, purchase or
invest in the securities of an affiliate, purchase assets from an affiliate, or
issue a guarantee, acceptance, or letter of credit on behalf of an affiliate;
provided that the aggregate amount of the above transactions of the bank and its
subsidiaries does not exceed 10 percent of the capital stock and surplus of the
bank on a per affiliate basis or 20 percent of the capital stock and surplus of
the bank on an aggregate affiliate basis. In addition, such transactions must be
on terms and conditions that are consistent with safe and sound banking
practices and, in particular, a bank and its subsidiaries generally may not
purchase from an affiliate a low-quality asset, as that term is defined in the
Federal Reserve Act. Such restrictions also prevent a bank holding company and
its other affiliates from borrowing from a banking subsidiary of the bank
holding company unless the loans are secured by marketable collateral of
designated amounts. Further, Western Sierra and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services.
A bank holding company is prohibited from itself engaging in or acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
company engaged in nonbanking activities. One of the principal exceptions to the
prohibition is for activities found by the FRB by order or regulation to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making these determinations, the FRB considers whether the
performance of such activities by a bank holding company would offer advantages
to the public which outweigh possible adverse effects.
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Federal Reserve Regulation Y sets out those activities which are regarded as
closely related to banking or managing or controlling banks, and thus, are
permissible activities that may be engaged in by bank holding companies subject
to approval in individual cases by the FRB. Most of these activities are now
permitted for national banks. There has been litigation challenging the validity
of certain activities authorized by the FRB for bank holding companies, and the
FRB has various regulations in this regard still under consideration. The future
scope of permitted activities is uncertain.
Western Sierra National Bank and Roseville 1st National Bank are subject to
primary supervision, examination and regulation by the Comptroller and are also
subject to applicable regulations of the FDIC and the FRB, and in addition the
provisions of California law, insofar as they are not preempted by federal
banking law. Lake Community Bank is subject to primary supervision, examination
and regulation by the California Department of Financial Institutions and the
FDIC and is subject to applicable regulations of the FRB. The deposits of all
three financial institutions are insured by the FDIC to applicable limits. As a
consequence of the extensive regulation of commercial banking activities in
California and the United States, the subsidiary banks' businesses are
particularly susceptible to changes in California and federal legislation and
regulations, which may have the effect of increasing the cost of doing business,
limiting permissible activities or increasing competition.
Various other requirements and restrictions under the laws of the United States
and the State of California affect the operations of the subsidiary banks.
Federal and California statutes and regulations relate to many aspects of the
banks' operations, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, branching, capital requirements and disclosure obligations to
depositors and borrowers. The Comptroller regulates the number and locations of
the branch offices of a national bank, but may only permit a national bank to
maintain branches in locations and under the conditions imposed by state laws
upon state banks. California law presently permits a bank to locate a branch
office in any locality in the state. Additionally, California law exempts banks,
including national banks, from California usury laws.
IMPACT OF MONETARY POLICIES. The earnings and growth of Western Sierra are
subject to the influence of domestic and foreign economic conditions, including
inflation, recession and unemployment. The earnings of the Company are affected
not only by general economic conditions but also by the monetary and fiscal
policies of the United States and federal agencies, particularly the Federal
Reserve. The Federal Reserve can and does implement national monetary policy,
such as seeking to curb inflation and combat recession, by its open market
operations in United State Government securities and by its control of the
discount rates applicable to borrowings by banks from the Federal Reserve
System. The actions of the Federal Reserve in these areas influence the growth
of bank loans, investments and deposits and affect the interest rates charged on
loans and paid on deposits. As demonstrated over the past several years by the
Federal Reserve's actions regarding interest rates, its policies have had a
significant effect on the operating results of commercial banks and are expected
to continue to do so in the future. The nature and timing of any future changes
in monetary policies are not predictable.
RECENT AND PROPOSED LEGISLATION. The operations of Western Sierra are subject to
extensive regulation by federal, state and local governmental authorities and
are subject to the various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. Western
Sierra believes that it is in substantial compliance in all material respects
with applicable federal, state and local laws, rules and regulations. Because
the business of Western Sierra is highly regulated, the laws, rules and
regulations applicable to each of them are subject to regular modification and
change.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. Most recently, President Clinton signed into law the
Gramm-Leach-Bliley Act. This legislation eliminates many of the barriers that
have separated the insurance, securities and bank industries since the Great
Depression. The federal banking agencies (the Federal Reserve, FDIC, Office of
the Comptroller of the Currency) among others, are currently drafting
regulations to implement the Gramm-Leach-Bliley Act. The likelihood of any major
change from these regulations, and the impact such change may have on the
Company is impossible to predict.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999, is the result
of a decade of debate in the Congress regarding a fundamental reformation of the
nations' financial system. The law is subdivided into seven titles, by
functional area. Title I acts to facilitate affiliations among banks, insurance
companies and securities firms. Title II narrows the exemptions from the
securities laws previously enjoyed by banks, requires the Federal Reserve and
the SEC to work together to draft rules governing certain securities activities
of banks and creates a new,
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voluntary investment bank holding company. Title III restates the proposition
that the states are the functional regulators for all insurance activities,
including the insurance activities of federally-chartered banks. The law bars
the states from prohibiting insurance activities by depository institutions The
law encourages the states to develop uniform or reciprocal rules for the
licensing of insurance agents. Title IV prohibits the creation of additional
unitary thrift holding companies. Title V imposes significant requirements on
financial institutions related to the transfer of nonpublic person information.
These provisions require each institution to develop and distribute to
accountholders an information disclosure policy, and requires that the policy
allow customers to, and for the institution to, honor a customer's request to
"opt-out" of the proposed transfer of specified nonpublic information to third
parties. Title VI reforms the Federal Home Loan Bank system to allow broader
access among depository institutions to the systems advance programs, and to
improve the corporate governance and capital maintenance requirements for the
system. Title VII addresses a multitude of issues including disclosure of ATM
surcharging practices, disclosure of agreements among non-governmental entities
and insured depository institutions which donate to non-governmental entities
regarding donations made in connection with the Community Reinvestment Act, and
disclosure by the recipient non-governmental entities of how such funds are
used. Additionally, the law extends the period of time between CRA examinations
of community banks.
Western Sierra intends to comply with all provisions of the Gramm-Leach-Bliley
Act and all implementing regulations as they become effective, and intends to
develop appropriate policies and procedures to meet its responsibilities in
connection with the privacy provisions of Title V of that Act.
CONSUMER PROTECTION LAWS AND REGULATIONS. The bank regulatory agencies are
focusing greater attention on compliance with consumer protection laws and their
implementing regulations. Examination and enforcement have become more intense
in nature, and insured institutions have been advised to monitor carefully
compliance with such laws and regulations. Western Sierra is subject to many
federal consumer protection statutes and regulations, some of which are
discussed below.
The Community Reinvestment Act (CRA) is intended to encourage insured depository
institutions, while operating safely and soundly, to help meet the credit needs
of their communities. The CRA specifically directs the federal regulatory
agencies, in examining insured depository institutions, to assess a bank's
record of helping meet the credit needs of its entire community, including low-
and moderate-income neighborhoods, consistent with safe and sound banking
practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The four
point rating scale ranges from a high of "outstanding" to a low of "substantial
noncompliance."
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in
any credit transaction, whether for consumer or business purposes, on the basis
of race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. The
Truth in Lending Act (TILA) is designed to ensure that credit terms are
disclosed in a meaningful was so that consumers may compare credit terms more
readily and knowledgeably. As a result of the TILA, all creditors must use the
same credit terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the total of payments
and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including making it
unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself. The Home Mortgage
Disclosure Act (HMDA) grew out of public concern over credit shortages in
certain urban neighborhoods and provides public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also includes
a "fair lending" aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to
provide borrowers with disclosures regarding the nature and cost of real estate
settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks,
and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursement and other
penalties. Due to heightened regulatory concern related to compliance with CRA,
TILA, FH Act, ECOA, HMDA and RESPA generally, the Company may incur additional
compliance costs or be required to expend additional funds for investments in
its local community.
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RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activity, which was subsequently amended by SFAS 137 to delay the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Management does not believe that the adoption
of SFAS 133 will have a significant impact on its financial position and results
of operations when implemented.
OTHER. Other legislation which has been or may be proposed to the United States
Congress and the California Legislature and regulations which may be proposed by
the FDIC and the DFI may affect the business of the Company. It cannot be
predicted whether any pending or proposed legislation or regulations will be
adopted or the effect such legislation or regulations may have upon the business
or the Company
OTHER INFORMATION CONCERNING THE COMPANY. The Company holds no material patents,
trademarks, licenses, franchises or concessions.
No expenditures were made by the Company since inception on material research
activities relating to the development of services or the improvement of
existing services. Based upon present business activities, compliance with
federal, state and local provisions regulating discharge of materials into the
environment will have no material effects upon the capital expenditures,
earnings and competitive position of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES. Western Sierra and Western Sierra National Bank own the real
property located at 4011 Plaza Goldorado Circle, Cameron Park, California. The
building situated on the property consists of 6,842 square feet and houses the
head office, note department and mortgage division of Western Sierra National
Bank.
Western Sierra and Western Sierra National Bank also own the real property
located at 3970 J Missouri Flat Road, Placerville, California. The building
situated on the property consists of approximately 3,707 square feet and houses
the West Placerville branch office of Western Sierra National Bank.
Western Sierra and Western Sierra National Bank also own the real property
located at the corner of Park Drive and El Dorado Hills Boulevard, El Dorado
Hills, California. The building to be completed on the property will consist of
approximately 7,000 square feet and will house the El Dorado Hills branch office
of Western Sierra National Bank.
Western Sierra also owns the additional property adjacent to Western Sierra
National Bank's executive and head offices at 4011 Plaza Goldorado Circle. It is
Western Sierra's intention to construct a new administrative building on this
site. It is anticipated that construction will begin in the third quarter of
2000.
Western Sierra and Roseville 1st National Bank own the real property located at
1801 Douglas Boulevard, Roseville, California. The building situated on the
property consists of 7,960 square feet and houses the executive and head offices
of Roseville 1st National Bank.
Western Sierra and Lake Community Bank own Lake Community Bank's headquarters
office located at 805 Eleventh Street, Lakeport, California. The headquarters
office is built on 47,188 square feet of land.
Western Sierra and Lake Community Bank also own the modular building which
housed Lake Community Bank's former headquarters banking office. This building
with the addition now consists of approximately 4,027 square feet of interior
space. Western Sierra and Lake Community Bank have sublet this space.
Western Sierra leases the premises of its head office located at 3350 Country
Club Drive, Suite 202, Cameron Park, California. The lease is presently for a
term expiring May 31, 2001. The office space consists of approximately 2,400
square feet.
Western Sierra and Western Sierra National Bank lease the premises of Western
Sierra National Bank's Placerville branch office located at 1450 Broadway,
Placerville, California. The lease is presently for a term expiring June 30,
2002. The office space at this branch consists of approximately 6,500 square
feet.
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Western Sierra and Western Sierra National Bank lease the premises of Western
Sierra National Bank's Pollock Pines branch office located at 2661 Sanders
Drive, Pollock Pines, California. The premises are leased for a term expiring on
July 31, 2000. The office space at this branch consists of approximately 1,520
square feet.
Western Sierra and Western Sierra National Bank lease the premises of Western
Sierra National Bank's Lincoln branch office located at 571 5th Street, Lincoln,
California. The premises are leased for a term expiring on September 30, 2002.
The office space of this branch consists of approximately 5,500 square feet.
Western Sierra and Western Sierra National Bank lease the premises of Western
Sierra National Bank's Point West branch at 1900 Point West Way, Suite 270,
Sacramento, California. The premises are leased for a term expiring on March 31,
2000. The office space at this site consists of approximately 2,450 square feet.
Western Sierra and Western Sierra National Bank lease the premises of Western
Sierra National Bank?s current El Dorado Hills branch office located at 3840 El
Dorado Hills Boulevard, El Dorado Hill, California. The premises are leased for
a term expiring on August 13, 2003. The office space at this site consists of
approximately 2,000 square feet. When Western Sierra National Bank moves to its
new office which is currently being built, Western Sierra National Bank will
sublease these premises.
Western Sierra and Roseville 1st National Bank lease the premises of Roseville
1st National Bank's Granite Bay branch office located at 6951 Douglas Boulevard,
Granite Bay, California. The lease is presently for a term expiring July 1,
2000. The office space at this branch consists of approximately 1,400 square
feet.
Western Sierra and Lake Community Bank lease the premises of Lake Community
Bank's Kelseyville branch office located at 4280 Main Street, Kelseyville,
California. The lease is presently for a term expiring December 18, 2003. The
office space at this branch consists of approximately 2,140 square feet.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Western Sierra and/or its subsidiary banks are a party to
claims and legal proceedings arising in the ordinary course of business. Western
Sierra Bancorp's management is not aware of any material pending litigation
proceedings to which either it or any of its subsidiary banks is a party or has
recently been a party, which will have a material adverse effect on the
financial condition or results of operations of Western Sierra Bancorp taken as
a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of the security holders during the forth
quarter of the period covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICES
Western Sierra common stock is listed on the NASDAQ National Market under the
symbol WSBA. Management of Western Sierra is aware that the San Francisco office
of Hoefer & Arnett, Incorporated, Sutro & Co., Dean Witter, Paine Webber,
Prudential, Resource Trust, 1st National Bank, Solomon Booth, Northern Trust,
Philadep, South West, Midwest & Co., Schwab, Edward D. Jones, Donaldson, Old
Discount Brokerage and CEDE handle trades in Western Sierra common stock (the
"Western Sierra securities dealers").
The following table shows the high and low bid quotations for Western Sierra
common stock, as reported by Western Sierra securities dealers during the
calendar quarters for the years 1999 and 1998. These quotations reflect the
price that would be received by the seller, without retail mark-up, mark-down or
commissions and may not have represented actual transactions:
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Bid Prices
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Quarter High Low Volume
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4th Quarter 1999 $ 14.25 $ 11.50 166,416
3rd Quarter 1999 $15.125 $11.786 197,254
2nd Quarter 1999 $ 16.00 $ 12.50 78,100
1st Quarter 1999 $ 16.75 $ 15.50 38,100
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4th Quarter 1998 $ 19.00 $ 16.00 20,500
3rd Quarter 1998 $ 20.25 $ 15.00 35,707
2nd Quarter 1998 $ 21.00 $ 18.50 72,806
1st Quarter 1998 $ 19.50 $ 17.25 46,976
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As of March 15, 2000, the outstanding shares of Western Sierra common stock were
held by approximately 1,293 record holders.
DIVIDENDS
Western Sierra shareholders are entitled to receive dividends when and as
declared by its board of directors, out of funds legally available therefor, as
provided in the California General Corporation Law. The California General
Corporation Law provides that a corporation may make a distribution to its
shareholders if its retained earnings immediately prior to the dividend payout
at least equal the amount of the proposed distribution. In the event that
sufficient retained earnings are not available for the proposed distribution, a
corporation may, nevertheless, make a distribution if it meets both the
"quantitative solvency" and the "liquidity" tests, as set forth in the
California General Corporation Law. In general, the quantitative solvency test
requires that the sum of the assets of the corporation equal at least 1-1/4
times its liabilities. The liquidity test generally requires that a corporation
have current assets at least equal to current liabilities, or, if the average of
the earnings of the corporation before taxes on income and before interest
expense for the two preceding fiscal years was less than the average of the
interest expense of the corporation for those fiscal years, then current assets
must equal at least 1-1/4 times current liabilities.
Western Sierra paid stock dividends of 7% per share on April 17, 1995, 4% per
share on October 20, 1995, 6% per share on April 30, 1997, 10% per share on
October 20, 1997 and 5% per share on November 1, 1999.
The amount and payment of dividends by Western Sierra are set by Western
Sierra's Board of Directors with numerous factors involved including Western
Sierra's earnings, financial condition and the need for capital for expanded
growth and general economic conditions. While it is anticipated that Western
Sierra will continue to declare stock dividends based upon the recommendations
of the Board of Directors of Western Sierra, there can be no assurance that such
dividends will occur. Under the definitive merger agreement with Sentinel
Community Bank discussed on page 8, Western Sierra has agreed that it will not
declare or pay any dividend on its shares of Western Sierra common stock, other
than regular cash dividends consistent with past practices. This restriction
would no longer be applicable in the event the merger is not approved by the
shareholders, and will not restrict Western Sierra's ability to pay dividends
following the merger.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS ARE PRESENTED TO ASSIST IN THE
UNDERSTANDING OF THE FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS OF
WESTERN SIERRA BANCORP AND ITS SUBSIDIARIES ("WESTERN SIERRA," EXCEPT WHEN THE
CONTEXT REQUIRES OTHERWISE). THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING
ELSEWHERE HEREIN.
WESTERN SIERRA HAS THREE WHOLLY OWNED SUBSIDIARY BANKS, WESTERN SIERRA NATIONAL
BANK, ROSEVILLE 1st NATIONAL BANK AND LAKE COMMUNITY BANK, WHICH ARE
COLLECTIVELY REFERRED TO AS THE "SUBSIDIARY BANKS".
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995) to assist in the understanding
of anticipated future operating and financial performance, growth opportunities,
growth rates, and other similar forecasts and statements of expectations. These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties and other factors, which may cause
actual results to differ materially from those in such statements. These factors
include, but are not limited to, the following: risks from changes in economic,
monetary policy and industrial conditions; changes in interest rates and deposit
rates; inflation; risks inherent in making loans including repayment risks and
value of collateral; loan growth; adequacy of the allowance for loan losses and
the assessment of problem loans; fluctuations in consumer spending; the demand
for Western Sierra's products and services; dependence on senior management;
technological changes; ability to increase market share; expense projections;
system conversion costs; costs associated with new buildings; acquisitions;
risks, realization of cost savings,
-7-
<PAGE> 10
changes in accounting policies and practices; costs and effects of litigation;
and recently-enacted or proposed legislation.
Such forward-looking statements speak only as of the date on which such
statements are made. Western Sierra undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
In addition, certain statements in future filings by Western Sierra with the
Securities and Exchange Commission, in press releases and in oral and written
statements made by or with the approval of Western Sierra which are not
statements of historical fact constitute forward-looking statements.
MERGERS
The mergers with Roseville 1st National Bank and Lake Community Bank, completed
on April 30,1999, were accounted for as a pooling-of-interests and accordingly
Western Sierra's historical consolidated financial statements have been restated
to include the accounts and results of operation of the two merged banks as if
the merger had been effective as of the earliest period presented.
Western Sierra's acquisitions are discussed in further detail in Note 2 of the
audited financial statements and notes thereto appearing elsewhere herein.
On December 27, 1999, Western Sierra signed a definitive agreement to merge with
Sentinel Community Bank ("Sentinel"), a $93 million institution headquartered in
Sonora, California. The resulting holding company will have approximately $392
million on assets and fourteen branch offices. The stock-for stock merger was
valued at approximately $8.5 million as of the announcement date. The merger
agreement provides that Sentinel shareholders receive shares of Western Sierra's
common stock. This transaction, which is subject to regulatory approvals and the
shareholder approval of both companies, will be accounted for using the
pooling-of-interests method of accounting and is expected to close in the second
quarter of 2000.
FINANCIAL CONDITION
1999 COMPARED TO 1998
Total assets at December 31,1999 were $299.3 million, an increase of $8.7
million, or 3.0%, over total assets of $290.6 million at December 31, 1998.
Loans were $213.9 million, an increase of $49.7 million or 30.3%, over total
loans of $164.2 million at December 31, 1998. Loan growth was the result of
increased marketing efforts and economic growth in the greater Sacramento area.
Federal funds sold and investment securities were $52.6 million, a decrease of
$39.1 million, or 42.6%, from total federal funds sold and investment securities
of $91.7 million at December 31, 1998.
Total deposits at December 31, 1999 were $265.4 million, an increase of $1.7
million, or 0.6%, over total deposits of $263.7 million at December 31, 1998.
Most of the deposit growth occurred in the money market deposits and
certificates of deposit over $100,000. Money market deposits grew $5.9 million,
or 22.9% during 1999. Growth in certificates of deposit over $100,000 was $2.8
million or 6.5% during 1999. Savings deposits remained steady and
non-interest-bearing deposits decreased from $71.9 million to $63.9 million, a
decrease of $8.0 million or 11.2%. Growth in the interest bearing deposit
accounts was partly off-set by a decrease in non-interest bearing transaction
accounts but the net overall increase was due primarily to the growth in the
economy in the area serviced.
Total shareholders equity at December 31, 1999 was $25.5 million, an increase of
$1.6 million over total shareholders equity of $23.9 million at December 31,
1998. The increase in equity is due to an increase in retained earnings of $1.1
million for the twelve months ended December 31, 1999, and the exercise of stock
options by employees and directors.
1998 COMPARED TO 1997
Total assets at December 31,1998 were $290.6 million, an increase of $45.6
million or 18.6% over total assets of $245.0 million at December 31, 1997. Loans
were $164.2 million, an increase of $5.4 million or 3.4% over total loans of
$158.8 million at December 31, 1997. Federal funds sold and investment
securities were $91.7 million, an increase of $53.3 million or 126.6%, from
total federal funds sold and investment securities of $41.3 million at December
31, 1997.
-8-
<PAGE> 11
Total deposits at December 31, 1998 were $263.7 million, an increase of $44.3
million or 20.0% over total deposits of $221.1 million at December 31, 1997.
Non-interest bearing deposits increased $31.2 million or 76.7%, the remaining
increase was evenly spread over the various interest bearing deposit categories.
The overall growth is attributed to the growth in the economy of the area served
and unusually large deposit balances by two title company customers totaling
$11.3 million.
Total shareholder equity at December 31,1998 was $23.9 million, an increase of
$2.3 million over total shareholder equity of $21.6 million at December 31,
1997. The increase in equity was due to an increase in retained earnings of $1.1
million for the twelve months ended December 31, 1998 and the exercise of stock
options by employees and directors.
RESULTS OF OPERATIONS
The following is Western Sierra's management's discussion and analysis of the
significant changes in income and expense accounts for the years ended December
31, 1999, 1998 and 1997.
INTRODUCTION. This discussion is designed to provide a better understanding of
significant trends related to Western Sierra's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. It
should be read in conjunction with Western Sierra's audited financial statements
and notes thereto and the other financial information appearing elsewhere
herein.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income increased
from $18.9 million in 1997 to $20.0 million in 1998, and to $21.5 million in
1999, representing a 6.0% increase in 1998 over 1997 and a 7.5% increase in 1999
over 1998. The total interest income increases in the periods discussed were
primarily the result of growth in Western Sierra's established market areas.
Total interest expense increased from $7.3 million in 1997 to $7.9 million in
1998 and decreased to $7.7 million in 1999, representing an 8.2% increase in
1998 over 1997 and a 1.8% decrease in 1999 from 1998. The increase in interest
expense from 1997 to 1998 was primarily the result of an increase in the balance
of certificates of deposit. The decrease in interest expense in 1999 from 1998
was primarily the result of lower rates paid on certificates of deposit.
Western Sierra's net interest margin (net interest income divided by average
earning assets) was 5.82% in 1997, 5.32% in 1998, and 5.37% in 1999. The overall
yield on the investment portfolio decreased from 7.36% in 1997 to 6.92% in 1998
and to 6.06% in 1999. During the same periods, the yield on the loan portfolio
decreased from 10.26% in 1997 to 9.78% in 1998, and to 9.24% in 1999.
Western Sierra's net interest income increased from $11.6 million in 1997 to
$12.1 million in 1998 and to $13.8 million in 1999, representing a 4.6% increase
in 1998 over 1997 and a 13.6% increase in 1999 over 1998. The increases in the
periods discussed were primarily the result of the overall growth of Western
Sierra, with average interest-earning assets increasing 12.6% to $256.9 million
in 1999 from $228.3 million in 1998 and 14.5% from $199.3 million in 1997.
During these same periods, the net interest margin increased to 5.37% in 1999
from 5.32% in 1998 and decreased from 5.82% in 1997. However, the increase in
volume due to Western Sierra's growth from 1997 to 1998 outweighed the decrease
in the net interest margin which resulted in the significant growth in net
interest income for the same period.
-9-
<PAGE> 12
The following table sets forth the changes in interest income and expense
attributable to changes in rates and volumes:
ANALYSIS OF CHANGES IN NET INTEREST INCOME.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1999 Versus 1998 1998 Versus 1997
--------------------------------- ---------------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
(Dollars in thousands) Change Rate Volume Change Rate Volume
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ (204) $ 93 $ (297) $ 274 $ (158) $ 432
Investment securities 102 (443) 545 699 (196) 895
Loans, gross 1,607 (1,029) 2,636 151 (776) 927
------- ------- ------- ------- ------- -------
Total interest-earning
assets 1,505 (1,279) 2,884 1,124 (1,130) 2,254
------- ------- ------- ------- ------- -------
NOW, MMDA 133 (23) 156 (51) (89) 38
Savings (15) (32) 17 (28) (11) (17)
Certificates of deposit (399) (534) 135 674 (217) 891
Short-term borrowings 137 (104) 241 (1) 1 (2)
------- ------- ------- ------- ------- -------
Total interest- bearing
liabilities (144) (693) 549 594 (316) 910
------- ------- ------- ------- ------- -------
Net interest income $ 1,649 $ (686) $ 2,335 $ 530 $ (814) $ 1,344
======= ======= ======= ======= ======= =======
</TABLE>
The change in interest income or interest expense that is attributable to both
changes in rate and changes in volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute amounts of changes in each.
The following is an unaudited summary of changes in earnings of Western Sierra
for the years ended December 31, 1999 and 1998. In the opinion of Western
Sierra's management, the following summary of changes in earnings reflects all
adjustments which Western Sierra considers necessary for a fair presentation of
the results of its operations for these periods. This summary of changes in
earnings should be read in conjunction with the Financial Statements and Notes
relating thereto appearing elsewhere herein.
-10-
<PAGE> 13
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
(Dollars in thousands) 1999 over 1998 1998 over 1997
-------------------------- -----------------------
(Unaudited) Amount of % of Amount of % of
Change Change Change Change
--------- -------- --------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,607 10.08% $ 151 0.96%
Interest on securities 274 9.97% 646 30.72%
Interest on deposits in banks (172) (60.14)% 53 22.75%
Interest on federal funds sold (204) (19.81)% 274 36.24%
------- -------
Total interest income 1,505 7.52% 1,124 5.95%
------- -------
INTEREST EXPENSE
Interest on deposits (281) (3.57)% $ 595 8.18%
Interest on borrowed funds 137 13700.00% (1) (50.00)%
------- -------
Total interest income (144) (1.83)% 594 8.16%
------- -------
Net interest income 1,649 13.59% 530 4.57%
PROVISION FOR LOAN LOSSES (235) (30.32)% (295) (27.57)%
------- -------
Net interest income after
provision for loan losses 1,884 16.58% 825 7.83%
------- -------
NONINTEREST INCOME
Service charges (86) (6.76)% 7 0.55%
Other income (571) (22.95)% 746 42.82%
------- -------
Total noninterest income (657) (17.47)% 753 25.04%
------- -------
OTHER EXPENSES
Salaries and related benefits (334) (5.20)% 1,001 18.46%
Occupancy and equipment expense (31) (1.59)% 321 19.68%
Other (1,008) (19.66)% 1,736 51.18%
------- -------
Total other expenses (1,373) (10.17)% 3,058 29.28%
------- -------
Income before income taxes 2,600 160.49% (1,480) (47.74)%
PROVISION FOR INCOME TAXES 896 172.64% (630) (54.83)%
------- -------
NET INCOME $ 1,704 154.77% $ (850) (43.57)%
======= =======
</TABLE>
NONINTEREST INCOME. Noninterest income increased from $3.0 million in 1997 to
$3.8 million in 1998 and decreased to $3.1 million in 1999, representing a 25.0%
increase in 1998 over 1997 and a 17.5% decrease in 1999 from 1998. The increase
in noninterest income in 1998 and the decrease in 1999 were primarily the result
of changes in the volume of mortgage loan activity due to market rates.
OTHER EXPENSES. The continued growth of Western Sierra required additional staff
and overhead expense to support general and administrative services and
increased the cost of occupying Western Sierra's offices. Salaries were also
adjusted to be competitive with the industry and to reward performance. Other
expenses are comprised of salaries and related benefits, occupancy, equipment
and other expenses. Other expenses increased from $10.4 million in 1997 to $13.5
million in 1998, and decreased to $12.1 million in 1999, representing a 29.3%
increase in 1998 over 1997 and a 10.2% decrease in 1999 from 1998. The increase
in total other expenses in 1998 versus 1997 was due to the continued growth of
Western Sierra including the majority of the acquisition costs of Roseville 1st
National Bank and Lake Community Bank in April of 1999. The decrease in 1999
from 1998 was due to many of the expected cost savings from the mergers being
realized.
-11-
<PAGE> 14
The following table compares the various elements of other expenses as a
percentage of average assets for the years ended December 31, 1999, 1998 and
1997. (Dollars in thousands except percentage amounts.)
<TABLE>
<CAPTION>
Salaries Occupancy
and and Other
Year Ended Average Related Equipment Operating
December 31, Assets(1) Benefits Expenses Expenses
------------ --------- -------- --------- ---------
<S> <C> <C> <C> <C>
1999 $286,552 2.1% .7% 1.4%(2)
1998 $259,438 2.5% .8% 2.0%(2)
1997 $226,658 2.4% .7% 1.5%
</TABLE>
- ------------------
(1) Based on the average of daily balances.
(2) Included merger costs.
PROVISION FOR LOAN LOSSES. The provision for loan losses corresponds directly to
the level of the allowance that management deems sufficient to offset potential
loan losses. The balance in the loan loss allowance reflects the amount which,
in management's judgment, is adequate to provide for these potential loan losses
after weighing the mix of the loan portfolio, current economic conditions, past
loan experience and such other factors as deserve recognition in estimating loan
losses.
Management allocated $540 thousand as a provision for loan losses in 1999, $775
thousand in 1998 and $1.07 million in 1997. Loans charged off net of recoveries
in 1999 were $85 thousand, in 1998 were $968 thousand and in 1997 were $314
thousand. The ratio of the allowance for loan losses to total gross loans was
1.35% in 1999, 1.48% in 1998, and 1.66% in 1997.
In management's opinion, the balance of the allowance for loan losses at
December 31, 1999 was sufficient to sustain any foreseeable losses in the loan
portfolio at that time. However, no assurances can be given that Western Sierra
will not sustain substantially higher loan and lease losses.
INCOME TAXES. Income taxes were $1.42 million in 1999, $519 thousand in 1998,
and $1.15 million in 1997, representing effective tax rates of 33.5%, 32.1% and
37.1%, respectively.
NET INCOME. The net income and basic earnings per share of Western Sierra were
$2.8 million and $1.12 per share in 1999, $1.1 million and $.46 per share in
1998, and $1.9 million and $.85 per share in 1997, respectively. The decrease in
net income in 1998 from 1997 was largely attributable to expenses associated
with the merger of Lake Community Bank and Roseville 1st National Bank. The
increase in net income in 1999 over 1998 was due to increased interest income
generated from increased loan volume as well as decreased operating expenses due
to efficiencies gained from the merger.
LIQUIDITY. Western Sierra has an asset and liability management program allowing
it to maintain its interest margins during times of both rising and falling
interest rates and to maintain sufficient liquidity. Liquidity of Western Sierra
at December 31, 1999 was 14.7%, at December 31, 1998 was 38.1%, and at December
31, 1997 was 28.0% based on liquid assets (consisting of cash and due from
banks, investments not pledged, federal funds sold and loans available-
for-sale) divided by total liabilities. Western Sierra's management believes it
maintains adequate liquidity levels.
CAPITAL RESOURCES. The shareholders' equity accounts of Western Sierra increased
from $21.6 million at December 31, 1997, to $23.9 million at December 31, 1998
and to $25.5 million at December 31, 1999. These increases are attributable to
retained earnings and the exercise of stock options adjusted for unrealized
gains and losses on available-for-sale securities. Western Sierra is subject to
various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Western Sierra must meet specific capital guidelines
that involve quantitative measures of Western Sierra's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. Western Sierra's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Western Sierra to maintain minimum amounts and ratios of total and Tier
1 capital (primarily common stock and retained earnings less goodwill) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1999, that Western Sierra exceeds all capital
adequacy requirements to which it is subject.
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<PAGE> 15
As of June 30, 1999, the most recent notification from the FDIC categorized
Western Sierra as well capitalized under Regulation Y. To be categorized as well
capitalized, Western Sierra must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the next table. There are
no conditions or events since that notification which management believes have
changed Western Sierra's categorization.
Western Sierra's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized December 31,
Requirement Requirement 1999
----------- ----------- ------------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based to
risk-weighted assets 4% 6% 11.3%
Total risk-based to
risk-weighted assets 8% 10% 12.6%
Leverage to total
average assets 4-5% 5% 9.3%
</TABLE>
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the unaudited average balances of Western Sierra's assets, liabilities and
shareholders' equity accounts and the percentage distribution of the items,
computed using the daily average balances, for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
(Unaudited) ---------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- ---------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
--------- ---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 15,273 5.33 $ 16,926 6.52 $ 14,484 6.39
Investment securities 51,741 18.06 43,880 16.91 31,729 14.00
Federal funds sold 15,221 5.31 21,392 8.25 13,603 6.00
Loans:
Commercial 43,729 15.26 60,604 23.36 52,126 23.00
Installment 5,443 1.90 9,471 3.65 11,000 4.85
Real estate 141,208 49.28 93,463 36.03 91,540 40.39
Less deferred costs (429) (0.15) (537) (0.21) (698) (0.31)
Less allowance for loan and lease
losses (2,632) (0.92) (2,592) (1.00) (2,021) (0.89)
--------- ------- -------
Net loans 187,319 65.37 160,409 61.83 151,947 67.04
--------- ------- -------
Bank premises and equipment, net 7,692 2.68 7,929 3.06 7,607 3.36
Other real estate 1,349 0.47 1,916 0.74 2,578 1.14
Other assets 7,957 2.78 6,986 2.69 4,710 2.08
--------- ------ --------- ------ --------- ------
TOTAL ASSETS $ 286,552 100.00 $ 259,438 100.00 $ 226,658 100.00
========= ====== ========= ====== ========= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 63,262 22.08 $ 48,243 18.60 $ 35,302 15.58
NOW and money market 54,465 19.01 48,307 18.62 46,912 20.70
Savings 21,563 7.52 20,788 8.01 21,555 9.51
Time 72,986 25.47 82,274 31.71 76,161 33.60
Time > $100,000 46,635 16.27 34,788 13.41 24,638 10.87
Short-term borrowings 2,485 0.87 2 0.00 29 0.01
Other liabilities 2,232 0.78 2,301 0.89 1,662 0.73
--------- ------ --------- ------ --------- ------
Total liabilities 263,628 92.00 236,703 91.24 206,259 91.00
Shareholders' equity:
Common stock 10,645 3.71 10,647 4.10 9,807 4.33
Retained earnings 12,861 4.49 11,904 4.59 10,684 4.71
Unearned ESOP shares (20) (0.01)
Unrealized (loss) gain on AFS
investment securities, net (582) (0.20) 184 0.07 (72) (0.03)
--------- ------ --------- ------ --------- ------
Total shareholders' equity 22,924 8.00 22,735 8.76 20,399 9.00
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 286,552 100.00 $ 259,438 100.00 $ 226,658 100.00
========= ====== ========= ====== ========= ======
</TABLE>
(1) Percentages of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
-13-
<PAGE> 16
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of Western Sierra's investment securities as of
December 31, 1999 and December 31, 1998. (Dollars in thousands)
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
-------------- --------------- ---------------- --------------- ---------------
December 31, 1999 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Municipals $ 537 6.00% $ 1,703 5.20% $ 1,286 5.50% $11,376 5.10% $14,902 5.18%
Agencies/SBA Pools 103 6.50% 9,361 5.80% 6,932 6.80% 10,161 7.00% 26,557 6.52%
Corporates 0 0.00% 3,204 5.90% 0 0.00% 0 0.00% 3,204 5.90%
Trust Preferreds 0 0.00% 0 0.00% 0 0.00% 461 9.00% 461 9.00%
Stock 175 0.00% 0 0.00% 0 0.00% 1,215 6.00% 1,390 6.00%
------ ------- ------- ------- -------
Total $ 815 6.08% $14,268 5.75% $ 8,218 6.60% $23,214 6.06% $46,514 6.06%
====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
-------------- --------------- ---------------- --------------- ---------------
December 31, 1998 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- ------ ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Treasuries $ 500 6.25% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 500 6.25%
Municipals 504 5.00% 3,127 5.00% 1,154 5.50% 11,417 5.10% 16,202 5.11%
Agencies/SBA Pools 168 7.50% 8,474 6.00% 11,881 6.50% 15,335 7.10% 35,858 6.64%
Corporates 754 6.00% 3,310 5.90% 0 0.00% 0 0.00% 4,064 5.92%
Trust Preferreds 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Stock 5 0.00% 0 0.00% 0 0.00% 863 6.00% 868 6.00%
------ ------- ------- ------- -------
Total $1,931 7.03% $14,911 5.77% $13,035 6.41% $27,615 6.24% $57,492 6.15%
====== ======= ======= ======= =======
</TABLE>
-14-
<PAGE> 17
LOAN PORTFOLIO. Western Sierra's largest historical lending categories are real
estate loans and commercial loans. These categories accounted for approximately
67.4% and 19.5%, respectively, of Western Sierra's total loan portfolio at
December 31, 1998, and approximately 75.9% and 14.5%, respectively, of Western
Sierra's total loan portfolio at December 31, 1999. Loans are carried at face
amount, less payments collected and the allowance for possible loan losses.
Interest on all loans is accrued monthly on a simple interest basis. Typically,
once a loan is placed on nonaccrual status, Western Sierra reverses interest
accrued through the date of transfer. Loans are placed on nonaccrual status when
principal or interest on a loan is past due 90 days or more, unless the loan is
both well-secured and in the process of collection. Interest actually received
for loans on nonaccrual status is recognized as income at the time of receipt
for loans for which the ultimate collectibility of principal is not in doubt.
Problem loans are maintained on accrual status only when management of Western
Sierra is confident of full repayment within a reasonable period of time.
The rates of interest charged on variable rate loans are set at specified
increments in relation to Western Sierra's published lending rate and vary as
Western Sierra's lending rate varies. At December 31, 1998, approximately 52.6%
of Western Sierra's loan portfolio was comprised of variable interest rate
loans, and at December 31, 1999, approximately 50.2% of Western Sierra's loan
portfolio was comprised of variable interest rate loans.
DISTRIBUTION OF LOANS. The distribution of Western Sierra's total loans by type
of loan as of the dates indicated is shown in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
Type of Loan 1999 1998 1997 1996 1995
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Real estate $ 162,306 $ 110,625 $ 109,351 $ 103,156 $ 87,191
Commercial 30,937 31,963 29,339 23,981 25,558
Agriculture 15,370 16,268 13,942 9,410 7,363
Installment 5,315 5,323 6,158 6,168 7,366
--------- --------- --------- --------- ---------
TOTAL 213,928 164,179 158,790 142,715 127,478
Less:
Deferred loans fees (515) (405) (640) (762) (707)
Allowance for loan losses (2,886) (2,431) (2,624) (1,869) (1,962)
--------- --------- --------- --------- ---------
TOTAL NET LOANS $ 210,527 $ 161,343 $ 155,526 $ 140,084 $ 124,809
========= ========= ========= ========= =========
</TABLE>
COMMERCIAL LOANS. Commercial loans are made for the purpose of providing working
funds, financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from 30 to 360 days,
and term loans, which are loans with maturities normally ranging from one to
five years. Short term business loans are generally used to finance current
transactions and typically provide for periodic interest payments, with
principal being payable at maturity or periodically. Term loans normally provide
for monthly payments of both principal and interest.
Western Sierra also extends lines of credit to business customers. On business
credit lines, Western Sierra specifies a maximum amount which it stands ready to
lend to the customer during a specified period in return for which the customer
agrees to maintain its primary banking relationship with Western Sierra. The
purpose for which such loans will be used and the security therefor, if any, are
generally determined before Western Sierra's commitment is extended. Normally,
Western Sierra does not make loan commitments in material amounts for periods in
excess of one year.
REAL ESTATE LOANS. Real estate loans are primarily made for the purpose of
purchasing, improving or constructing single family residences and commercial
and industrial properties.
At December 31, 1999, approximately 77% of Western Sierra's real estate
construction loans consisted of loans secured by first trust deeds on the
construction of owner-occupied single family dwellings, and the remaining 23%
consisted of loans secured by first trust deeds on speculative single family
dwellings. Construction loans are generally written with terms of six to twelve
months and usually do not exceed a loan to appraised value ratio of 75 to 80%.
The risk associated with speculative construction lending includes the
borrower's inability to complete and sell the project, the borrower's incorrect
estimate of necessary construction funds and/or time for completion and economic
changes, including depressed real estate values and increased interest rates.
Management has established underwriting criteria to minimize losses on
speculative construction loans by lending only to experienced developers and
contractors with proven track records. To date Western Sierra has not suffered
any significant losses through its speculative real estate construction loans.
-15-
<PAGE> 18
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding of Western Sierra as
of December 31, 1999 which, based on the remaining scheduled repayments of
principal, have the ability to be repriced or are due in less than one year, in
one to five years or in more than five years. Management has increased the fixed
rate portion of Western Sierra's loan portfolio in 1999 in order to diversify
its loan repricing options as part of its overall asset/liability management
program.
<TABLE>
<CAPTION>
Less than One Year to After
(Dollars in thousands) One Year Five Years Five Years Total
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed rate $ 23,929 $29,924 $52,331 $106,184
Variable 85,946 19,346 1,937 107,229
-------- ------- ------- --------
Total $109,875 $49,270 $54,268 $213,413
======== ======= ======= ========
</TABLE>
LOAN COMMITMENTS. The following table shows Western Sierra's loan commitments at
the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
(Dollars in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Commercial $22,800 $26,529 $19,383
Real estate 29,238 21,614 16,847
Consumer 3,794 3,712 5,634
------- ------- -------
Total commitments $55,832 $51,855 $41,864
======= ======= =======
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 60% of the commitments at December 31, 1999 will
be exercised during 2000.
SUMMARY OF LOAN LOSS EXPERIENCE. As a natural corollary to Western Sierra's
lending activities, some loan losses are experienced. The risk of loss varies
with the type of loan being made and the creditworthiness of the borrower over
the term of the loan. To some extent, the degree of perceived risk is taken into
account in establishing the structure of, and interest rates and security for,
specific loans and for various types of loans. Western Sierra attempts to
minimize its credit risk exposure by use of thorough loan application and
approval procedures.
Western Sierra maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality. Those loans which Western Sierra's
management determines require further monitoring and supervision are segregated
and reviewed on a periodic basis. Significant problem loans are reviewed on a
monthly basis by Western Sierra's Loan Committee. Loans for which it is probable
that Western Sierra will be unable to collect all amounts due (including
principal and interest) are considered to be impaired. The recorded investment
in impaired loans totaled $454 thousand at December 31, 1999. In addition, when
principal or interest on a loan is past due 90 days or more, such loan is placed
on nonaccrual status unless it is both well-secured and in the process of
collection. Loans totaling approximately $543 thousand were on nonaccrual status
as of December 31, 1999. Interest foregone on nonaccrual loans during the years
ended December 31, 1999 and 1998 amounted to approximately $27 thousand and $67
thousand, respectively. Western Sierra classifies certain loans on nonaccrual
status as impaired.
Financial difficulties encountered by certain borrowers may cause Western Sierra
to restructure the terms of their loans to facilitate loan payments. As of
December 31, 1998, Western Sierra had $289 thousand in troubled debt
restructured loans. There were no restructured loans at December 31, 1999.
Western Sierra charges off that portion of any loan which management or bank
examiners consider to represent a loss. A loan is generally considered by
management to represent a loss in whole or in part when an exposure beyond any
collateral value is apparent, servicing of the unsecured portion has been
discontinued or collection is not anticipated based on the borrower's financial
condition and general economic conditions in the borrower's industry. The
principal amount of any loan which is declared a loss is charged against Western
Sierra's allowance for loan losses.
-16-
<PAGE> 19
The following table sets forth the amount of loans on Western Sierra's books
which were 30 to 89 days past due at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------
(Dollars in thousands) 1999 1998
---- ----
<S> <C> <C>
Commercial $ 24 $ 55
Real estate 85 662
---- ----
Total $109 $717
==== ====
</TABLE>
The following table sets forth the amount of loans on Western Sierra's books
which were on nonaccrual status at the dates indicated:
<TABLE>
December 31,
----------------
(Dollars in thousands) 1999 1998
---- ------
<S> <C> <C>
Commercial $ 0 $ 293
Real estate 543 1,113
---- ------
Total $543 $1,406
==== ======
</TABLE>
The following table summarizes Western Sierra's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES
Loans:
Average loans $189,951 $163,001 $153,968 $134,363 $118,466
Loans at end of period $213,413 $163,774 $158,150 $141,952 $126,772
Loans charged off $ 220 $ 1,044 $ 360 $ 1,471 $ 243
Recoveries of loans
previously charged off $ 135 $ 76 $ 46 $ 51 $ 65
Net loans charged off $ 85 $ 968 $ 314 $ 1,417 $ 178
Allowance for loan
and lease losses $ 2,886 $ 2,431 $ 2,624 $ 1,868 $ 1,961
Provisions for loan
and lease losses $ 540 $ 775 $ 1,070 $ 1,024 $ 345
Ratios:
Net loan charge-offs to
average loans 0.05% 0.59% 0.20% 0.23% 0.27%
Net loan charge-offs to
loans at end of period 0.04% 0.59% 0.20% 1.00% 0.14%
Allowance for possible loan
losses to average loans 1.52% 1.49% 1.70% 1.39% 1.66%
Allowance for possible
loan losses to loans at
end of period 1.35% 1.48% 1.66% 1.32% 1.55%
Net loan charge-offs to
allowance for possible
loan losses 2.98% 39.82% 11.97% 75.86% 9.08%
Net loan charge-offs to
provision for possible
loan losses 15.74% 124.90% 29.35% 138.38% 51.59%
</TABLE>
Western Sierra's allowance for loan and lease losses is to provide for losses
which can be reasonably anticipated. The allowance for loan and lease losses is
established through charges to operating expenses in the form of provisions for
loan and lease losses. Provisions for loan and lease losses amounted to $540
thousand in 1999, $775 thousand in 1998 and $1.07 million in 1997. The decreased
charge-offs and provision in 1999 reflect an improved economic market and
stronger underwriting standards implemented by Western Sierra. Actual loan and
lease losses or recoveries are charged or credited, respectively, directly to
the allowance for loan and lease losses. The amount of the allowance is
determined by management of Western Sierra. Among the factors considered in
determining the allowance for loan and lease losses are the current financial
condition of Western Sierra's borrowers and the value of the security, if any,
for their loans. Estimates of future economic conditions and their impact on
various industries and
-17-
<PAGE> 20
individual borrowers are also taken into consideration, as are Western Sierra's
historical loan loss experience and reports of banking regulatory authorities.
Because these estimates and evaluations are primarily judgmental factors, no
assurance can be given that Western Sierra may not sustain loan and lease losses
substantially higher in relation to the size of the allowance for loan and lease
losses or that subsequent evaluation of the loan portfolio may not require
substantial changes in such allowance.
At December 31, 1999, 1998 and 1997, the allowance was 1.35%, 1.48%, and 1.66%,
of the loans then outstanding, respectively. Although the current level of the
allowance is deemed adequate by management, future provisions will be subject to
continuing reevaluation of risks in the loan portfolio.
Management of Western Sierra reviews with Western Sierra's Board of Directors
the adequacy of the allowance for loan and lease losses on a monthly basis and
adjusts the loan loss provision upward where specific items reflect a need for
such an adjustment. Management of Western Sierra charged off approximately $220
thousand in 1999, $1.04 million in 1998 and $360 thousand in 1997. Recoveries of
loans previously charged off were $135 thousand in 1999, $76 thousand in 1998
and $46 thousand in 1997. Management does not believe there has been any
significant deterioration in Western Sierra's loan portfolio. Management also
believes that Western Sierra has adequately reserved for all individual items in
its portfolio which may result in a loss material to Western Sierra. See
"Description of Western Sierra--Western Sierra's Management's Discussion and
Analysis of Financial Condition and Results of Operations--Provision for Loan
Losses".
INVESTMENT SECURITIES. Western Sierra has invested $48.8 million in federal
instruments, securities issued by states and political subdivisions and other
debt securities, which yielded approximately 6.0% per annum during 1999. Western
Sierra's present investment policy is to invest excess funds in federal funds,
U.S. Treasuries, securities issued by the U.S. Government, securities issued by
states and political subdivisions, corporate bonds and trust preferred
securities.
INTEREST RATES AND DIFFERENTIALS. Certain information concerning
interest-earning assets and interest-bearing liabilities and yields thereon
(unaudited) is set forth in the following table. Amounts outstanding are daily
average balances:
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31,
----------------------------------
(Unaudited) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold:
Average outstanding $ 15,221 $ 21,392 $ 13,603
Average yield 5.43% 4.81% 5.56%
Interest income $ 826 $ 1,030 $ 756
Investment securities:
Average outstanding $ 51,741 $ 43,880 $ 31,729
Average yield 6.06% 6.92% 7.36%
Interest income $ 3,137 $ 3,035 $ 2,336
Loans:
Average outstanding $189,951 $163,001 $153,968
Average yield 9.24% 9.78% 10.26%
Interest income $ 17,551 $ 15,944 $ 15,793
Total interest-earning assets:
Average outstanding $256,913 $228,273 $199,300
Average yield 8.37% 8.77% 9.48%
Interest income $ 21,514 $ 20,009 $ 18,885
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $ 54,465 $ 48,307 $ 46,912
Average yield 2.49% 2.53% 2.71%
Interest expense $ 1,355 $ 1,222 $ 1,273
Savings deposits:
Average outstanding $ 21,563 $ 20,788 $ 21,555
Average yield 2.02% 2.17% 2.22%
Interest expense $ 436 $ 451 $ 479
Time deposits:
Average outstanding $119,621 $117,062 $100,799
Average yield 4.85% 5.29% 5.48%
Interest expense $ 5,798 $ 6,197 $ 5,523
</TABLE>
-18-
<PAGE> 21
<TABLE>
<S> <C> <C> <C>
Other borrowings:
Average outstanding $ 2,485 $ 2 $ 29
Average yield 5.55% 50.00% 6.90%
Interest expense $ 138 $ 1 $ 2
Total interest-bearing liabilities:
Average outstanding $198,134 $186,159 $169,295
Average yield 3.90% 4.23% 4.30%
Interest expense $ 7,727 $ 7,871 $ 7,277
Net interest income $ 13,787 $ 12,138 $ 11,608
Average net yield on
interest-earning assets 5.37% 5.32% 5.82%
</TABLE>
LIQUIDITY MANAGEMENT. To augment short-term liquidity, Western Sierra National
Bank, Roseville 1st National Bank and Lake Community Bank have unsecured
short-term borrowing agreements with their correspondent banks in the amounts of
$5 million, $2 million and $2 million, respectively. Western Sierra National
Bank and Roseville 1st National Bank can also borrow up to $1.5 million, and
$759 thousand, respectively, on an overnight basis from the FRB. In addition,
Western Sierra National Bank has the ability to borrow up to $980 thousand on a
short-term basis from the Federal Home Loan Bank secured by investment
securities. Western Sierra National Bank and Roseville 1st National Bank can
also borrow $9 million and $4 million, respectively, from the Federal Home Loan
Bank secured by mortgage loans totaling $10.2 million and $5.2 million,
respectively. At December 31, 1999, Western Sierra National Bank had $6 million
in outstanding borrowings. There were no outstanding borrowings for Roseville
1st National Bank and Lake Community Bank at December 31, 1999.
Policies have been developed by Western Sierra's management and approved by
Western Sierra's Board of Directors which establish guidelines for the
investments and liquidity of Western Sierra. These policies include an
Investment Policy and an Asset Liability Policy. The goals of these policies are
to provide liquidity to meet the financial requirements of Western Sierra's
customers, maintain adequate reserves as required by regulatory agencies and
maximize earnings of Western Sierra.
The following table shows Western Sierra's average deposits for each of the
periods indicated below, based upon average daily balances:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
(Dollars in thousands) Average Percent Average Percent Average Percent
(Unaudited) Balance of Total Balance of Total Balance of Total
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 63,262 24.43% $ 48,243 20.58% $ 35,302 17.26%
NOW accounts 21,415 8.27% 22,531 9.61% 22,267 10.88%
Savings deposits 21,563 8.33% 20,788 8.87% 21,555 10.54%
Money market deposits 33,050 12.77% 25,776 11.00% 24,645 12.05%
Time deposits 119,621 46.20% 117,062 49.94% 100,799 49.27%
-------- ------ -------- ------ -------- ------
Total deposits $258,911 100.00% $234,400 100.00% $204,568 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
LIABILITY MANAGEMENT. It is management's policy to restrict the maturities of a
majority of its certificates of deposit in denominations of $100,000 or more to
less than one year. The maturities of such time certificates of deposit
("TCD's"), as well as other time deposits, were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
TCD's Other
(Dollars in thousands) Over Time
(Unaudited) $100,000 Deposits
------- -------
<S> <C> <C>
Less than three months $24,559 $30,724
Over three months through twelve months 20,253 41,698
Over twelve months through five years 1,117 6,396
Over five years 0 12
------- -------
Total $45,929 $78,830
======= =======
</TABLE>
While the deposits of Western Sierra may fluctuate up and down somewhat with
local and national economic conditions, management of Western Sierra does not
believe that such deposits, or the business of Western Sierra in general, are
seasonal in nature. Liability management is monitored by Western Sierra's Board
of Directors which meets monthly.
-19-
<PAGE> 22
REGULATORY MATTERS.
Capital Adequacy. The capital adequacy of banking institutions has become
increasingly important in recent years. The deregulation of the banking industry
during the 1980's has resulted in, among other things, a broadening of business
activities beyond that of traditional banking products and services. Because of
this volatility within the banking industry, regulatory agencies have increased
their focus upon ensuring that banking institutions meet certain capital
requirements as a means of protecting depositors and investors against such
volatility.
The federal banking agencies have adopted regulations requiring insured
institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of
common shareholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, minus intangible assets,
identified losses and investments in certain subsidiaries) to total assets.
Institutions which have received the highest composite regulatory rating and
which are not experiencing or anticipating significant growth are required to
maintain a minimum leverage capital ratio of 3% Tier 1 capital to total assets.
All other institutions are required to maintain a minimum leverage capital ratio
of at least 100 to 200 basis points above the 3% minimum requirement.
The federal banking agencies have also adopted a statement of policy,
supplementing its leverage capital ratio requirements, which provided
definitions of qualifying total capital (consisting of Tier 1 capital and
supplementary capital, including the allowance for loan losses up to a maximum
of 1.25% of risk-weighted assets) and sets forth minimum risk-based capital
ratios. Insured institutions are required to maintain a ratio of qualifying
total capital to risk-weighted assets of 8%, at least one-half (4%) of which
must be in the form of Tier 1 capital.
The following table sets forth Western Sierra's capital positions at December
31, 1999 under the regulatory guidelines discussed above:
<TABLE>
<CAPTION>
December 31, 1999
Actual Capital Ratios Minimum Capital Ratios
--------------------- ----------------------
<S> <C> <C>
Total risk-based capital ratio 12.6% 8.0%
Tier 1 capital to risk-weighted assets 11.3% 4.0%
Leverage ratio 9.3% 3.0%
</TABLE>
As is indicated by the above table, Western Sierra exceeded all applicable
regulatory capital guidelines at December 31, 1999. Western Sierra's management
believes that, under the current regulations, Western Sierra will continue to
meet its minimum capital requirements in the foreseeable future.
Dividends. Western Sierra National Bank and Roseville 1st National Bank, as
national banks, are subject to dividend restrictions set forth by the
Comptroller. Under such restrictions, neither Western Sierra National Bank nor
Roseville 1st National Bank may, without the prior approval of the Comptroller,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years,
provided that bank's surplus fund is a least equal to its common capital. If the
capital surplus falls below the balance of the common capital account, then
further restrictions apply. This is not the case with either Western Sierra
National Bank or Roseville 1st National Bank. Neither Western Sierra National
Bank nor Roseville 1st National Bank paid any dividends during the year ended
December 31, 1999.
Dividends payable by Lake Community Bank are restricted under California law to
the lesser of Lake Community Bank's retained earnings, or Lake Community Bank's
net income for the latest three fiscal years, less dividends previously declared
during that period, or, with the approval of the Department of Financial
Institutions, to the greater of the retained earnings of Lake Community Bank,
the net income of Lake Community Bank for its last fiscal year or the net income
of Lake Community Bank for its current fiscal year.
The FDIC has broad authority to prohibit a bank from engaging in banking
practices which it considers to be unsafe or unsound. It is possible, depending
upon the financial condition of the bank in question and other factors, that the
FDIC may assert that the payment of dividends or other payments by the bank is
considered an unsafe or unsound banking practice and therefore, implement
corrective action to address such a practice.
In addition to the regulations concerning minimum uniform capital adequacy
requirements discussed above, the FDIC has established guidelines regarding the
maintenance of an adequate allowance for loan and lease losses. Therefore, the
payment of cash dividends by Lake Community Bank will generally depend, in
addition to regulatory constraints, upon Lake Community Bank's earnings during
any fiscal period, the assessment of Lake Community Bank's Board of Directors of
the capital requirements of the institution and other factors, including the
maintenance of an adequate allowance for loan and lease losses.
-20-
<PAGE> 23
Lake Community Bank is not subject to any restrictions on the payment of
dividends other than compliance with law as stated above. Dividends of
$1,850,000 were paid by Lake Community Bank to Western Sierra during the year
ended December 31, 1999.
Reserve Balances. Western Sierra National Bank and Roseville 1st National Bank
are required to maintain and Lake Community Bank maintains reserve balances with
the FRB. At December 31, 1999, Western Sierra National Bank's qualifying balance
with the FRB was approximately $1.0 million and $2.1 million, respectively,
consisting of vault cash and balances, Roseville 1st National Bank's qualifying
balance with the FRB was approximately $25 thousand and $685 thousand,
respectively, consisting of vault cash and balances, and Lake Community Bank's
qualifying balance with the FRB was approximately $600 thousand and $1.1
million, respectively, consisting of vault cash and balances.
Year 2000 Compliance. Western Sierra previously recognized the material nature
of the business issues surrounding computer processing of dates into and beyond
the Year 2000 and began taking corrective action as required pursuant to the
interagency statements issued by the Federal Financial Institutions Examination
Council. Management believes Western Sierra has completed all of the activities
within its control to ensure that Western Sierra's systems are Year 2000
compliant. Western Sierra has not experienced any interruptions to normal
operations due to the start of the Year 2000.
Western Sierra's Year 2000 readiness costs were approximately $109,000. Western
Sierra does not currently expect to apply any further funds to address Year 2000
issues.
As of February 29, 2000, Western Sierra has not had any material disruptions of
its internal computer systems or software applications and has not experienced
any problems with the computer systems or software applications of its third
party vendors, suppliers or service providers. Western Sierra will continue to
monitor these third parties to determine the impact, if any, on the business of
Western Sierra and the actions it must take, if any, in the event of
noncompliance by any of these third parties. Based upon Western Sierra's
assessment of compliance by third parties, there appears to be no material
business risk posed by any such noncompliance.
Although Western Sierra's Year 2000 rollover did not present any material
business disruption, there are some remaining Year 2000 related risks, including
risks due to the fact that the Year 2000 is a leap year. Management believes
that appropriate actions have been taken to address these remaining Year 2000
issues and contingency plans are in place to minimize the financial impact to
Western Sierra. Management, however, cannot be certain that Year 2000 issues
affecting customers, suppliers or service providers of Western Sierra will not
have a material adverse impact on Western Sierra.
Quantitative and Qualitative Disclosures About Market Risk. Market risk is the
risk of loss from adverse changes in market prices and rates. Western Sierra's
market risk arises primarily from interest rate risk inherent in its loan and
deposit functions and management actively monitors and manages this interest
rate risk exposure. Western Sierra 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. Western Sierra has a positive gap.
In addition, Western Sierra uses interest rate shock simulations to estimate the
effect of certain hypothetical rate changes. Based upon Western Sierra's shock
simulations, net interest income is expected to rise with increasing rates and
fall with declining rates.
Western Sierra's positive gap is the result of the majority of Western Sierra's
investments having terms greater than five years on the asset side. On the
liability side, the majority of Western Sierra's time deposits have average
terms of approximately six months while savings accounts and other
interest-bearing transaction accounts are recorded for gap analysis in the next
day to three month category because they do not have a contractual maturity
date.
Taking into consideration that savings accounts and other interest-bearing
transaction accounts typically do not react immediately to changes in interest
rates, management has taken the following steps to manage its positive gap
position. Western Sierra has added loans tied to indices which change at a
slower rate than prime and more closely match Western Sierra's liabilities. In
addition, Western Sierra holds the majority of its investments in the
available-for-sale category in order to be able to react to changes in interest
rates.
The following table sets forth the distribution of repricing opportunities of
Western Sierra'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, 1999. 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. The 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
Western Sierra.
-21-
<PAGE> 24
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Over Three
Months
Next Day Through One Year
(Dollars in thousands) to Three Twelve Through Over
(Unaudited) Months Months Five Years Five Years Total
--------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 6,075 $ 0 $ 0 $ 0 $ 6,075
Interest-bearing due from time 198 0 0 0 198
Taxable investment securities 175 103 12,565 18,768 31,611
Nontaxable investment securities 0 537 1,703 12,663 14,903
Loans 89,331 20,769 49,095 54,218 213,413
--------- -------- -------- ------- --------
Total interest-earning assets 95,779 21,409 63,363 85,649 266,200
--------- -------- -------- ------- --------
Liabilities:
Savings deposits(1) 76,793 0 0 0 76,793
Time deposits 55,283 61,951 7,513 12 124,759
Other borrowings 6,300 0 0 0 6,300
--------- -------- -------- ------- --------
Total interest-bearing liabilities 138,376 61,951 7,513 12 207,852
--------- -------- -------- ------- --------
Net (interest-bearing liabilities)
interest-earning assets $ (42,597) $(40,542) $ 55,850 $85,637 $ 58,348
========= ======== ======== ======= ========
Cumulative net (interest-bearing
liabilities) interest-earning assets
("GAP") $ (42,597) $(83,139) $(27,289) $58,348
Cumulative GAP as a percentage of
total interest-earning assets (16.00)% (31.23)% (10.25)% 21.92%
</TABLE>
- ----------------
(1) Savings deposits include interest-bearing transaction accounts.
-22-
<PAGE> 25
The following table sets forth the distribution of the expected maturities of
Western Sierra's interest-earning assets and interest-bearing liabilities as of
December 31, 1999 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 1999 maturity category.
EXPECTED MATURITIES
<TABLE>
<CAPTION>
(Dollars in thousands)
(Unaudited) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
-------- ------ ------- ------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 6,075 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,075 $ 6,075
Weighted average rate 5.62% 0.00% 0.00% 0.00% 0.00% 0.00% 5.62%
Interest-bearing due from banks $ 198 $ 0 $ 0 $ 0 $ 0 $ 0 $ 198 $ 198
Weighted average rate 5.80% 0.00% 0.00% 0.00% 0.00% 0.00% 5.80%
Investment securities(1) $ 814 $1,196 $ 2,132 $ 6,163 $ 4,802 $31,407 $ 46,514 $ 46,441
Weighted average rate 5.58% 6.42% 6.06% 5.93% 5.94% 5.83% 5.88%
Fixed rate loans $ 23,932 $2,978 $12,246 $ 3,069 $11,629 $52,331 $106,185 $109,571
Weighted average rate 8.14% 9.12% 9.88% 9.20% 9.11% 8.05% 8.46%
Variable rate loans(2) $ 85,946 $2,219 $ 1,968 $ 8,355 $ 6,804 $ 1,936 $107,228 $107,228
Weighted average rate 9.56% 7.51% 8.97% 8.58% 8.70% 8.10% 9.35%
Total interest-bearing assets $116,965 $6,393 $16,346 $17,587 $23,235 $85,674 $266,200 $269,513
Savings deposits(3) $ 76,793 $ 0 $ 0 $ 0 $ 0 $ 0 $ 76,793 $ 76,793
Weighted average rate 2.05% 0.00% 0.00% 0.00% 0.00% 0.00% 2.05%
Time deposits $117,234 $5,974 $ 1,382 $ 0 $ 157 $ 12 $124,759 $125,713
Weighted average rate 5.00% 5.25% 5.29% 0.00% 5.25% 2.02% 5.02%
Other borrowings $ 6,300 $ 0 $ 0 $ 0 $ 0 $ 0 $ 6,300 $ 6,300
Weighted average rate 5.89% 0.00% 0.00% 0.00% 0.00% 0.00% 5.89%
Total interest-bearing liabilities $200,327 $5,974 $ 1,382 $ 0 $ 157 $ 12 $207,852 $208,806
</TABLE>
- ------------
(1) Interest rates on tax exempt obligations have not been tax effected to
include the related tax benefit in calculating the weighted average yield.
(2) Of the total variable rate loans, 91% reprice in one year or less.
(3) Savings deposits include interest-bearing transaction accounts.
-23-
<PAGE> 26
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS Page
----
<S> <C>
Independent Auditor's Report F-1
Balance Sheet at December 31, 1999 and 1998 F-2
Statement of Income for the Years Ended
December 31, 1999, 1998 and 1997 F-3 to F-4
Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 F-5 to F-7
Statement of Cash Flows for the Years Ended F-8 to F-11
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements F-12 to F-47
</TABLE>
-24-
<PAGE> 27
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Western Sierra Bancorp
and Subsidiaries
We have audited the accompanying consolidated balance sheet of Western
Sierra Bancorp and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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.
The consolidated financial statements as of December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999 have been
restated to reflect the pooling of interests with Lake Community Bank and
Roseville 1st Community Bancorp as described in Note 2 to the consolidated
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Western Sierra Bancorp and subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ PERRY-SMITH & CO., LLP
Certified Public Accountants
Sacramento, California
February 18, 2000
F-1
<PAGE> 28
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,738,000 $ 12,046,000
Federal funds sold 6,075,000 34,220,000
Interest-bearing deposits in banks 198,000 3,960,000
Loans held for sale 964,000 4,481,000
Trading securities (Note 3) 175,000 5,000
Available-for-sale investment securities (Notes 3 and 9) 44,071,000 55,599,000
Held-to-maturity investment securities (market value of
$2,195,000 in 1999 and $1,923,000
in 1998) (Notes 3 and 9) 2,268,000 1,888,000
Loans and leases, less allowance for loan and
lease losses of $2,886,000 in 1999 and
$2,431,000 in 1998 (Notes 4, 10 and 14) 210,527,000 161,343,000
Other real estate (Note 5) 715,000 1,547,000
Bank premises and equipment, net (Notes 6 and 10) 8,871,000 8,370,000
Accrued interest receivable and other assets
(Notes 7, 13 and 15) 9,658,000 7,169,000
------------- -------------
$ 299,260,000 $ 290,628,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing (Note 14) $ 63,865,000 $ 71,891,000
Interest bearing (Notes 8 and 14) 201,552,000 191,829,000
------------- -------------
Total deposits 265,417,000 263,720,000
Short-term borrowings (Notes 9 and 14) 6,300,000 150,000
Accrued interest payable and other liabilities 2,038,000 2,828,000
------------- -------------
Total liabilities 273,755,000 266,698,000
------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity (Note 11):
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 - 2,515,192
shares in 1999 and 2,326,966 shares in 1998 15,911,000 13,431,000
Retained earnings 11,534,000 10,384,000
Unearned ESOP shares (Note 15) (300,000)
Accumulated other comprehensive (loss) income
(Notes 3 and 16) (1,640,000) 115,000
------------- -------------
Total shareholders' equity 25,505,000 23,930,000
------------- -------------
$ 299,260,000 $ 290,628,000
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 29
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans and leases $17,551,000 $15,944,000 $15,793,000
Interest on Federal funds sold 826,000 1,030,000 756,000
Interest on investment securities:
Taxable 2,280,000 2,365,000 1,949,000
Exempt from Federal income taxes 743,000 384,000 154,000
Interest on deposits in banks 114,000 286,000 233,000
----------- ----------- -----------
Total interest income 21,514,000 20,009,000 18,885,000
----------- ----------- -----------
Interest expense:
Interest on deposits (Note 8) 7,589,000 7,870,000 7,275,000
Interest on short-term borrowings
(Note 9) 138,000 1,000 2,000
----------- ----------- -----------
Total interest expense 7,727,000 7,871,000 7,277,000
----------- ----------- -----------
Net interest income 13,787,000 12,138,000 11,608,000
Provision for loan and lease losses
(Note 4) 540,000 775,000 1,070,000
----------- ----------- -----------
Net interest income after
provision for loan and
lease losses 13,247,000 11,363,000 10,538,000
----------- ----------- -----------
Non-interest income:
Service charges and fees 1,186,000 1,272,000 1,265,000
Gain on sale and packaging of
residential mortgage and
government-guaranteed
commercial loans 1,214,000 1,839,000 1,104,000
Gain on sale of investment
securities, net (Note 3) 8,000 8,000
Unrealized appreciation of trading
securities (Note 3) 42,000
Other income 661,000 641,000 630,000
----------- ----------- -----------
Total non-interest income 3,103,000 3,760,000 3,007,000
----------- ----------- -----------
</TABLE>
(Continued)
F-3
<PAGE> 30
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits
(Notes 4 and 15) $ 6,089,000 $ 6,423,000 $ 5,422,000
Occupancy (Notes 6 and 10) 877,000 812,000 790,000
Equipment (Note 6) 1,044,000 1,140,000 841,000
Merger expenses (Note 2) 353,000 1,112,000
Other expenses (Note 12) 3,767,000 4,016,000 3,392,000
----------- ----------- -----------
Total other expenses 12,130,000 13,503,000 10,445,000
----------- ----------- -----------
Income before income taxes 4,220,000 1,620,000 3,100,000
Income taxes (Note 13) 1,415,000 519,000 1,149,000
----------- ----------- -----------
Net income $ 2,805,000 $ 1,101,000 $ 1,951,000
=========== =========== ===========
Basic earnings per share (Note 11) $ 1.12 $ .46 $ .85
=========== =========== ===========
Diluted earnings per share (Note 11) $ 1.09 $ .44 $ .82
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 31
WESTERN SIERRA BANCORP AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
----------------------- RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS (LOSS) INCOME EQUITY INCOME
--------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997, as previously reported 796,948 $ 4,989,000 $ 2,762,000 $ (31,000) $ 7,720,000
Lake Community Bank pooling of interests 856,597 3,178,000 5,012,000 (41,000) 8,149,000
Roseville 1st Community Bancorp and subsidiary
pooling of interests 387,486 2,021,000 1,750,000 4,000 3,775,000
--------- ------------ ------------ ---------- ------------
Balance, January 1, 1997, restated 2,041,031 10,188,000 9,524,000 (68,000) 19,644,000
Comprehensive income:
Net income 1,951,000 1,951,000 $1,951,000
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities (Note 16) 208,000 208,000 208,000
----------
Total comprehensive income $2,159,000
==========
Stock options exercised and related tax
benefit (Note 11) 11,943 119,000 119,000
6% stock dividend 47,927 617,000 (617,000)
10% stock dividend 85,203 1,236,000 (1,236,000)
Cash dividend - $.27 per share (335,000) (335,000)
Fractional shares (4,000) (4,000)
Earned ESOP shares (Note 15) 4,000 40,000 40,000
--------- ------------ ---------- ------------ ----------
Balance, December 31, 1997 2,190,104 12,200,000 9,283,000 140,000 21,623,000
--------- ------------ ---------- ------------ ----------
</TABLE>
(Continued)
F-5
<PAGE> 32
WESTERN SIERRA BANCORP AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------------ RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS (LOSS) INCOME EQUITY INCOME
---------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,190,104 $ 12,200,000 $ 9,283,000 $ 140,000 $ 21,623,000
Comprehensive income:
Net income 1,101,000 1,101,000 $ 1,101,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Note 16) (25,000) (25,000) (25,000)
-----------
Total comprehensive income $ 1,076,000
===========
Stock options exercised and related
tax benefit (Note 11) 136,862 1,231,000 1,231,000
---------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 2,326,966 13,431,000 10,384,000 115,000 23,930,000
Comprehensive income:
Net income 2,805,000 2,805,000 $ 2,805,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (Notes 3 and 16) (1,755,000) (1,755,000) (1,755,000)
-----------
Total comprehensive income $ 1,050,000
===========
Stock options exercised and related tax
benefit (Note 11) 91,679 899,000 899,000
5% stock dividend 120,691 1,634,000 (1,634,000)
Repurchase and retirement of common stock (Note 11) (4,199) (53,000) (53,000)
Fractional shares (Note 2) (1,358) (21,000) (21,000)
Unearned ESOP shares (Note 15) (18,587) (300,000) (300,000)
---------- ----------- ----------- ------------ -----------
Balance, December 31, 1999 2,515,192 $ 15,611,000 $11,534,000 $(1,640,000) $ 25,505,000
========== =========== =========== ============ ===========
</TABLE>
(Continued)
F-6
<PAGE> 33
WESTERN SIERRA BANCORP AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1998
<S> <C>
Disclosure of reclassification amount, net of taxes (Note 16):
Unrealized holding losses arising during the year $(20,000)
Less: reclassification adjustment for gains included in net income 5,000
--------
Net unrealized holding losses on available-for-sale investment
securities $(25,000)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 34
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,805,000 $ 1,101,000 $ 1,951,000
Adjustments to reconcile net
income to cash provided by
operating activities:
Provision for loan and lease losses 540,000 775,000 1,070,000
Depreciation and amortization 887,000 1,009,000 879,000
Deferred loan origination costs and
fees, net 110,000 (236,000) (122,000)
Amortization of investment security
premiums, net 116,000 75,000 10,000
Gain on sale of available-for-sale
investment securities (8,000) (8,000)
Provision for losses on other real
estate 25,000 432,000 309,000
Gain on sale of premises and
equipment (8,000)
Loss (gain) on sale of other real
estate 43,000 (24,000) 14,000
Increase in trading securities (128,000) (5,000)
Unrealized appreciation on
trading securities (42,000)
Increase in cash surrender value
of life insurance policies (193,000) (208,000) (130,000)
Decrease (increase) in loans held
for sale 3,517,000 (1,806,000) (1,527,000)
Increase in accrued interest
receivable and other assets (436,000) (346,000) (549,000)
(Decrease) increase in accrued
interest payable and other
liabilities (790,000) 916,000 365,000
Deferred taxes (398,000) (503,000) (248,000)
Provision for impairment of former
premises and equipment 393,000
----------- ----------- -----------
Net cash provided by
operating activities 6,048,000 1,570,000 2,009,000
----------- ----------- -----------
</TABLE>
(Continued)
F-8
<PAGE> 35
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Cash acquired in the purchase of
selected assets and liabilities of
another bank $ 5,945,000
Proceeds from called available-
for-sale investment securities $ 6,452,000 $ 14,235,000 3,750,000
Proceeds from the sale of available-
for-sale investment securities 508,000 4,176,000
Proceeds from called held-to-
maturity investment securities 2,000 3,000,000 1,536,000
Proceeds from matured available-
for-sale investment securities 1,869,000 1,000,000
Proceeds from matured held-to-
maturity investment securities 50,000 25,000 114,000
Purchases of available-for-sale
investment securities (2,826,000) (42,931,000) (16,987,000)
Purchases of held-to-maturity
investment securities (446,000) (3,371,000)
Principal repayments received from
available-for-sale SBA pools and
mortgage-backed securities 3,233,000 3,255,000 1,290,000
Principal repayments received from
held-to-maturity mortgage-backed
securities 14,000 38,000 169,000
Net increase in loans and leases (49,338,000) (7,180,000) (17,016,000)
Proceeds from the sale of premises
and equipment 47,000
Purchases of premises and equipment (1,390,000) (1,753,000) (966,000)
Proceeds from the sale of other real
estate 267,000 416,000 1,754,000
Capitalized additions to other real
estate (81,000)
Proceeds from the surrendered
officer life insurance 504,000
Net decrease (increase) in interest-
bearing deposits in banks 3,762,000 597,000 (200,000)
Purchase of life insurance policies (295,000) (1,195,000)
------------ ------------ ------------
Net cash used in investing
activities (38,599,000) (28,367,000) (21,001,000)
------------ ------------ ------------
</TABLE>
(Continued)
F-9
<PAGE> 36
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in demand,
interest-bearing and savings
deposits $ (580,000) $ 30,093,000 $ 8,904,000
Net increase in time deposits 2,277,000 12,530,000 22,602,000
Net increase in short-term borrowings 5,850,000 150,000
Payments for fractional shares (21,000) (4,000)
Repurchase of common stock (53,000)
Proceeds from (repayment of) ESOP
borrowings 300,000 (40,000)
Purchase of unearned ESOP shares (300,000)
Proceeds from the exercise of stock
options 625,000 993,000 88,000
Cash dividends paid (335,000) (248,000)
------------ ------------ ------------
Net cash provided by
financing activities 8,098,000 43,431,000 31,302,000
------------ ------------ ------------
(Decrease) increase in cash
and cash equivalents (24,453,000) 16,634,000 12,310,000
Cash and cash equivalents at
beginning of year 46,266,000 29,632,000 17,322,000
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 21,813,000 $ 46,266,000 $ 29,632,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 7,846,000 $ 7,887,000 $ 7,249,000
Income taxes $ 1,338,000 $ 1,223,000 $ 1,316,000
Non-cash investing activities:
Real estate acquired through
foreclosure $ 200,000 $ 823,000 $ 1,124,000
Net change in unrealized gain on
available-for-sale investment
securities $ (2,684,000) $ (47,000) $ 330,000
Non-cash financing activities:
Dividends declared of $.27 per
share $ 335,000
</TABLE>
(Continued)
F-10
<PAGE> 37
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Supplemental schedule related to acquisition:
On February 21, 1997, the Company acquired certain assets and liabilities of
the Lincoln branch of Wells Fargo Bank (Note 18):
<TABLE>
<S> <C>
Deposits assumed $ 6,440,000
Fair value of assets and liabilities acquired, net (129,000)
Premium paid for deposits (366,000)
-----------
Cash acquired $ 5,945,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 38
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Western Sierra Bancorp (the "Company") was incorporated on July 11,
1996, and subsequently obtained approval of the Board of Governors of
the Federal Reserve System to be a bank holding company. On December 31,
1996, Western Sierra National Bank (WSNB) consummated a merger with
Western Sierra Bancorp. On April 30, 1999, the Company consummated
mergers with Roseville 1st Community Bancorp (R1CB) and Lake Community
Bank (LCB). The mergers qualified as tax-free exchanges and were
accounted for under the pooling-of-interests method of accounting.
Information concerning common stock, stock option plans and per share
data has been restated on an equivalent share basis. WSNB, R1CB and LCB
(the "subsidiaries") engage in consumer, commercial and agricultural
banking, offering a wide range of products and services to individuals
and businesses in El Dorado, Placer, Sacramento and Lake counties.
The accounting and reporting policies of the Company and its
subsidiaries conform with generally accepted accounting principles and
prevailing practices within the banking industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.
Investment Securities
Investments are classified into the following categories:
- Trading securities, reported at fair value, with unrealized
gains and losses included in earnings.
- Available-for-sale securities, reported at fair value, with
unrealized gains and losses excluded from earnings and reported,
net of taxes, as accumulated other comprehensive income (loss)
within shareholders' equity.
- Held-to-maturity securities, which management has the positive
intent and ability to hold, reported at amortized cost, adjusted
for the accretion of discounts and amortization of premiums.
F-12
<PAGE> 39
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
Management determines the appropriate classification of its investments
at the time of purchase and may only change the classification in
certain limited circumstances. All transfers between categories are
accounted for at fair value.
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities
is reported in interest income, net of applicable adjustments for
accretion of discounts and amortization of premiums. In addition,
unrealized losses that are other than temporary are recognized in
earnings for all investments.
Loan Sales and Servicing
Originated mortgage loans are either held in the loan portfolio or sold
in the secondary market. Loans held for sale are carried at the lower of
cost or market value. Market value is determined by the specific
identification method as of the balance sheet date or the date which
investors have committed to purchase the loans. At the time the loans
are sold, the related right to service the loans are either retained,
earning future servicing income, or released in exchange for a one-time
servicing-released premium. Mortgage loans subsequently transferred to
the loan portfolio are transferred at the lower of cost or market value
at the date of transfer. Any difference between the carrying amount of
the loan and its outstanding principal balance is recognized as an
adjustment to yield by the interest method. Loans serviced for others
totaled $5,322,000 and $7,857,000 as of December 31, 1999 and 1998,
respectively.
The guaranteed portion of certain Small Business Administration (SBA)
loans are sold to third parties with the unguaranteed portion retained.
A premium in excess of the adjusted carrying value of the loan is
generally recognized at the time of sale. A portion of this premium may
be required to be refunded if the borrower defaults or the loan prepays
within ninety days of the settlement date. However, there were no sales
of loans subject to these recourse provisions at December 31, 1999, 1998
or 1997. SBA loans with unpaid balances of $4,324,000 and $5,289,000
were being serviced for others at December 31, 1999 and 1998,
respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
and are subsequently amortized in proportion to and over the period of
the related net servicing income or expense. Servicing assets are
periodically evaluated for impairment. Servicing rights were not
considered material for disclosure purposes.
In addition, commercial loans totaling $23,247,000 and $6,538,000 were
serviced for others as of December 31, 1999 and 1998, respectively.
These loans were sold without recourse and, therefore, their balances
are not included on the balance sheet.
F-13
<PAGE> 40
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases
Loans and leases are stated at principal balances outstanding, except
for loans transferred from loans held for sale which are carried at the
lower of principal balance or market value at the date of transfer,
adjusted for accretion of discounts. Interest is accrued daily based
upon outstanding loan and lease balances. However, when, in the opinion
of management, loans and leases are considered to be impaired and the
future collectibility of interest and principal is in serious doubt,
loans and leases are placed on nonaccrual status and the accrual of
interest income is suspended. Any interest accrued but unpaid is charged
against income. Payments received are applied to reduce principal to the
extent necessary to ensure collection. Subsequent payments on these
loans and leases, or payments received on nonaccrual loans and leases
for which the ultimate collectibility of principal is not in doubt, are
applied first to earned but unpaid interest and then to principal.
An impaired loan or lease is measured based on the present value of
expected future cash flows discounted at the instrument's effective
interest rate or, as a practical matter, at the instrument's observable
market price or the fair value of collateral if the loan or lease is
collateral dependent. A loan or lease is considered impaired when, based
on current information and events, it is probable that the Company will
be unable to collect all amounts due (including both principal and
interest) in accordance with the contractual terms of the loan or lease
agreement.
Loan and lease origination fees, commitment fees, direct loan and lease
origination costs and purchase premiums and discounts on loans and
leases are deferred and recognized as an adjustment of yield, to be
amortized to interest income over the contractual term of the loan or
lease. The unamortized balance of deferred fees and costs is reported as
a component of net loans and leases.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained to provide for
losses related to impaired loans and leases and other losses that can be
expected to occur in the normal course of business. The determination of
the allowance is based on estimates made by management, to include
consideration of the character of the loan and lease portfolio,
specifically identified problem loans and leases, potential losses
inherent in the portfolio taken as a whole and economic conditions in
the Company's service areas. These estimates are particularly
susceptible to changes in the economic environment and market
conditions. The allowance is established through a provision for loan
and lease losses which is charged to expense.
F-14
<PAGE> 41
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the recorded investment in the loan balance and accrued interest income
over the estimated fair market value of the property, net of estimated
selling costs, is charged against the allowance for loan and lease
losses. A valuation allowance for losses on other real estate is
maintained to provide for temporary declines in value. The allowance is
established through a provision for losses on other real estate which is
included in other expenses. Subsequent gains or losses on sales or
writedowns resulting from permanent impairments are recorded in other
income or expense as incurred.
Premises and Equipment
Premises and equipment are carried at cost. Depreciation is determined
using the straight- line method over the estimated useful lives of the
related assets. The useful lives of premises are estimated to be thirty
to forty years. The useful lives of furniture, fixtures and equipment
are estimated to be one to fifteen years. Leasehold improvements are
amortized over the life of the asset or the term of the related lease,
whichever is shorter. When assets are sold or otherwise disposed of, the
cost and related accumulated depreciation or amortization are removed
from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to
expense as incurred.
Income Taxes
The Company files its taxes with its subsidiaries on a consolidated
basis. The allocation of income tax expense (benefit) represents the
proportionate share of the consolidated provision for income taxes.
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial statement
and tax basis of existing assets and liabilities. On the balance sheet,
net deferred tax assets are included in accrued interest receivable and
other assets.
Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents. Generally,
Federal funds are sold for one day periods.
F-15
<PAGE> 42
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied
to determine the dilutive effect of stock options in computing
diluted EPS. Earnings per share is retroactively adjusted for stock
dividends for all periods presented. In addition, earnings per share
has been restated on an equivalent share basis for all periods
presented in connection with the mergers previously noted.
Stock-Based Compensation
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the exercise
price. However, if the fair value of stock-based compensation
computed under a fair value based method, as prescribed in Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, is material to the financial statements, pro forma net
income and earnings per share are disclosed as if the fair value
method had been applied.
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates.
New Financial Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activity,
which was subsequently amended by SFAS 137 to delay the effective
date to all fiscal quarters of fiscal years beginning after June 15,
2000. This Statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at
fair value. Management does not believe that the adoption of SFAS 133
will have a significant impact on its financial position and results
of operation when implemented.
F-16
<PAGE> 43
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. MERGERS
On April 30, 1999, the Company completed mergers with LCB and R1CB by
exchanging 856,597 and 387,486 shares, respectively, of its common
stock (after adjustment for fractional shares) for all the common
stock of the two entities. Each share of LCB and R1CB were exchanged
for .6905 shares and 1.211 shares, respectively, of the Company. In
addition, outstanding LCB and R1CB stock options were converted at
the same exchange ratios into options to purchase 67,391 and 66,643
shares, respectively, of the Company's common stock.
The mergers have been accounted for as pooling of interests and,
accordingly, all prior period financial statements have been restated
to include the combined results of operations, financial position and
cash flows of the Company, LCB and R1CB. Information concerning
common stock, stock option plans and per share data has been restated
on an equivalent share basis. In addition, the Company, LCB and R1CB
incurred $353,000 and $1,112,000 in merger related costs ($.06 and
$.28 per common share, after taxes) which were charged to operations
during the years ended December 31, 1999 and 1998, respectively.
There were no material transactions between LCB, R1CB and the Company
prior to the mergers, and the effects of conforming the accounting
policies of LCB and R1CB to those of the Company were not material.
Selected financial information for the combining entities included in
the consolidated statements of income for the four months ended April
30, 1999 (unaudited) and the two years ended December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
April 30,
1999 December 31, December 31,
(Unaudited) 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net interest income:
Western Sierra Bancorp and
Subsidiary $ 2,038,000 $ 5,905,000 $ 5,379,000
Roseville 1st Community
Bancorp and Subsidiary 830,000 2,263,000 2,231,000
Lake Community Bank 1,353,000 3,970,000 3,998,000
----------- ----------- -----------
Combined $ 4,221,000 $12,138,000 $11,608,000
=========== =========== ===========
Net income:
Western Sierra Bancorp and
Subsidiary $ 324,000 $ 878,000 $ 1,003,000
Roseville 1st Community
Bancorp and Subsidiary 159,000 190,000 182,000
Lake Community Bank 299,000 33,000 766,000
----------- ----------- -----------
Combined $ 782,000 $ 1,101,000 $ 1,951,000
=========== =========== ===========
</TABLE>
F-17
<PAGE> 44
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES
Trading Securities
The estimated market value of trading securities at December 31, 1999
and 1998 totaled $175,000 and $5,000, respectively. Net unrealized
appreciation of trading securities of $42,000 was included in
non-interest income for the year ended December 31, 1999. There were
no unrealized holding gains or losses included in earnings for the
years ended December 31, 1998 and 1997. There were no sales or
transfers of trading securities during the years ended December 31,
1999, 1998 and 1997.
The amortized cost and estimated market value of investment
securities at December 31, 1999 and 1998 consisted of the following:
Available-for Sale:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 20,686,000 $ 1,000 $ (960,000) $ 19,727,000
Obligations of states
and political sub-
divisions 15,188,000 (1,345,000) 13,843,000
Government guaran-
teed mortgage-
backed securities 5,877,000 10,000 (96,000) 5,791,000
Corporate debt
securities 3,782,000 (117,000) 3,665,000
Federal Reserve
Bank stock 212,000 212,000
Federal Home Loan
Bank stock 758,000 758,000
Pacific Coast Bankers
Bank stock 75,000 75,000
------------ ------- ------------ ------------
$ 46,578,000 $11,000 $ (2,518,000) $ 44,071,000
============ ======= ============ ============
</TABLE>
Net unrealized losses on available-for-sale investment securities
totaling $2,507,000 were recorded net of $867,000 in tax benefits as
accumulated other comprehensive losses within shareholders' equity.
There were no sales or transfers of available-for-sale investment
securities during the year ended December 31, 1999.
F-18
<PAGE> 45
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 499,000 $ 1,000 $ 500,000
U.S. Government
agencies 26,251,000 155,000 $ (35,000) 26,371,000
Obligations of states
and political sub-
divisions 15,306,000 233,000 (172,000) 15,367,000
Government guaran-
teed mortgage-
backed securities 8,452,000 27,000 (44,000) 8,435,000
Corporate debt
securities 4,052,000 23,000 (11,000) 4,064,000
Federal Reserve
Bank stock 211,000 211,000
Federal Home Loan
Bank stock 576,000 576,000
Pacific Coast Bankers
Bank stock 75,000 75,000
------------ ------------ ------------ ------------
$ 55,422,000 $ 439,000 $ (262,000) $ 55,599,000
============ ============ ============ ============
</TABLE>
Net unrealized gains on available-for-sale investment securities
totaling $177,000 were recorded net of $62,000 in tax liabilities as
accumulated other comprehensive income within shareholders' equity.
Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the year ended December 31, 1998 totaled
$508,000 and $8,000, respectively. Proceeds and gross realized gains
and losses from the sale of available-for- sale investment securities
for the year ended December 31, 1997 totaled $4,176,000, $17,000 and
$9,000, respectively. There were no transfers of available-for-sale
investment securities during the years ended December 31, 1998 and
1997.
F-19
<PAGE> 46
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
Held-to Maturity:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------ ----------- -----------
<S> <C> <C> <C> <C>
U.S. Government
agencies $ 1,000,000 $ (32,000) $ 968,000
Obligations of states
and political sub-
divisions 1,060,000 (42,000) 1,018,000
Government guaran-
teed mortgage-
backed securities 38,000 $1,000 39,000
Other securities 170,000 170,000
----------- ------ ----------- -----------
$ 2,268,000 $1,000 $ (74,000) $ 2,195,000
=========== ====== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
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 835,000 20,000 855,000
Government guaran-
teed mortgage-
backed securities 53,000 2,000 55,000
---------- ---------- --- ----------
$1,888,000 $ 35,000 $ - $1,923,000
========== ========== === ==========
</TABLE>
There were no sales or transfers of held-to-maturity investment
securities for the years ended December 31, 1999, 1998 and 1997.
F-20
<PAGE> 47
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment
securities at December 31, 1999 by contractual maturity are shown
below. Expected maturities may differ from contractual maturities
because the issuers of the securities may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-------------------------------- --------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year $ 481,000 $ 481,000 $ 25,000 $ 25,000
After one year
through five years 14,317,000 13,786,000 85,000 85,000
After five years
through ten years 7,290,000 6,987,000 1,000,000 968,000
After ten years 14,286,000 12,777,000 950,000 908,000
----------- ----------- ----------- -----------
36,374,000 34,031,000 2,060,000 1,986,000
Investment securities
not due at a single
maturity date:
Government guar-
anteed mortgage-
backed securities 5,877,000 5,791,000 38,000 39,000
SBA loan pools 3,282,000 3,204,000
Federal Reserve
Bank stock 212,000 212,000
Federal Home
Loan Bank
stock 758,000 758,000
Pacific Coast
Bankers bank
stock 75,000 75,000
Other securities 170,000 170,000
----------- ----------- ----------- -----------
$46,578,000 $44,071,000 $ 2,268,000 $ 2,195,000
=========== =========== =========== ===========
</TABLE>
Investment securities with amortized costs totaling $30,706,000 and
$10,491,000 and market values totaling $29,066,000 and $10,605,000
were pledged to secure treasury tax and loan accounts, public
deposits and short-term borrowing arrangements at December 31, 1999
and 1998, respectively.
F-21
<PAGE> 48
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Commercial $ 29,174,000 $ 30,580,000
Real estate - mortgage 126,294,000 91,244,000
Real estate - construction 36,012,000 19,381,000
Lease financing 1,763,000 1,383,000
Installment 5,315,000 5,323,000
Agricultural 15,370,000 16,268,000
------------- -------------
213,928,000 164,179,000
Deferred loan and lease origination fees
and costs, net (515,000) (405,000)
Allowance for loan and lease losses (2,886,000) (2,431,000)
------------- -------------
$ 210,527,000 $ 161,343,000
============= =============
</TABLE>
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 2,431,000 $ 2,624,000 $ 1,868,000
Provision charged to operations 540,000 775,000 1,070,000
Losses charged to allowance (220,000) (1,044,000) (360,000)
Recoveries 135,000 76,000 46,000
----------- ----------- -----------
Balance, end of year $ 2,886,000 $ 2,431,000 $ 2,624,000
=========== =========== ===========
</TABLE>
The recorded investment in loans that were considered to be impaired
totaled $454,000 and $1,129,000 at December 31, 1999 and 1998,
respectively. The related allowance for loan losses for these loans
at December 31, 1999 and 1998 was $96,000 and $294,000, respectively.
The average recorded investment in impaired loans for the years ended
December 31, 1999, 1998 and 1997 was $952,000, $1,753,000 and
$2,689,000, respectively. The Company recognized $3,000, $66,000 and
$172,000 in interest income on impaired loans during these same
periods on a cash basis.
At December 31, 1999 and 1998, nonaccrual loans totaled $543,000 and
$1,406,000, respectively. Interest foregone on nonaccrual loans
totaled $27,000, $67,000 and $172,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
Salaries and employee benefits totaling $779,000, $706,000 and
$708,000 have been deferred as loan and lease origination costs
during 1999, 1998 and 1997, respectively.
F-22
<PAGE> 49
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. OTHER REAL ESTATE
Other real estate consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Other real estate $ 1,481,000 $ 2,293,000
Valuation allowance (766,000) (746,000)
----------- -----------
$ 715,000 $ 1,547,000
=========== ===========
</TABLE>
In October 1998, management determined that the carrying value of
former bank premises was not recoverable. Accordingly, the carrying
value of the building was eliminated through a charge to other
expenses totaling $72,000 to reflect the impairment.
There was no depreciation expense on other real estate during 1999.
Depreciation expense on former bank premises totaled $26,000 and
$31,000 for the years ended December 31, 1998 and 1997, respectively.
Changes in the valuation allowance for other real estate were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 746,000 $ 314,000 $ 252,000
Provision for losses on other
real estate 25,000 432,000 309,000
Losses charged to allowance (5,000) (247,000)
--------- --------- ---------
Balance, end of year $ 766,000 $ 746,000 $ 314,000
========= ========= =========
</TABLE>
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 2,476,000 $ 2,476,000
Building and improvements 4,565,000 4,565,000
Furniture, fixtures and equipment 5,857,000 4,645,000
Leasehold improvements 367,000 344,000
Construction in progress 400,000 426,000
------------ ------------
13,665,000 12,456,000
Less accumulated depreciation
and amortization (4,794,000) (4,086,000)
------------ ------------
$ 8,871,000 $ 8,370,000
============ ============
</TABLE>
F-23
<PAGE> 50
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. BANK PREMISES AND EQUIPMENT (Continued)
In December 1998, management determined that the carrying amount of
certain equipment and software were not recoverable. Accordingly, the
carrying value of the equipment and software was eliminated through a
charge to other expenses totaling $321,000 to reflect the impairment.
Depreciation and amortization included in occupancy and equipment
expense totaled $850,000, $887,000 and $754,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
7. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Accrued interest receivable $2,580,000 $2,121,000
Deferred tax assets, net (Note 13) 2,852,000 1,527,000
Cash surrender value of officer life
insurance policies (Note 15) 2,613,000 2,125,000
Deposit premium, net (Note 18) 262,000 299,000
Prepaid expenses 624,000 459,000
Other 727,000 638,000
---------- ----------
$9,658,000 $7,169,000
========== ==========
</TABLE>
8. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Savings $ 20,780,000 $ 20,964,000
NOW accounts 24,175,000 22,477,000
Money market 31,838,000 25,906,000
Time, $100,000 or more 45,929,000 43,128,000
Other time 78,830,000 79,354,000
------------ ------------
$201,552,000 $191,829,000
============ ============
</TABLE>
F-24
<PAGE> 51
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
2000 $117,237,000
2001 5,971,000
2002 1,381,000
2003 1,000
Thereafter 169,000
------------
$124,759,000
============
</TABLE>
Interest expense recognized on interest-bearing deposits consisted of
the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Savings $ 436,000 $ 451,000 $ 479,000
NOW accounts 329,000 374,000 337,000
Money market 1,026,000 848,000 936,000
Time, $100,000 or more 1,822,000 1,913,000 1,233,000
Other time 3,976,000 4,284,000 4,290,000
---------- ---------- ----------
$7,589,000 $7,870,000 $7,275,000
========== ========== ==========
</TABLE>
9. SHORT-TERM BORROWING ARRANGEMENTS
The Company has $9,000,000 in unsecured borrowing arrangements with
three of its correspondent banks. In addition, as of December 31,
1999, the Company could borrow up to $2,278,000 on an overnight basis
from the Federal Reserve Bank, secured by investment securities with
amortized costs totaling $2,500,000 and estimated market values
totaling $2,348,000. There were no short-term borrowings outstanding
under these arrangements at December 31, 1999 and 1998.
At December 31, 1999, the Company could also borrow up to $13,980,000
from the Federal Home Loan Bank, secured by investment securities
with amortized costs totaling $4,014,000 and estimated market values
totaling $3,954,000 and mortgage loans with carrying values totaling
approximately $15,383,000. An advance totaling $6,000,000 was
outstanding from the Federal Home Loan Bank at December 31, 1999
bearing an interest rate of 5.91% and maturing on March 8, 2000.
There were no short-term borrowings outstanding under this
arrangement at December 31, 1998.
F-25
<PAGE> 52
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. SHORT-TERM BORROWING ARRANGEMENTS (Continued)
On March 23, 1999, the Company's Employee Stock Ownership Plan
entered into an agreement with a director to establish a $300,000
unsecured revolving line of credit with a fixed interest rate of 8%
and maturity date of March 23, 2001. Advances on the line of credit
totaled $300,000 as of December 31, 1999.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its branch offices under noncancelable
operating leases. These leases expire on various dates through 2004
and have various renewal options ranging from five to ten years.
Rental payments include minimum rentals, plus adjustments for
changing price indexes. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
2000 $ 375,000
2001 308,000
2002 237,000
2003 148,000
2004 82,000
----------
$1,150,000
==========
</TABLE>
Rental expense included in occupancy expense totaled $273,000,
$292,000 and $242,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company subleases former branch offices for approximately $3,200
per month. The sublease income is expected to exceed all rental
expenses associated with these properties.
Financial Instruments With Off-Balance-Sheet Risk
The subsidiaries are party to financial instruments with
off-balance-sheet risk in the normal course of business in order to
meet the financing needs of their customers and to reduce their
exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized on
the balance sheet.
The subsidiaries' exposure to credit loss in the event of
nonperformance by the other party for commitments to extend credit
and letters of credit is represented by the contractual amount of
those instruments. The subsidiaries use the same credit policies in
making commitments and letters of credit as they do for loans
included on the balance sheet.
F-26
<PAGE> 53
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
The following financial instruments represent off-balance-sheet
credit risk:
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Commitments to extend credit:
Revolving lines of credit secured by
1-4 family residences $ 2,880,000 $ 3,758,000
Commercial real estate, construction
and land development commitments:
Secured by real estate 26,358,000 17,856,000
Not secured by real estate 679,000
Other commercial commitments not
secured by real estate 15,969,000 17,307,000
Agricultural commitments 5,826,000 8,728,000
Other unused commitments 3,794,000 3,712,000
----------- -----------
$55,506,000 $51,361,000
=========== ===========
Letters of credit $ 326,000 $ 494,000
=========== ===========
</TABLE>
Real estate commitments are generally secured by property with a
loan-to-value ratio not to exceed 80%. In addition, the majority of
the Bank's commitments have variable interest rates.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include
deposits, accounts receivable, inventory, equipment, income-producing
commercial properties and residential real estate.
Letters of credit are conditional commitments to guarantee the
performance or financial obligation of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers.
F-27
<PAGE> 54
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Significant Concentrations of Credit Risk
The subsidiaries grant real estate mortgage, real estate
construction, commercial, agricultural and consumer loans to
customers throughout El Dorado, Placer, Sacramento and Lake counties.
Although the subsidiaries have diversified loan and lease portfolios,
a substantial portion of their portfolios is secured by commercial
and residential real estate. However, personal and business income
represent the primary source of repayment for a majority of these
loans. In addition, a substantial portion of the loans in the Lake
county area are dependent upon the agribusiness and resort and
recreational economic sectors.
Contingencies
The Company and its subsidiaries are 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 such
actions will not materially affect the financial position or results
of operations of the Company or its subsidiaries.
Federal Reserve Requirement
Banks are required to maintain reserves with the Federal Reserve Bank
equal to the percentage of their reservable deposits. The reserve
balances held by the subsidiaries with the Federal Reserve Bank
totaled $1,625,000 as of December 31, 1999.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured
institutions under correspondent banking agreements. Deposits
totaling $2,924,000 at December 31, 1999 exceeded the federal
insurance limits.
11. SHAREHOLDERS' EQUITY
Dividends
Upon declaration by the Board of Directors of the Company, all
shareholders of record will be entitled to receive dividends. Under
applicable Federal laws, the Comptroller of the Currency restricts
the total dividend payment of any national banking association in any
calendar year to the net income of the year, as defined, combined
with the net income for the two preceding years, less distributions
made to shareholders during the same three- year period. In addition,
the California Financial Code restricts the total dividend payment of
any State banking association in any calendar year to the lesser of
(1) the bank's retained earnings or (2) the bank's net income for its
last three fiscal years, less distributions made to shareholders
during the same three-year period. At December 31, 1999, the
subsidiaries had $4,509,000 in retained earnings available for
dividend payments to the Company.
F-28
<PAGE> 55
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
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 Year Ended Income Outstanding Amount
------------------ ------ ----------- ------
<S> <C> <C> <C>
December 31, 1999
Basic earnings per share $2,805,000 2,501,000 $1.12
=====
Effect of dilutive stock options 75,000
---------- ----------
Diluted earnings per share $2,805,000 2,576,000 $1.09
========== ========== =====
December 31, 1998
Basic earnings per share $1,101,000 $2,368,000 $ .46
=====
Effect of dilutive stock options 123,000
---------- ----------
Diluted earnings per share $1,101,000 2,491,000 $ .44
========== ========== =====
December 31, 1997
Basic earnings per share $1,951,000 2,285,000 $ .85
=====
Effect of dilutive stock options 105,000
---------- ----------
Diluted earnings per share $1,951,000 2,390,000 $ .82
========== ========== =====
</TABLE>
Stock Options
In 1999, 1997 and 1989, the Board of Directors adopted stock option
plans for which 502,570 shares of common stock remain reserved for
issuance to employees and Directors under incentive and nonstatutory
agreements. The plans require that the option price may not be less
than the fair market value of the stock at the date the option is
granted, and that the stock must be paid in full at the time the
option is exercised. The options expire on a date determined by the
Board of Directors, but not later than ten years from the date of
grant. The vesting period is determined by the Board of Directors and
is generally over five years. Outstanding options under the 1997 and
1989 plans are exercisable until their expiration; however, no new
options will be granted under these plans.
F-29
<PAGE> 56
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been
recognized for options granted under its stock option plan. Had
compensation cost for the plan been determined based on the fair
value at grant date for awards in 1999 and 1997 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated
below. Compensation expense is recognized in the years in which the
options become vested.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings - as reported $ 2,805,000 $ 1,101,000 $ 1,951,000
Net earnings - pro forma $ 2,630,000 $ 1,054,000 $ 1,904,000
Basic earnings per share -
as reported $ 1.12 $ .46 $ .85
Basic earnings per share -
pro forma $ 1.05 $ .45 $ .83
Diluted earnings per share -
as reported $ 1.09 $ .44 $ .82
Diluted earnings per share -
pro forma $ 1.02 $ .42 $ .80
</TABLE>
The fair value of each option is estimated on the date of grant using
an option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1997
---------------- ----------------
<S> <C> <C>
Dividend yield (not applicable)
Expected volatility 100.84% 23.33% to 25.35%
Risk-free interest rate 5.48% to 5.58% 5.78%
Expected option life 10 years 10 years
</TABLE>
F-30
<PAGE> 57
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
A summary of the combined activity within the plans follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 249,119 $ 8.07 385,981 $ 7.68 344,403 $ 7.03
Options granted 60,500 $12.14 47,422 $11.97
Options exercised (91,679) $ 6.50 (136,862) $ 6.96 (11,943) $ 7.22
Options canceled (25,307) $ 9.02 (14,729) $ 6.97
Options resulting
from stock
dividends 9,937 $ 9.99 20,828 $ 8.03
------------- ------------- ------------
Options outstanding,
end of year 202,570 $ 9.97 249,119 $ 8.07 385,981 $ 7.68
============= ============= ============
Options exercisable,
end of year 148,238 $ 9.48 210,557 $ 8.10 309,891 $ 7.40
============= ============= ============
Weighted average
fair value of options
granted during the
year $ 7.07 $ 6.45
</TABLE>
A summary of options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
- ------------------------ ------------- ----------- ------------
<S> <C> <C> <C>
$ 4.19 1,363 5.4 years 1,363
$ 5.90 25,431 4.2 years 25,431
$ 6.30 2,543 4.9 years 2,543
$ 8.17 44,074 6.9 years 40,646
$ 8.62 7,069 .2 years 7,069
$10.39 28,875 7.5 years 17,325
$10.82 12,705 7.5 years 7,623
$11.04 6,930 7.7 years 4,158
$12.14 57,015 9.4 years 25,515
$13.45 16,565 3.3 years 16,565
--------- -------
202,570 148,238
========= =======
</TABLE>
F-31
<PAGE> 58
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
During 1999, the Board of Directors authorized the repurchase of up
to 30,000 shares of the Company's common stock. Repurchases are
generally made in the open market at market prices.
Regulatory Capital
The subsidiaries are subject to certain regulatory capital
requirements administered by the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
Failure to meet these minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect
on the subsidiaries' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the subsidiaries must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The subsidiaries' capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
The Company is subject to similar capital requirements administered
by the Board of Governors of the Federal Reserve System.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its subsidiaries to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets as set forth on the
following pages. Each of these components is defined in the
regulations. Management believes that the Company and its
subsidiaries meet all their capital adequacy requirements as of
December 31, 1999.
In addition, the most recent notifications from the OCC and FDIC as
of June 30, 1999 categorized each of the subsidiaries as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the subsidiaries must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth on the following page. There are no
conditions or events since that notification that management believes
have changed the categories.
F-32
<PAGE> 59
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
Western Sierra Bancorp and
Subsidiaries $26,883,000 9.3% $23,366,000 9.1% $20,967,000 9.3%
Minimum regulatory requirement $11,523,000 4.0% $10,275,000 4.0% $ 9,043,000 4.0%
Western Sierra National Bank $10,745,000 7.7% $ 9,000,000 7.4% $ 8,224,000 8.3%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 7,005,000 5.0% $ 6,060,000 5.0% $ 4,953,000 5.0%
Minimum regulatory requirement $ 5,604,000 4.0% $ 4,848,000 4.0% $ 3,963,000 4.0%
Roseville 1st National Bank $ 4,789,000 8.0% $ 4,024,000 8.0% $ 3,832,000 8.6%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 3,005,000 5.0% $ 2,527,000 5.0% $ 2,226,000 5.0%
Minimum regulatory requirement $ 2,404,000 4.0% $ 2,022,000 4.0% $ 1,781,000 4.0%
Lake Community Bank $ 8,582,000 9.9% $ 9,014,000 10.7% $ 8,562,000 10.4%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 4,340,000 5.0% $ 4,205,000 5.0% $ 4,124,000 5.0%
Minimum regulatory requirement $ 3,472,000 4.0% $ 3,364,000 4.0% $ 3,299,000 4.0%
Tier 1 Risk-Based Capital Ratio
Western Sierra Bancorp and
Subsidiaries $26,883,000 11.3% $23,366,000 11.6% $20,967,000 11.6%
Minimum regulatory requirement $ 9,477,000 4.0% $ 5,574,000 4.0% $ 7,231,000 4.0%
Western Sierra National Bank $10,745,000 10.0% $ 9,000,000 10.0% $ 8,224,000 10.2%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 6,463,000 6.0% $ 5,397,000 6.0% $ 4,817,000 6.0%
Minimum regulatory requirement $ 4,308,000 4.0% $ 3,598,000 4.0% $ 3,211,000 4.0%
Roseville 1st National Bank $ 4,789,000 10.0% $ 4,024,000 9.7% $ 3,832,000 9.3%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 2,884,000 6.0% $ 2,489,000 5.0% $ 2,485,000 6.0%
Minimum regulatory requirement $ 1,923,000 4.0% $ 1,660,000 4.0% $ 1,657,000 4.0%
Lake Community Bank $ 8,582,000 10.8% $ 9,014,000 13.2% $ 8,562,000 14.5%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 4,756,000 6.0% $ 4,091,000 6.0% $ 3,544,000 6.0%
Minimum regulatory requirement $ 3,171,000 4.0% $ 2,727,000 4.0% $ 2,363,000 4.0%
</TABLE>
F-33
<PAGE> 60
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ----------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Risk-Based Capital Ratio
Western Sierra Bancorp and
Subsidiaries $29,769,000 12.6% $25,601,000 12.8% $23,172,000 12.8%
Minimum regulatory requirement $18,950,000 8.0% $16,042,000 8.0% $14,444,000 8.0%
Western Sierra National Bank $11,889,023 11.0% $10,055,000 11.2% $ 9,172,000 11.4%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $10,771,000 10.0% $ 8,994,000 10.0% $ 8,028,000 10.0%
Minimum regulatory requirement $ 8,617,000 8.0% $ 7,195,000 8.0% $ 6,423,000 8.0%
Roseville 1st National Bank $ 5,245,000 10.9% $ 4,353,000 10.5% $ 4,353,000 10.5%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 4,807,000 10.0% $ 4,149,000 10.0% $ 4,142,000 10.0%
Minimum regulatory requirement $ 3,846,000 8.0% $ 3,319,000 8.0% $ 3,313,000 8.0%
Lake Community Bank $ 9,576,000 12.1% $ 9,865,000 14.5% $ 9,299,000 15.8%
Minimum requirement for "Well-
Capitalized" institution under
prompt corrective action $ 7,927,000 10.0% $ 6,798,000 10.0% $ 5,886,000 10.0%
Minimum regulatory requirement $ 6,342,000 8.0% $ 5,439,000 8.0% $ 4,709,000 8.0%
</TABLE>
12. OTHER EXPENSES
Other expenses consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Advertising and promotion $ 166,000 $ 244,000 $ 222,000
Stationery and supplies 255,000 292,000 269,000
Professional fees 664,000 599,000 394,000
Other real estate 102,000 639,000 551,000
Other operating expenses 2,580,000 2,242,000 1,956,000
---------- ---------- ----------
$3,767,000 $4,016,000 $3,392,000
========== ========== ==========
</TABLE>
F-34
<PAGE> 61
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. OTHER EXPENSES (Continued)
Professional fees include amounts paid to outside vendors to perform
accounting, data processing, courier and other deposit related
services for companies maintaining large non- interest bearing
deposits with the Company. Total costs incurred are dependent upon
the volume of deposits and totaled $300,000 and $108,000 for the
years ended December 31, 1999 and 1998, respectively. During the same
periods the companies maintained average available balances of
$12,718,000 and $5,931,000, respectively. If these deposits were
considered to be interest bearing and the costs reclassified as
interest expense, the Company's net interest margin would have
decreased to 5.04% from 5.16% and to 5.27% from 5.35% for the years
ended December 31, 1999 and 1998. In addition, the companies'
non-interest bearing deposits at December 31, 1999 and 1998 totaled
$11,336,000 and $26,766,000, respectively. The companies did not
maintain significant deposits with the Company during 1997.
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
Federal State Total
----------- ----------- -----------
<S> <C> <C> <C>
1999
Current $ 1,297,000 $ 516,000 $ 1,813,000
Deferred (309,000) (89,000) (398,000)
----------- ----------- -----------
Income tax expense $ 988,000 $ 427,000 $ 1,415,000
=========== =========== ===========
1998
Current $ 735,000 $ 287,000 $ 1,022,000
Deferred (360,000) (143,000) (503,000)
----------- ----------- -----------
Income tax expense $ 375,000 $ 144,000 $ 519,000
=========== =========== ===========
1997
Current $ 994,000 $ 403,000 $ 1,397,000
Deferred (176,000) (72,000) (248,000)
----------- ----------- -----------
Income tax expense $ 818,000 $ 331,000 $ 1,149,000
=========== =========== ===========
</TABLE>
F-35
<PAGE> 62
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. INCOME TAXES (Continued)
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and lease losses $ 966,000 $ 751,000
Other real estate 357,000 334,000
Merger costs capitalized for tax purposes 387,000 262,000
Deferred compensation 360,000 253,000
Net operating loss carryforward 80,000 159,000
Future benefit of State tax deduction 159,000 85,000
Loans held for sale 1,000 16,000
Organization costs 7,000 11,000
Deposit purchase premium 16,000 10,000
Unrealized loss on available-for-sale
investment securities 867,000
Other 15,000 21,000
----------- -----------
Total deferred tax assets 3,215,000 1,902,000
----------- -----------
Deferred tax liabilities:
Future liability of State deferred tax
assets (147,000) (116,000)
Adjustment for change in tax accounting
method (90,000) (120,000)
Federal Home Loan Bank stock
dividends (58,000) (32,000)
Bank premises and equipment (68,000) (35,000)
Unrealized gain on available-for-sale
investment securities (62,000)
Other (10,000)
----------- -----------
Total deferred tax liabilities (363,000) (375,000)
----------- -----------
Net deferred tax assets $ 2,852,000 $ 1,527,000
=========== ===========
</TABLE>
As of December 31, 1999, the Company has Federal net operating loss
carryforwards totaling $235,000 which were acquired during the merger
with R1CB and expire in 2004.
F-36
<PAGE> 63
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. INCOME TAXES (Continued)
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to operating income
before income taxes. The items comprising these differences for the
years ended December 31, 1999, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- ---------------------------
Amount Rate % Amount Rate % Amount Rate %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
expense, at statutory
rate $ 1,435,000 34.0 $ 551,000 34.0 $ 1,054,000 34.0
State franchise tax, net
of Federal tax effect 244,000 5.8 107,000 6.6 209,000 6.7
Benefit of tax-exempt
income (278,000) (6.6) (166,000) (10.2) (81,000) (2.6)
Tax-exempt income from
life insurance policies (61,000) (1.5) (60,000) (3.7) (38,000) (1.2)
Taxable gain on surren-
dered life insurance
policy 64,000 4.0
Other 75,000 1.8 23,000 1.4 5,000 .2
----------- ---- ----------- ---- ----------- ----
Total income tax
expense $ 1,415,000 33.5 $ 519,000 32.1 $ 1,149,000 37.1
=========== ==== =========== ==== =========== ====
</TABLE>
14. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into
transactions with related parties, including Directors. These
transactions are on substantially the same terms and conditions as
those prevailing for comparable transactions with unrelated parties.
The following is a summary of the aggregate activity involving
related parties during 1999:
Borrowings from the Bank
<TABLE>
<S> <C>
Balance, January 1, 1999 $ 2,243,000
Disbursements 6,832,000
Amounts repaid (2,428,000)
-----------
Balance, December 31, 1999 $ 6,647,000
===========
Undisbursed commitments to related parties,
December 31, 1999 $ 1,613,000
===========
Deposits in the Bank
Average outstanding deposits from related parties
for the year ended December 31, 1999 $ 7,884,000
===========
</TABLE>
F-37
<PAGE> 64
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. RELATED PARTY TRANSACTIONS (Continued)
Loan to the Company's Employee Stock Ownership Plan (ESOP)
The Company's ESOP established an unsecured revolving line of credit
in the amount of $300,000 with a director during 1999. (See Notes 9
and 15.)
15. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Western Sierra Bancorp and Subsidiaries 401KSOP is available to
employees meeting certain service requirements. The Company's
contribution to the plan is discretionary and is allocated in the
same ratio as each participant's compensation bears to total
compensation for all participants. Contributions totaled $65,000,
$111,000 and $78,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Employee Stock Ownership Plan
The Employee Stock Ownership Plan (ESOP) is designed to invest
primarily in securities of the Company purchased on the open market.
The purchase of shares is funded through contributions to the ESOP by
the Company and loans from certain members of the Board of Directors.
Contributions to the plan are at the sole discretion of the Board of
Directors and are limited on a participant-by-participant basis to
the lesser of $30,000 or 25% of the participant's compensation for
the plan year. Compensation is defined as all compensation paid
during the plan year which is considered to be W-2 income, to include
amounts deferred under the Company's 401KSOP. Employer contributions
vest at a rate of 20% per year after two years of employment.
Employee contributions are not permitted. Benefits may be distributed
in the form of qualifying Company securities or cash. However,
participants have the right to demand that their benefits be
distributed in the form of qualifying Company securities.
During 1999, the ESOP purchased 17,702 shares of the Company's common
stock with the proceeds of a $300,000 loan to the ESOP by a member of
the Board of Directors. Interest expense of $17,000 was incurred
during the year ended December 31, 1999.
As the debt is repaid, shares are released and allocated to active
employees in proportion to the debt service paid during the year. The
debt of the ESOP is recorded as debt of the Company and the shares
are reported as unearned ESOP shares in shareholders' equity. As
shares are committed to be released, the Company reports compensation
expense equal to the current market price of the shares, and the
shares are recognized as outstanding for earnings per share and
capital ratio computations. Dividends on allocated ESOP shares are
recorded as a reduction of retained earnings and are allocated to the
participants; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest.
Compensation expense of $179,000, $90,000 and $75,000 was recognized
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-38
<PAGE> 65
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. EMPLOYEE BENEFIT PLANS (Continued)
Employee Stock Ownership Plan (Continued)
Allocated, committed-to-be-released and unallocated ESOP shares as of
December 31, 1999, 1998 and 1997, adjusted for stock dividends, were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Allocated 22,928 19,665 19,665
Committed-to-be released 3,346 3,263
Unallocated 18,587
-------- -------- --------
Total ESOP shares 44,861 22,928 19,665
======== ======== ========
Fair value of unreleased shares $265,000 $ - $ -
======== ======== ========
</TABLE>
Salary Continuation Plan
Under the salary continuation plan, the Company is obligated to
provide key executives, or their designated beneficiaries, with
annual benefits for fifteen years after retirement or death. These
benefits are substantially equivalent to those available under
insurance policies purchased by the Company on the lives of the
executives. The estimated present value of these future benefits are
accrued over the period from the effective date of the plan until the
executives' expected retirement dates. The expense recognized under
this plan totaled $206,000, $257,000 and $70,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Under this plan, the Company invested in single premium life
insurance policies with cash surrender values totaling $2,613,000 and
$2,125,000 at December 31, 1999 and 1998, respectively. On the
consolidated balance sheet, the cash surrender value of life
insurance polices is included in accrued interest receivable and
other assets.
16. COMPREHENSIVE INCOME
Comprehensive income is reported 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. Unrealized gains and losses on the
Company's available-for-sale investment securities are 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.
F-39
<PAGE> 66
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. COMPREHENSIVE INCOME (Continued)
At December 31, 1999, 1998 and 1997, the Company held securities
classified as available-for-sale which had unrealized (losses) gains
as follows:
<TABLE>
<CAPTION>
Tax
Before Benefit After
Tax (Expense) Tax
----------- ----------- -----------
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Other comprehensive loss:
Unrealized holding losses $(2,684,000) $ 929,000 $(1,755,000)
=========== =========== ===========
For the Year Ended December 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (39,000) $ 19,000 $ (20,000)
Less: reclassification adjustment for
gains included in net income 8,000 (3,000) 5,000
----------- ----------- -----------
Net unrealized holding losses $ (47,000) $ 22,000 $ (25,000)
=========== =========== ===========
For the Year Ended December 31, 1997
Other comprehensive income:
Unrealized holding gains $ 330,000 $ (122,000) $ 208,000
=========== =========== ===========
</TABLE>
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for
which it is practicable to estimate fair value. These estimates are
made at a specific point in time based on relevant market data and
information about the financial instruments. These estimates do not
reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for
sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition,
the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimates and
have not been considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the fair
values presented.
F-40
<PAGE> 67
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used by the Company to
estimate the fair value of its financial instruments at December 31,
1999 and 1998:
Cash, cash equivalents and short-term borrowings: For cash, cash
equivalents and short-term borrowings, the carrying amount is
estimated to be fair value.
Investment securities: For investment securities, fair values are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are estimated using quoted
market prices for similar securities and indications of value
provided by brokers.
Loans and leases: For variable-rate loans and leases that reprice
frequently with no significant change in credit risk, fair values are
based on carrying values. Fair values of loans held for sale are
estimated using quoted market prices for similar loans. The fair
values for other loans and leases are estimated using discounted cash
flow analyses, using interest rates being offered at each reporting
date for loans and leases with similar terms to borrowers of
comparable creditworthiness. The carrying amount of accrued interest
receivable approximates its fair value.
Cash surrender value of life insurance policies: The fair value of
life insurance policies are based on cash surrender values at each
reporting date as provided by the insurers.
Deposits: The fair values for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date
represented by their carrying amount. Fair values for fixed-rate
certificates of deposit are estimated using discounted cash flow
analysis using interest rates offered by the Company at each
reporting date for certificates with similar remaining maturities.
The carrying amount of accrued interest payable approximates its fair
value.
Commitments to extend credit: Commitments to extend credit are
primarily for variable rate loans and letters of credit. For these
commitments, there is no difference between the commitment amounts
and their fair values. Commitments to fund fixed rate loans are at
rates which approximate fair value at each reporting date.
F-41
<PAGE> 68
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair value of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 15,738,000 $ 15,738,000 $ 12,046,000 $ 12,046,000
Federal funds sold 6,075,000 6,075,000 34,220,000 34,220,000
Interest-bearing deposits
in banks 198,000 198,000 3,960,000 3,960,000
Loans held for sale 964,000 967,000 4,481,000 4,502,000
Investment securities 46,514,000 46,441,000 57,492,000 57,527,000
Loans and leases 210,527,000 213,913,000 161,343,000 165,262,000
Accrued interest receivable 2,580,000 2,580,000 2,121,000 2,121,000
Cash surrender value of life
insurance policies 2,613,000 2,613,000 2,125,000 2,125,000
------------ ------------ ------------ ------------
$285,209,000 $288,525,000 $277,788,000 $281,763,000
------------ ------------ ------------ ------------
Financial liabilities:
Deposits $265,417,000 $266,371,000 $263,720,000 $265,759,000
Short-term borrowings 6,300,000 6,300,000 150,000 150,000
Accrued interest payable 697,000 697,000 816,000 816,000
------------ ------------ ------------ ------------
$272,414,000 $273,368,000 $264,686,000 $266,725,000
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend
credit $ 55,506,000 $ 55,506,000 $ 51,361,000 $ 51,361,000
Letters of credit 326,000 326,000 494,000 494,000
------------ ------------ ------------ ------------
$ 55,832,000 $ 55,832,000 $ 51,855,000 $ 51,855,000
------------ ------------ ------------ ------------
</TABLE>
18. BRANCH ACQUISITION
The Company acquired certain assets and liabilities of the Lincoln
branch of Wells Fargo Bank on February 21, 1997, summarized as
follows:
<TABLE>
<S> <C>
Cash $5,945,000
Fair value of assets and liabilities
acquired, net 129,000
Premium paid for deposits 366,000
----------
Deposits assumed $6,440,000
==========
</TABLE>
The deposit premium is included on the consolidated balance sheet in
accrued interest receivable and other assets and is being amortized
using the straight-line method over ten years. Amortization expense
totaled $37,000 for each of the years ended December 31, 1999 and
1998 and $30,000 for the year ended December 31, 1997.
F-42
<PAGE> 69
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 940,000 $ 463,000
Investment in subsidiaries 22,738,000 22,602,000
Trading securities 175,000 5,000
Held-to-maturity investment securities (market
value of $170,000 in 1999) 170,000
Bank premises and equipment 651,000 603,000
Other assets 1,534,000 578,000
------------ ------------
Total assets $ 26,208,000 $ 24,251,000
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Short-term borrowings $ 300,000 $ 150,000
Accrued expenses and other liabilities 403,000 171,000
------------ ------------
Total liabilities 703,000 321,000
------------ ------------
Shareholders' equity:
Common stock 15,911,000 13,431,000
Retained earnings 11,534,000 10,384,000
Unearned ESOP shares (300,000)
Accumulated other comprehensive (loss)
income (1,640,000) 115,000
------------ ------------
Total shareholders' equity 25,505,000 23,930,000
------------ ------------
Total liabilities and shareholders' equity $ 26,208,000 $ 24,251,000
============ ============
</TABLE>
F-43
<PAGE> 70
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Dividends declared by subsidiaries -
eliminated in consolidation $ 1,850,000 $ 456,000
Other income from subsidiaries -
eliminated in consolidation 1,079,000
Interest income 11,000 $ 2,000
Unrealized appreciation on trading
securities 42,000
----------- ----------- -----------
Total income 2,971,000 467,000 2,000
----------- ----------- -----------
Expenses:
Salaries and benefits 1,521,000
Occupancy and equipment 69,000
Data processing fees 364,000
Interest expense 12,000 1,000
Professional fees 138,000 7,000 13,000
Director fees 55,000 41,000 41,000
Merger costs 194,000 456,000
Other expenses 122,000 91,000 16,000
----------- ----------- -----------
Total expenses 2,475,000 596,000 70,000
----------- ----------- -----------
Income (loss) before equity in
undistributed income of
subsidiaries 496,000 (129,000) (68,000)
Equity in undistributed income of
subsidiaries 1,759,000 992,000 1,991,000
----------- ----------- -----------
Income before income tax benefit 2,255,000 863,000 1,923,000
Income tax benefit 550,000 238,000 28,000
----------- ----------- -----------
Net income $ 2,805,000 $ 1,101,000 $ 1,951,000
=========== =========== ===========
</TABLE>
F-44
<PAGE> 71
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,805,000 $ 1,101,000 $ 1,951,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Undistributed earnings of
subsidiaries (1,759,000) (992,000) (1,991,000)
Increase in trading securities (128,000) (5,000)
Unrealized appreciation on
trading securities (42,000)
Depreciation 12,000
Increase in other assets (659,000) (179,000) (11,000)
Increase in other liabilities 232,000 170,000
Deferred taxes (72,000) (167,000)
----------- ----------- -----------
Net cash provided by
(used in) operating
activities 389,000 (67,000) (56,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of held-to-maturity invest-
ment securities (172,000)
Proceeds from called held-to-maturity
investment securities 2,000
Increase in construction in progress (6,000) (80,000)
Purchases of premises and equipment (54,000) (603,000)
Proceeds from the sale of assets to
subsidiary 80,000
----------- ----------- -----------
Net cash used in investing
activities (230,000) (523,000) (80,000)
----------- ----------- -----------
Cash flows from financing activities:
(Repayment of) proceeds from short-
term borrowings (150,000) 150,000
Repurchase of common stock (26,000)
Proceeds from ESOP borrowings 300,000
Purchase of unearned ESOP shares (300,000)
Payments for fractional shares (21,000) (4,000)
Proceeds from exercise of stock options 515,000 697,000 88,000
----------- ----------- -----------
Net cash provided by
financing activities 318,000 847,000 84,000
----------- ----------- -----------
</TABLE>
(Continued)
F-45
<PAGE> 72
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents $ 477,000 $ 257,000 $ (52,000)
Cash and cash equivalents at beginning of
year 463,000 206,000 258,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 940,000 $ 463,000 $ 206,000
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest
expense $ 12,000 $ 1,000
Non-cash investing activities:
Net change in unrealized gain on
available-for-sale investment
securities $(2,684,000) $ (47,000) $ 330,000
Proceeds and tax benefit from stock
issuance from Lake Community
Bank prior to merger $ 159,000
Repurchase of common stock from
Lake Community Bank prior to
merger $ (27,000)
</TABLE>
F-46
<PAGE> 73
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
20. MERGERS
Merger of Western Sierra Bancorp and Sentinel Community Bank
On December 27, 1999, the Boards of Directors of Western Sierra
Bancorp and Sentinel Community Bank approved a definitive merger
agreement between the two companies. Under the agreement, each share
of Sentinel Community Bank will be converted into the right to
receive shares of the Company's common stock. Sentinel Community Bank
will be merged with the Company's subsidiary, Western Sierra National
Bank. The transaction will be accounted for under the
pooling-of-interests method of accounting. It is expected that this
merger will be accomplished in the second quarter of 2000, subject to
shareholder and regulatory approval.
The unaudited pro forma information set forth below assumes that the
merger of the two companies took place on January 1, 1997 and that
each share of Sentinel Community Bank was exchanged for 1.4910 shares
of the Company's common stock. The information is presented for
informational purposes only and is not necessarily indicative of the
results of operations that actually would have been achieved had the
merger been consummated at that time.
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net interest income $ 17,650 $ 15,859 $ 14,661
Net income $ 3,308 $ 1,702 $ 1,631
Basic earnings per common share $ 1.03 $ .55 $ .55
Diluted earnings per common share $ 1.00 $ .53 $ .53
</TABLE>
Merger of Western Sierra National Bank and Roseville 1st National
Bank
The Company intends to merge Roseville 1st National Bank into Western
Sierra National Bank. The merger is expected to be completed in the
second quarter of 2000.
F-47
<PAGE> 74
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS. The following table sets forth
certain information, as of March 15, 2000, with respect to those persons who are
directors and executive officers of Western Sierra and its subsidiaries:
<TABLE>
<CAPTION>
Year First
Appointed
Director or
Name Age Officer Title
- ---- --- ----------- -----
<S> <C> <C> <C>
Joseph A. Surra 58 1983 Chairman of the Board of Western Sierra and
Western Sierra National Bank
Robert G. Albrecht 81 1983 Director of Western Sierra
Charles W. Bacchi 56 1993 Director of Western Sierra
Barbara L. Cook 68 1993 Director of Western Sierra
Kirk Dowdell 37 1997 Executive Vice President and Chief Credit
Officer of Western Sierra and Western Sierra
National Bank.
Kirk C. Doyle 46 1999 Director of Western Sierra
William J. Fisher 52 1993 Director of Western Sierra
Lesa Fynes 41 1987 Senior Vice President and Chief Financial
Officer of Western Sierra, Western Sierra
National Bank and Roseville 1st National Bank
Gary D. Gall 48 1993 Director, President and Chief Executive
Officer of Western Sierra and Western Sierra
National Bank.
Richard L. Golemon 67 1983 Director of Western Sierra
John H. Helms 74 1999 Director of Western Sierra
Howard A. "Skip" Jahn 54 1999 Director of Western Sierra
Thomas Manz 50 1999 Director of Western Sierra and Chairman of
the Board of Roseville 1st National Bank
Douglas A. Nordell 51 1999 President and Chief Executive Officer of Lake
Community Bank
Harold S. Prescott, Jr. 68 1983 Director of Western Sierra
Darol B. Rasmussen 78 1987 Director of Western Sierra
Osvaldo I. Scariot 73 1983 Director of Western Sierra
Richard C. Seeba 61 1999 Director and Executive Vice President of
Western Sierra and President and Chief
Executive Officer of Roseville 1st National
Bank
Howard "Bud" Van Lente 73 1999 Director of Western Sierra and Chairman of
the Board of Lake Community Bank
Thomas C. Warren 62 1999 Secretary of Western Sierra and Senior Vice
President and Manager of Information Systems
of Western Sierra
</TABLE>
-25-
<PAGE> 75
The business experience of each of the directors and executive officers for the
past five years is described below.
JOSEPH A. SURRA has been the Assistant Superintendent of Business and Facilities
for Auburn Union School district for fifteen years. He also owned and operated
Gold Country Hardware Inc. for fifteen years. He was Director of Business
Affairs to Sacramento State University and was responsible for budgeting,
accounting and general services for eight years. He currently serves as a
director on a nonprofit board.
ROBERT G. ALBRECHT was part owner of Wisner and Becker Contractor Engineers for
thirty-three years and served as the President and Chief Executive Officer for
twelve years. He retired in 1983. Mr. Albrecht bought Coyote Creek Ranch in
Winnemucca, Nevada in 1982 and still runs the ranch today.
CHARLES W. BACCHI is a partner in Bacchi Ranch, Lotus, California. He was
employed at the California State Legislature for over five years. The government
of Guam also employed him as a political consultant of the governor for five
years.
BARBARA L. COOK was an owner and partner with Cook and Cook Real Estate for
thirteen years. She was also the co-owner of Coker and Cook Real Estate for
three years. The business was sold in 1998 to Caldwell Banker where Ms. Cook
continues as a Broker Associate.
KIRK DOWDELL has been Executive Vice President and Chief Credit Officer of
Western Sierra since May, 1999 and Executive Vice President and Chief Credit
Officer of Western Sierra National Bank since September, 1997. Prior to coming
to Western Sierra National Bank he was Regional Vice President for the Banking
Division of Commerce Security Bank. He has nine years banking experience.
KIRK DOYLE has been a director of Western Sierra since April 1999 and has served
on the board of directors of Roseville 1st National Bank since 1994. Mr. Doyle
is the founder and President of Kirk Doyle Realtor, a residential real estate
company located in Roseville, California, and has held the position since 1983.
WILLIAM J. FISHER is an attorney and is the President and broker of Pacific
States Development Corporation, a real estate development and marketing firm.
LESA FYNES has been with Western Sierra National Bank since 1987. She was
promoted to Assistant Controller in August of 1989, and was promoted to
Controller of Western Sierra National Bank in September of 1990. In October of
1998, Ms. Fynes was promoted to Chief Financial Officer of Western Sierra
National Bank. She currently serves as the Senior Vice President and Chief
Financial Officer of Western Sierra, Western Sierra National Bank and Roseville
1st National Bank. In 1997, Ms. Fynes successfully passed the Certified Public
Accountant exam.
GARY D. GALL has been President and Chief Executive Officer of Western Sierra
National Bank since 1993. He has been President and Chief Executive Officer of
Western Sierra since its formation in 1996. He previously served as the
President and Chief Executive Officer of Delta National Bank for seven years. He
has 27 years of banking experience. He currently serves on the Board of Trustees
of Simpson College in Redding, California.
RICHARD GOLEMON was in the heating and air conditioning business for over thirty
years. He moved to the area in 1970 and reactivated a dormant business, Mays
Sheet Metal, which he successfully operated for fifteen years. He sold the
business in 1985. He is semi-retired and manages his real estate investments.
JOHN H. HELMS founded Helms Petroleum Products Company in Lakeport in 1966. Mr.
Helms has been in the petroleum distribution and marketing business for
thirty-two years. His company has owned Two Jack's Mini Stop Stores since 1978,
the Helms General Tire Company since 1970 and Lampson Field Chevron Service
since 1981. In addition, Mr. Helms is a founding organizer and director of Lake
Community Bank.
HOWARD JAHN has been a director of Roseville 1st National Bank since 1992. Mr.
Jahn is a founder and member of Jackson and Jahn, LLC, a real estate development
company organized in 1997. Prior to his involvement with Jackson and Jahn, LLC,
Mr. Jahn was a senior vice president of CB Commercial, a commercial real estate
brokerage firm, for over 20 years.
THOMAS MANZ has been on the board of directors and served as Chairman of the
Board of Roseville 1st National Bank since 1992. Mr. Manz is the founder and
President of TJM Enterprises, a real estate development company organized in
1993. From 1993 to 1997, Mr. Manz was a general partner of Buzz Oates
Enterprise, a partnership engaged in the business of real estate development.
-26-
<PAGE> 76
DOUGLAS A. NORDELL has been the President and Chief Executive Officer of Lake
Community Bank since November, 1998. He also served as the Executive Vice
President and Chief Operating Officer of Roseville 1st National Bank since
November, 1994. From December, 1991 through November, 1994 he was co-owner of
three convenience mini marts known as Square Deal Marts, Inc. in Chico,
California. Prior to that he served in various banking management positions for
nineteen years.
HAROLD S. PRESCOTT, JR. is licensed to practice engineering in Washington,
Oregon and California. He founded Prescott Engineering in 1973 as a sole
proprietor. Today he is a consulting engineer and semi-retired.
DAROL B. RASMUSSEN practiced dentistry for thirty years in Carmichael,
California. He is now retired. Dr. Rasmussen currently serves as a Director on
the Sacramento College Foundation board.
OSVALDO I. SCARIOT owned and operated El Dorado Disposal Service and Western El
Dorado Recovery System for over 50 years. He sold the business in 1998. He is
now retired.
RICHARD C. SEEBA has served as Executive Vice President of Western Sierra since
April, 1999 and as the President and Chief Executive Officer of Roseville 1st
National Bank since 1990 and has been a director of Roseville 1st National Bank
since 1990. Prior to joining Roseville 1st National Bank, Mr. Seeba had been
employed in the banking industry for over 40 years.
HOWARD ("BUD") VAN LENTE is a long time resident of the Lakeport area, and
serves as the Chairman of the Board of Directors of Lake Community Bank. Mr. Van
Lente was a licensed real estate broker. He was a seven-year member of the
Lakeport Planning Commission, and the former Mayor of the City of Lakeport. Mr.
Van Lente is a partner in a real estate investment company and has owned a real
estate brokerage firm. He and his wife, Gwen, have also owned several business
operations in Lakeport. Mr. Van Lente is a founding organizer of the Lake
Community Bank and chaired the organizing committee.
THOMAS C. WARREN has served as Senior Vice President and Manager of Information
Systems of Western Sierra since April, 1999. He also served as Senior Vice
President and Chief Financial Officer of Roseville 1st National Bank until July,
1999. Prior to joining Roseville 1st National Bank, he was engaged as a
consultant to a community development bank and various start-up companies in San
Diego, California. Mr. Warren has served as a senior officer with the Federal
Reserve System and other financial institutions for over 30 years.
WESTERN SIERRA'S BOARD OF DIRECTORS AND COMMITTEES. Western Sierra's Board of
Directors met fifteen (15) times in 1999. None of Western Sierra's directors
attended less than 75 percent of all of Western Sierra's Board of Directors'
meetings and committee meetings (of which they were a member).
Western Sierra has an Audit Committee which met seven (7) times in 1999. The
Audit Committee consists of Robert Albrecht, Charles Bacchi, Barbara Cook and
Harold Prescott. The purpose of the Audit Committee is to review all internal
and external examination reports, review internal audit findings and during
1999, to monitor Year 2000 progress and to select Western Sierra's independent
certified public accountants.
Western Sierra has an Executive Committee which met fifteen (15) times in 1999.
The Executive Committee consists of Robert Albrecht, Kirk Doyle, Gary Gall,
Osvaldo Scariot, Richard Seeba, Joseph Surra and Howard Van Lente. The purpose
of the Executive Committee is to review policies, review human resource issues,
grant stock options and approve other personnel matters which are in excess of
management's authority, consider mergers and acquisitions, develop marketing
programs and participate in strategic planning.
There are no known family relationships amongst the above-described people. None
of the above-described people or any person nominated to become a director or
any promoter or control person has, in the last five years:
a. Filed personal bankruptcy or been a general partner or executive officer of
a business that has filed bankruptcy.
b. Been convicted in a criminal proceedings and is not currently subject to a
pending criminal proceedings.
c. Subject to any order, judgement, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, baring, suspending or otherwise limiting his/her
involvement in any type of business, securities or banking activities.
d. Been found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
All of the above mentioned people are in compliance with Section 16(a) of the
Exchange Act with respect to the most recent fiscal year, to the best of their
knowledge.
-27-
<PAGE> 77
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
Director Compensation. During 1999, outside directors received $300 per month
from Western Sierra for director fees and directors of each of the subsidiary
banks received $300 per month from the subsidiary banks on which they serve, for
director fees, except the Chairman of the Board of Western Sierra, who received
$1,000 per month from Western Sierra and the Chairmen of the Boards of each of
the subsidiary banks who received $500 per month from the subsidiary banks on
which they serve as Chairman. The outside directors of each of the subsidiary
banks will also receive $200 per month from the subsidiary banks on which they
serve as loan committee members.
In November, 1996, each of the then directors of Western Sierra, other than Mr.
Gall, was granted stock options to acquire 4,897 shares of Western Sierra common
stock, all at an exercise price of $8.17 per share. The options are for a term
of ten years expiring in November, 2006. These options were fully vested upon
the grant.
In May, 1999, each of the directors of Western Sierra who was a director in
1998, other than Mr. Gall, was granted stock options to acquire 2,100 shares of
Western Sierra common stock, all at an exercise price of $12.143 per share. The
options are for a term of ten years expiring in May, 2009. These options were
fully vested upon the grant.
During 1999, each of the directors of Western Sierra also participated in
Western Sierra's incentive compensation plan and each, other than Mr. Gall and
Mr. Seeba earned a bonus as follows: Western Sierra directors prior to the
merger date of April 30, 1999 - $8,767.20 and Western Sierra directors who
became directors after the merger date of April 30, 1999 - $6,187.33.
Executive Compensation. The executive officers of Western Sierra received during
1999, and will receive in 2000, cash compensation in their capacities as
executive officers of Western Sierra and the subsidiary banks.
The following table sets forth a summary of the compensation paid during Western
Sierra's past three fiscal years for services rendered in all capacities to Gary
D. Gall, the President and Chief Executive Officer of Western Sierra and Western
Sierra National Bank and to Kirk Dowdell, the Executive Vice President and Chief
Credit Officer of Western Sierra and Western Sierra National Bank, the only
executive officers of Western Sierra and/or the subsidiary banks whose annual
base compensation and bonus exceeded $100,000 during Western Sierra's 1999
fiscal year.
-28-
<PAGE> 78
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-----------------------
Long Term Compensation
Annual Compensation -----------------------
Awards Payouts
- --------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(3)
Position Year ($) ($) ($) ($) SARs(2) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary D. Gall, President, 1999 155,219 87,972 12,922 0 23,100 0
CEO and Director -------------------------------------------------------------------------------------------
of Western Sierra and Western 1998 140,500 106,486 11,147 0 0 0 9,129
-------------------------------------------------------------------------------------------
Sierra National Bank 1997 127,500 67,529 8,497 0 28,875 0 10,773
- --------------------------------------------------------------------------------------------------------------------------------
Kirk Dowdell, Executive 1999 100,980 23,424 9,570 0 1,575 0
Vice President and -------------------------------------------------------------------------------------------
Chief Credit Officer of 1998 89,900 6,100 8,305 0 0 0 180
Western Sierra and -------------------------------------------------------------------------------------------
Western Sierra National Bank(4) 1997 23,816 16,100 0 0 6,930 0 96
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These amounts represent perquisites consisting of country club fees for all
officers and automobile allowance and family health insurance premiums for
Mr. Gall.
(2) These amounts are adjusted for stock dividends. Western Sierra has no SARs.
(3) This amount represents Western Sierra's contribution for the cost of
premiums for life insurance and 401(k) Plan and ESOP.
(4) Mr. Dowdell began his employment with Western Sierra National Bank in
September, 1997.
-29-
<PAGE> 79
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
- ------------------------------------------------------------------------------------------------------
Individual Grants(1)
- ------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------
Options/SARs % of Total Options/SARs Exercise or
Granted Granted to Employees Base Price Expiration
Name (#) in Fiscal Year ($/Share) Date
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary D. Gall 23,100 54.6 $12.143 May 19, 2009
Kirk Dowdell 1,575 3.7 $12.143 April 7, 2009
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Western Sierra has no SARs and the number of options and exercise price are
adjusted for stock dividends.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options/SARs at In-the-Money
Year End(#) Options/SARs
Shares Acquired on Value Realized Exercisable/ at Year End($)
Name Exercise(#) ($) Unexercisable(1) Exercisable/Unexercisable(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gary D. Gall 0 N/A 33,102/32,479 $149,840/$98,397
Kirk Dowdell 0 N/A 4,473/4,032 $14,019/$11,558
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A means not applicable.
(1) Western Sierra has no SARs.
-30-
<PAGE> 80
On December 4, 1997, Western Sierra National Bank entered into an agreement with
Mr. Gall to provide him with severance benefits of up to two years' worth of his
regular compensation at the time of severance of employment in the event of
- - any merger or consolidation where Western Sierra National Bank is (A) not
the surviving or resulting corporation or (B) the surviving corporation and
the shareholders of Western Sierra at the time immediately prior to such
merger will own less than 50% on a direct or indirect basis of the voting
equity interests of the surviving corporation after such merger,
- - upon transfer of all or substantially all of the assets of Western Sierra
National Bank, or
- - a sale of the equity securities of Western Sierra representing more than
50% of the aggregate voting power of all outstanding equity securities of
Western Sierra to any person or entity, or any group of persons and/or
entities acting in concert (any of these events shall be referred to as an
"Acquisition").
The severance agreement is for a term of 5 years, and in the event of an
Acquisition, if Mr. Gall is not given a new employment agreement that is
satisfactory to him in his sole discretion within 15 days prior to the date of
consummation of the Acquisition, then Western Sierra National Bank shall pay him
the severance payment in a lump sum.
Mr. Gall also has a salary continuation agreement which provides that Western
Sierra National Bank will pay him $75,000 per year for 15 years following his
retirement from Western Sierra National Bank at age 65 or later ("Retirement
Age"). In the event of disability while Mr. Gall is actively employed prior to
Retirement Age, he will receive a benefit amount that is a percentage of the
$75,000 per year for 15 years based on the vesting schedule below beginning at
the earlier of the time when he reaches age 65 or the date on which he is no
longer entitled to disability benefits provided by Western Sierra National Bank.
In the event Mr. Gall dies while actively employed by Western Sierra National
Bank prior to Retirement Age, his beneficiary will receive from Western Sierra
National Bank a lump sum benefit amount equal to the present value (using an 8%
discount rate) of $75,000 per year for fifteen years, as if such amount is to be
paid starting one month after his death. In the event of termination with or
without cause or voluntary termination, Mr. Gall shall receive a benefit amount
that is a percentage of the $75,000 per year for 15 years based on the vesting
schedule below for 15 years beginning with the month following the month in
which Mr. Gall attains age 65 or beginning with the month following his death,
if earlier. Mr. Gall may also elect to receive a benefit amount that is a
percentage of the $75,000 per year for 15 years based on the vesting schedule
below upon early retirement which is after at least 15 years of service
beginning January 9, 1995. The vesting schedule is 5% per year of service for
the first seventeen years beginning January 9, 1995, and decreases to an
additional 3% per year of service for the last five years. Payment of salary
continuation benefits to Mr. Gall is subject to his not working as an employee,
independent contractor, or consultant of or for a branch of a financial
institution located within a 15 mile radius of any branch of Western Sierra
National Bank.
On December 4, 1997, Western Sierra National Bank entered into an agreement with
Mr. Dowdell to provide him with severance benefits of up to two years' worth of
his regular compensation at the time of severance of employment in the event of
- - any merger or consolidation where Western Sierra National Bank is (A) not
the surviving or resulting corporation or (B) the surviving corporation and
the shareholders of Western Sierra at the time immediately prior to such
merger will own less than 50% on a direct or indirect basis of the voting
equity interests of the surviving corporation after such merger,
- - upon transfer of all or substantially all of the assets of Western Sierra
National Bank, or
- - a sale of the equity securities of Western Sierra representing more than
50% of the aggregate voting power of all outstanding equity securities of
Western Sierra to any person or entity, or any group of persons and/or
entities acting in concert (any of these events shall be referred to as an
"Acquisition").
The amount of the severance payment will be calculated as stated in the
severance agreement and is determined by the total assets of Western Sierra
National Bank at the time of the Acquisition. The severance agreement is for a
term of 5 years, and in the event of an Acquisition, if Mr. Dowdell is not
retained by the resulting corporation for at least one to two years in a
position comparable to that of the highest level senior vice president of the
resulting corporation or a position accepted by Mr. Dowdell, or the resulting
corporation reduces his base salary from his base salary at the time of the
Acquisition during the next one to two years following the Acquisition, then the
resulting corporation shall pay him the severance payment in a lump sum.
-31-
<PAGE> 81
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following tables show the beneficial ownership of shares of Western Sierra
common stock and Sentinel Community common stock held by the principal
shareholders and management of each corporation. The beneficial owner of a
security is a person who, directly or indirectly, through any contract
arrangement, understanding, relationship, or otherwise has or shares: (a) voting
power which includes the power to vote, or to direct the voting of, the security
or (b) investment power which includes the power to dispose, or to direct the
disposition, of the security. The beneficial owner of a security is also a
person who, directly or indirectly, creates or uses a trust, proxy, power of
attorney, pooling arrangement or any other contract, arrangement, or device with
the purpose or effect of divesting himself of beneficial ownership of a security
or preventing the vesting of beneficial ownership. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting
or investment power over the securities. Shares subject to options presently
exercisable or exercisable within 60 days of March 15, 2000 are deemed to be
beneficially owned by the holder but are not treated as outstanding for
computing the beneficial ownership of any other person.
Western Sierra Management. The following table shows as of March 15, 2000, the
number of shares of Western Sierra common stock beneficially owned by each
director and named executive officer of Western Sierra and by all Western Sierra
directors and executive officers as a group.
<TABLE>
<CAPTION>
Western Sierra Common Stock Percent
Beneficial Owner Beneficially Owned of Class(1)
- ---------------- --------------------------- -----------
Directors and Named Executive Officers:
- --------------------------------------
<S> <C> <C>
Robert G. Albrecht 88,745(2) 3.5
Charles W. Bacchi 10,640(3) *
Barbara L. Cook 9,300 *
Kirk Dowdell 5,696(4) *
Kirk Doyle 14,000(5) *
William J. Fisher 12,061(6) *
Gary D. Gall 147,425(7) 5.8
Richard L. Golemon 121,603(8) 4.8
John Helms 38,143(9) 1.5
Howard Jahn 20,840(10) *
Thomas Manz 29,565(11) 1.2
Harold S. Prescott, Jr. 64,268(12) 2.5
Darol B. Rasmussen 55,812(13) 2.2
Osvaldo I. Scariot 104,850(14) 4.2
Richard C. Seeba 136,992(15) 5.4
Joseph A. Surra 129,671(16) 5.1
Howard Van Lente 26,100(17) 1.0
All Directors and Executive 735,484(18) 28.1
Officers as a Group (20 in all)
______________________
</TABLE>
* Less than 1%.
(1) Includes shares subject to options held by the directors and executive
officers that are exercisable within 60 days of March 15, 2000. These are
treated as issued and outstanding for the purpose of computing the
percentages of each director, named executive officer and the directors and
executive officers as a group, but not for the purpose of computing the
percentage of class of any other person.
(2) Mr. Albrecht has shared voting and investment powers as to 80,476 of
these shares. The amount includes 6,997 shares acquirable by exercise of
stock options.
(3) Mr. Bacchi has shared voting and investment powers as to 8,540 of these
shares. The amount includes 2,100 shares acquirable by exercise of
stock options.
(4) Mr. Dowdell has shared voting and investment powers as to 278 of these
shares. The amount includes 4,788 shares acquirable by exercise of stock
options.
(5) Mr. Doyle has shared voting and investment powers as to all of these
shares.
(6) Mr. Fisher has shared voting and investment powers as to 5,064 of these
shares. The amount includes 6,997 shares acquirable by exercise of
stock options.
-32-
<PAGE> 82
(7) Mr. Gall has shared voting and investment powers as to 99,856 of these
shares as to which 98,798 shares were owned by Mr. Gall as co-trustee for
Western Sierra's KSOP and Western Sierra's Employee Stock Ownership Plan.
The amount includes 33,102 shares acquirable by exercise of stock options.
(8) Mr. Golemon has shared voting and investment powers as to 98,798 of these
shares as co-trustee for Western Sierra's KSOP and Western Sierra's
Employee Stock Ownership Plan. The amount includes 6,997 shares acquirable
by exercise of stock options.
(9) Mr. Helms has shared voting and investment powers as to all of these
shares.
(10) Mr. Jahn has shared voting and investment powers as to 15,278 of these
shares.
(11) Mr. Manz has shared voting and investment powers as to 13,919 of these
shares. The amount includes 5,722 shares acquirable by exercise of stock
options.
(12) Mr. Prescott has shared voting and investment powers as to 53,911 of these
shares.
(13) Dr. Rasmussen has shared voting and investment powers as to 35,326 of these
shares. The amount includes 2,100 shares acquirable by exercise of stock
options.
(14) Mr. Scariot has shared voting and investment powers as to 12,750 of these
shares. The amount includes 2,100 shares acquirable by exercise of stock
options.
(15) Mr. Seeba has shared voting and investment powers as to 118,651 of these
shares as to which 98,798 shares were owned by Mr. Seeba as co-trustee for
Western Sierra's KSOP and Western Sierra's Employee Stock Ownership Plan.
The amount includes 5,915 shares acquirable by exercise of stock options.
(16) Mr. Surra has shared voting and investment powers as to 122,373 of these
shares as to which 98,798 shares were owned by Mr. Surra as co-trustee for
Western Sierra's KSOP and Western Sierra's Employee Stock Ownership Plan.
The amount includes 6,997 shares acquirable by exercise of stock options.
(17) Mr. Van Lente has shared voting and investment powers as to all of these
shares.
(18) The amount includes 94,875 shares acquirable by exercise of stock options.
Address information follows:
Robert Albrecht, Barbara Cook, Darol Rasmussen, and
Gary Gall all Cameron Park, Ca.
Chuck Bacchi, Lotus, Ca.
Kirk Doyle, Roseville, Ca.
William Fisher, El Dorado Hills, Ca.
Richard Golemon and Osvaldo Scariot, Placerville, Ca.
John Helms and Howard Van Lente, Lakeport, Ca.
Howard Jahn and Richard Seeba, Granite Bay, Ca.
Thomas Manz and Kirk Dowdell, Sacramento, Ca.
Harold Prescott, Diamond Springs, Ca.
Joseph Surra, Orangevale, Ca.
There are no known arrangements, which would result in the change in control of
Western Sierra Bancorp.
WESTERN SIERRA PRINCIPAL SHAREHOLDERS. Western Sierra's Board of Directors knows
of no person who owns beneficially more than 5% of the outstanding shares of
Western Sierra common stock as of March 15, 2000 except for the persons in the
following table:
<TABLE>
<CAPTION>
Western Sierra Common Stock
Beneficially Owned
---------------------------
Relationship Number of Percent
Name and Address(1) with Western Sierra Shares of Class
- ------------------- ----------------------- --------- --------
<S> <C> <C> <C>
Gary D. Gall President/CEO, Director 147,425 5.8
Richard C. Seeba EVP, Director 136,992 5.4
Joseph A. Surra Director 129,671 5.1
</TABLE>
- -------------------
(1) Messrs. Gall's, Seeba's and Surra's addresses are c/o Western Sierra
Bancorp, 3350 Country Club Drive, Suite 202, Cameron Park, California
95682.
-33-
<PAGE> 83
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Some of the directors and executive officers of Western Sierra and their
immediate families, as well as the companies with which they are associated, are
customers of, or have had banking transactions with, Western Sierra in the
ordinary course of Western Sierra's business, and Western Sierra expects to have
banking transactions with such persons in the future. In management's opinion,
all loans and commitments to lend in such transactions were made in compliance
with applicable laws and on substantially the same terms, including interest
rates and collateral, as those prevailing for comparable transactions with other
persons of similar creditworthiness and in the opinion of management did not
involve more than a normal risk of collectibility or present other unfavorable
features.
ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
1. Listed and included in Part II, Item 7.
2. Financial Statement Schedules:
In accordance with Regulation S-X, the financial statement
schedules have been omitted because they are not applicable to or
required of the Company or the required information is included
in the financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) EXHIBITS
See Index to Exhibits at page 37 of this Form 10-KSB.
-34-
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN SIERRA BANCORP
Date: March 30, 2000 By: /s/ Gary D. Gall
------------------------------------
Gary D. Gall, President and
Chief Executive Officer
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 and on the dates indicated.
<TABLE>
<S> <C>
/s/ Gary D. Gall Date: March 30, 2000
- ----------------------------------
Gary D. Gall, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Lesa Fynes Date: March 30, 2000
- ----------------------------------
Lesa Fynes, Senior Vice President
and Chief Financial Officer
/s/ Joseph A. Surra Date: March 30, 2000
- ----------------------------------
Joseph A. Surra, Director and
Chairman of the Board
/s/ Robert G. Albrecht Date: March 30, 2000
- ----------------------------------
Robert G. Albrecht, Director
/s/ Charles W. Bacchi Date: March 30, 2000
- ----------------------------------
Charles W. Bacchi, Director
/s/ Barbara L. Cook Date: March 30, 2000
- ----------------------------------
Barbara L. Cook, Director
/s/ Kirk Dowdell Date: March 30, 2000
- ----------------------------------
Kirk Dowdell, Executive Vice
President and Chief Credit Officer
/s/ Kirk C. Doyle Date: March 30, 2000
- ----------------------------------
Kirk C. Doyle, Director
/s/ William J. Fisher Date: March 30, 2000
- ----------------------------------
William J. Fisher, Director
/s/ Richard L. Golemon Date: March 30, 2000
- ----------------------------------
Richard L. Golemon, Director
/s/ John H. Helms Date: March 30, 2000
- ----------------------------------
John H. Helms, Director
/s/ Howard A. Jahn Date: March 30, 2000
- ----------------------------------
Howard A. Jahn, Director
/s/ Thomas Manz Date: March 30, 2000
- ----------------------------------
Thomas Manz, Director
/s/ Douglas A Nordell Date: March 30, 2000
- ----------------------------------
Douglas A Nordell, President and
CEO of Lake Community Bank
/s/ Harold S. Prescott, Jr. Date: March 30, 2000
- ----------------------------------
Harold S. Prescott, Jr., Director
/s/ Darol B. Rasmussen Date: March 30, 2000
- ----------------------------------
Darol B. Rasmussen, Director
/s/ Osvaldo I. Scariot Date: March 30, 2000
- ----------------------------------
Osvaldo I. Scariot, Director
</TABLE>
-35-
<PAGE> 85
<TABLE>
<S> <C>
/s/ Richard C. Seeba Date: March 30, 2000
- ----------------------------------
Richard C. Seeba, Director and
Executive Vice President Of Western
Sierra and President and Chief
Executive Officer of Roseville
1st National Bank
/s/ Howard Van Lente Date: March 30, 2000
- ----------------------------------
Howard Van Lente, Director and
Chairman of the Board
of Lake Community Bank
/s/ Thomas C. Warren Date: March 30, 2000
- ----------------------------------
Thomas C. Warren, Secretary and
Senior Vice President and
Manager of Information Systems
</TABLE>
-36-
<PAGE> 86
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
1 Plan of acquisition etc. is filed in the registration statement
Form S-4 on March 17, 2000 and incorporated here by this
reference.
3.1 Articles of Incorporation of Registrant filed in the
registration statement of Registrant on Form S-4 file #333-6667
as Exhibit 3.2 is incorporated here by this reference.
3.2 Bylaws as amended of Registrant filed in the registration
statement of Registrant on Form S-4 File #333-6667 as
Exhibit 3.2 is incorporated here by this reference.
10 Material contracts of Registrant filed in the registration
statement of Registrant on Form S-4 filed on March 17, 2000
as Exhibits 10.1 through 10.19 and are incorporated here by
this reference.
11 Statement re: computation of per share earnings is included in
Note 1 to the audited financial statements on page F-16.
21 The subsidiaries of the Registrant are Western Sierra National
Bank, a national banking association, Lake Community Bank, a
California banking corporation, and Roseville 1st National
Bank, a national banking association.
22 Various required consents are filed in the registration
statement of the Registrant on Form S-4 as Exhibit 23 filed
on March 17, 2000 and incorporated here by this reference.
27 Financial Data Schedule
-37-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF INCOME, STATEMENT OF CASH
FLOWS, AND STATEMENT OF CHANGES IN SHAREHOLDER EQUITY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,738
<INT-BEARING-DEPOSITS> 198
<FED-FUNDS-SOLD> 6,075
<TRADING-ASSETS> 175
<INVESTMENTS-HELD-FOR-SALE> 44,071
<INVESTMENTS-CARRYING> 2,268
<INVESTMENTS-MARKET> 2,195
<LOANS> 213,413
<ALLOWANCE> 2,886
<TOTAL-ASSETS> 299,260
<DEPOSITS> 265,417
<SHORT-TERM> 6,300
<LIABILITIES-OTHER> 2,038
<LONG-TERM> 0
0
0
<COMMON> 15,911
<OTHER-SE> 9,594
<TOTAL-LIABILITIES-AND-EQUITY> 299,260
<INTEREST-LOAN> 17,551
<INTEREST-INVEST> 3,963
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,514
<INTEREST-DEPOSIT> 7,589
<INTEREST-EXPENSE> 7,727
<INTEREST-INCOME-NET> 13,787
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,130
<INCOME-PRETAX> 4,220
<INCOME-PRE-EXTRAORDINARY> 4,220
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,805
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 5.37
<LOANS-NON> 543
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,431
<CHARGE-OFFS> 540
<RECOVERIES> 135
<ALLOWANCE-CLOSE> 2,886
<ALLOWANCE-DOMESTIC> 2,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
