<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 26, 2000
Western Sierra Bancorp
(Exact Name of Registrant as Specified in Its Charter)
000-25979
Commission File Number
California 68-0390121
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification No.)
3350 Country Club Drive, Suite 202 , Cameron Park, California 95682
(Address of Principal Executive Offices) (Zip Code)
(530) 677-5600
(Registrant's Telephone Number, Including Area Code)
This Report includes a total of 37 pages.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired.
Page
----
SENTINEL COMMUNITY BANK AND SUBSIDIARY 3
Financial Statements as of December 31, 1999 and 1998 and for each of the Three
Years in the Period Ended December 31, 1999 and Report of Independent
Certified Public Accountants.
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
We have audited the accompanying consolidated balance sheet of SENTINEL
COMMUNITY BANK AND SUBSIDIARY (the Bank) as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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
Sentinel Community Bank and Subsidiary at December 31, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Stockton, California
January 28, 2000
3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
We have audited the accompanying consolidated balance sheet of SENTINEL
COMMUNITY BANK AND SUBSIDIARY (the Bank) as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the two years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Sentinel Community Bank and Subsidiary at December 31, 1998, and the
consolidated results of their operations and their consolidated cash flows
for the two years then ended in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Stockton, California
February 26, 1999
4
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash and cash equivalents $ 5,262,076 $ 8,144,215
Certificates of deposit 693,000 2,079,000
Securities available-for-sale 11,417,640 16,730,367
Securities held-to-maturity 11,937,135 9,576,986
Federal Home Loan Bank stock 455,500 557,900
Loans, net 60,035,335 51,079,784
Premises and equipment, net 1,099,775 1,217,141
Foreclosed real estate, net -- 693,981
Accrued interest receivable 730,419 810,489
Other assets 991,707 985,804
------------ -----------
$ 92,622,587 $91,875,667
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Customer deposits $ 77,766,750 $79,721,653
Borrowings 9,000,000 6,000,000
Accrued expenses and other liabilities 445,831 776,444
------------ -----------
Total liabilities 87,212,581 86,498,097
------------ -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, par value $5 per share (authorized
1,000,000 shares; issued and outstanding,
483,529 and 482,474 shares as of December 31,
1999 and 1998, respectively) 2,417,645 1,608,245
Additional paid-in capital 483,778 483,134
Retained earnings - substantially restricted 2,807,029 3,257,744
Accumulated other comprehensive (loss) income, net of tax (298,446) 28,447
------------ -----------
Total stockholders' equity 5,410,006 5,377,570
------------ -----------
$ 92,622,587 $91,875,667
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 5,295,488 $4,563,211 $ 3,973,081
Interest on securities 1,455,365 1,799,452 872,807
Interest on certificates of deposit 98,446 311,780 517,589
Interest on overnight funds 117,314 137,523 229,287
Interest on other investments 27,439 32,352 39,608
----------- ---------- -----------
Total interest income 6,994,052 6,844,318 5,632,372
----------- ---------- -----------
Interest expense
Interest expense on customer deposits 2,801,306 2,812,800 2,579,554
Interest expense on FHLB advances 329,415 310,205 --
----------- ---------- -----------
Total interest expense 3,130,721 3,123,005 2,579,554
----------- ---------- -----------
Net interest income 3,863,331 3,721,313 3,052,818
Provision for loan losses 379,769 235,000 173,000
----------- ---------- -----------
Net interest income after provision
for loan losses 3,483,562 3,486,313 2,879,818
----------- ---------- -----------
Other income
Service charges 351,672 297,877 212,477
Loan servicing fees 85,681 73,116 39,343
(Loss) gain on sale of assets (66,592) 35,732 --
(Loss) gain on sale of foreclosed real estate (70,295) 10,626 108,122
Other 176,642 106,511 117,119
----------- ---------- -----------
477,108 523,862 477,061
----------- ---------- -----------
Other expenses
Salaries and fringe benefits 1,527,188 1,452,448 1,274,554
Office occupancy and operations 656,958 594,917 539,956
Data processing 388,654 331,752 325,772
Payroll taxes and insurance 173,981 160,479 141,825
Professional services 166,413 116,261 87,624
Provision for losses on foreclosed real estate 23,638 76,365 140,000
Settlement and related legal expenses -- -- 1,098,573
Other 334,539 321,343 293,572
----------- ---------- -----------
3,271,371 3,053,565 3,901,876
----------- ---------- -----------
Income (loss) before income taxes 689,299 956,610 (544,997)
Income tax expense (benefit) $ 186,000 356,000 (225,000)
----------- ---------- -----------
NET EARNINGS (LOSS) $ 503,299 $ 600,610 $ (319,997)
=========== ========== ===========
Net earnings (loss) per share, basic $ 1.04 $ 1.27 $ (.68)
=========== ========== ===========
Net earnings (loss) per share, assuming dilution $ 1.00 $ 1.26 $ (.68)
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings - Other
----------------------- Paid in Comprehensive Substantially Comprehensive
Shares Amount Capital Income Restricted Income Total
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 31, 1997 313,461 $1,567,305 $ 405,736 $ 3,109,882 $ -- $ 5,082,923
Comprehensive loss
Net loss -- -- -- $ (319,997) (319,997) -- (319,997)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Comprehensive income $ (319,997)
===========
Balances at
December 31, 1997 313,461 1,567,305 405,736 2,789,885 -- 4,762,926
Stock options exercised 8,188 40,940 77,398 -- -- 118,338
Cash dividends paid
($.42 per share) -- -- -- (132,751) -- (132,751)
Comprehensive income
Net income -- -- -- $ 600,610 600,610 -- 600,610
Other comprehensive
income, net of tax
of $20,014
Cumulative effect
of reclassification
of securities -- -- -- 13,512 -- -- --
Unrealized gain
on securities -- -- -- 14,935 -- 28,447 28,447
----------- ----------- ------------ ----------- ----------- ----------- -----------
Comprehensive income $ 629,057
===========
Balances at
December 31, 1998 321,649 1,608,245 483,134 3,257,744 28,447 5,377,570
</TABLE>
7
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings - Other
Common Stock Paid in Comprehensive Substantially Comprehensive
Shares Amount Capital Income Restricted Income Total
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock options exercised 1,073 5,365 644 - - 6,009
Cash dividends paid
($.465 per share) - - - (149,567) - (149,567)
Stock split 160,807 804,035 - (804,035) - -
Cash dividend paid for
fractional shares
associated with stock split - - - (412) - (412)
Comprehensive income
Net income $503,299 503,299 - 503,299
Other comprehensive
income, net of tax
of $229,994
Unrealized loss
on securities - - - (326,893) - (326,893) (326,893)
----------- ---------- ------------ ----------- ----------- ----------- -----------
Comprehensive income $ 176,406
===========
Balances at
December 31, 1999 483,529 $2,417,645 $ 483,778 $ 2,807,029 $ (298,446) $ 5,410,006
=========== ========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
8
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 503,299 $ 600,610 $ (319,997)
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization of premises
and equipment 194,094 155,341 130,269
Net amortization (accretion) of securities 118,156 (57,567) (59,235)
Provision for loan losses 379,769 235,000 173,000
Provision for losses on foreclosed real estate 23,638 76,365 140,000
Loss (gain) on sale of securities
available-for-sale 66,348 (33,996) -
Loss on sale of equipment 244 1,125 -
Net loss (gain) on sale of foreclosed
real estate 70,295 (19,533) (108,122)
Decrease (increase) in accrued
interest receivable 80,070 (321,717) (135,347)
Decrease (increase) in other assets 326,492 (345,512) (514,219)
(Decrease) increase in other liabilities (330,613) 125,194 206,158
------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,431,792 415,310 (487,493)
------------ ------------ ------------
Cash flows from investing activities:
Increase in loans (9,163,592) (12,824,761) (2,947,265)
Proceeds from sale of foreclosed real estate 428,321 284,908 548,711
Decrease (increase) in certificates of deposit 1,386,000 4,338,000 (893,000)
Proceeds from sales of securities
available-for-sale 6,191,250 6,996,785 -
Proceeds from maturities and calls of
securities available-for-sale 2,988,973 8,821,290 -
Proceeds from maturities of securities
held-to-maturity 7,119,963 10,552,463 5,395,396
Purchases of available-for-sale securities (4,549,577) (28,356,038) -
Purchases of held-to-maturity securities (9,539,423) (6,914,174) (10,829,368)
Purchase of premises and equipment (76,972) (502,086) (308,883)
Capital expenditures on foreclosed real estate - (80,816) (40,350)
------------ ------------ ------------
Net cash used in investing activities (5,215,057) (17,684,429) (9,074,759)
------------ ------------ ------------
</TABLE>
9
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
(Decrease) increase in customer deposits $ (1,954,904) $ 8,364,883 $ 14,050,350
Increase in other borrowings 3,000,000 6,000,000 -
Proceeds from exercised stock options 6,009 118,338 -
Payment of cash dividend (149,979) (132,751) -
------------ ------------ ------------
Net cash provided by
financing activities 901,126 14,350,470 14,050,350
------------ ------------ ------------
Net decrease in cash and cash equivalents (2,882,139) (2,918,649) 4,488,098
Cash and cash equivalents, beginning of year 8,144,215 11,062,864 6,574,766
------------ ------------ ------------
Cash and cash equivalents, end of year $ 5,262,076 $ 8,144,215 $ 11,062,864
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3,136,080 $ 3,118,630 $ 2,578,347
Cash paid for income taxes $ 297,871 $ 522,000 $ 109,000
</TABLE>
Noncash investing and financing activities:
During 1999 a 3 for 2 stock split occurred, resulting in a
reclassification of $804,035 from retained earnings to common stock.
The Bank foreclosed on loans with balances of $73,367, $583,162 and
$261,060 in 1999, 1998 and 1997, respectively. The Bank made loans
amounting to $290,094, $303,000 and $306,550 in conjunction with the
sale of foreclosed real estate in 1999, 1998 and 1997, respectively.
During 1999, the Bank recognized an unrealized loss on
available-for-sale securities of $556,887. As a result, a deferred tax
asset of $229,994 was recorded and equity was decreased by $326,893.
During 1998, the Bank recognized an unrealized gain on
available-for-sale securities of $48,461. As a result, a deferred tax
liability of $20,014 was recorded and equity was increased by $28,447.
During 1998, the Bank recognized securities with an amortized cost of
$7,134,009 from held-to-maturity to the available-for-sale portfolio.
The accompanying notes are an integral part of these statements.
10
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Sentinel Community Bank (the Bank) is a federally chartered stock savings
and loan association with three branch offices. The Bank operated as
Sentinel Savings and Loan Association, a Federal Association until October
1, 1996, when it changed its name to Sentinel Community Bank. Deposits up to
$100,000 are insured by the Savings Association Insurance Fund (SAIF).
Sentinel Community Bank must comply with the rules and regulations of the
Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision (OTS). In 1990, Sentinel Associates, a wholly-owned subsidiary
of the Bank, was formed to develop single family residences for sale by
independent builders under the Bank's direction.
The Bank offers mortgage and commercial banking services to individuals and
businesses through three branches located in Sonora and Twain Harte,
California. In addition, the Bank has a loan production office in Arnold,
California.
In preparing financial statements in conformity with generally accepted
accounting principles applicable to savings institutions, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Sentinel Community Bank and
its wholly owned subsidiary, Sentinel Associates, Inc. (Associates). There
was no activity in Associates during 1999 or 1998. All intercompany amounts
have been eliminated.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information as
of December 31, 1999 and 1998. Such information, which pertains to the
Bank's financial instruments, does not purport to represent the aggregate
net fair value of the Bank. Further, the fair value estimates are based on
various assumptions, methodologies and subjective considerations, which vary
widely among different financial institutions and which are subject to
change. The following methods and assumptions are used by the Bank.
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
11
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
Securities: Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Certificates of deposit: The fair values of certificates of deposit are
estimated using discounted cash flow analyses, based on the current interest
rates being offered for certificates of deposit with similar maturities. The
carrying amount of accrued interest receivable approximates its fair value.
Federal Home Loan Bank stock: No secondary market exists for Federal Home
Loan Bank (FHLB) stock. The stock is bought and sold at par by the FHLB,
therefore, the stock's recorded value is its fair value. The amount of stock
required to be purchased by the Bank is based on the Bank's total assets and
is determined annually.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values estimated for demand deposits (NOW
accounts, passbook accounts, and certain types of money market accounts)
are, by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). The carrying amounts for variable-rate,
fixed-term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of the aggregate expected monthly maturities on
time deposits. The carrying amount of accrued interest payable approximates
its fair value.
Borrowings: The line of credit with FHLB of San Francisco represents
variable rate funding; therefore, carrying value approximates fair value.
Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the credit standing of the counterparties.
12
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments purchased
with an original maturity of three months or less. There was $699,000 and
$5,230,000 in interest bearing accounts included in cash and cash
equivalents at December 31, 1999 and 1998, respectively.
4. CERTIFICATES OF DEPOSIT
Certificates of deposit have maturities greater than three months at the
date purchased and are carried at cost.
5. SECURITIES HELD-TO-MATURITY
Bonds, notes and debentures for which the Bank has a positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized as adjustments
to interest income over the period to maturity.
6. SECURITIES AVAILABLE-FOR-SALE
Available-for-sale securities consist of bonds, notes and debentures not
classified as trading securities or held-to-maturity securities. Unrealized
holding gains and losses, net of tax, are reported as a net amount in a
separate component of shareholders' equity until realized. Gains and losses
on the sale of available-for-sale securities are determined using the
specific identification method. The amortization of premiums and accretion
of discounts are recognized as adjustments to interest income over the
period to maturity.
7. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at face value, net of the allowance for loan losses and
deferred loan fees. Interest on loans is credited to operations based on the
principal amount outstanding. Accrual of interest is discontinued (loan is
placed in nonaccrual status) either when reasonable doubt exists as to the
full, timely collection of interest or principal or when a loan becomes
contractually past due by 90 days or more with respect to interest or
principal, unless the loan is well secured and in the process of collection.
At that time, any accrued but uncollected interest is reversed, and
additional income is recorded only to the extent that payments are received
and the collection of principal is reasonably assured.
13
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
All loan origination fees and certain loan origination costs are deferred
and amortized over the contractual lives of the related loans using the
interest method. In 1999, 1998 and 1997, loan origination fees collected and
deferred were $233,078, $272,874 and $289,690, and amortization of the net
deferred fees to interest income amounted to $216,348, $289,459 and
$309,210, respectively.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb losses on existing loans
that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans.
In addition to originating variable-rate loans which are held for
investment, the Bank originates fixed-rate loans for portfolio which are
held for investment and for sale to government agencies and others. Loans
held for sale are valued at the lower of cost or market. Loan fees and
certain loan origination costs are deferred until the loans are sold.
Transfers of loans held for sale to the investment portfolio are recorded at
the lower of cost or market on the transfer date. Monthly servicing fees,
which approximate a normal servicing fee, are recognized as income as
payments become due. Loans with principal balances totaling $20,776,968 and
$17,272,383 were serviced for other investors at December 31, 1999 and 1998,
respectively.
Impaired loans, as defined, are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent. The
interest recognition policy for impaired loans is similar to that of
nonaccrual loans.
8. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization of equipment and leasehold
improvements are computed using the straight-line method over the estimated
useful lives of the related assets or over the terms of the applicable
leases, whichever is shorter. Equipment is depreciated over three to ten
years and leasehold improvements are amortized over five to thirty years.
The Bank-owned buildings are depreciated over their estimated useful life of
thirty years.
9. INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
14
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
10. FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at the lower of carrying amount or
fair value at the date of foreclosure. After foreclosure, valuations are
periodically performed by management. Any subsequent revisions in estimates
of fair value less cost to sell are reported as adjustments to the carrying
amount of the real estate provided that the adjusted carrying amount does
not exceed the original carrying amount at the date of foreclosure.
Valuation allowances relating to foreclosed real estate amounted to $15,400
and $389,600 as of December 31, 1999 and 1998, respectively. Revenue and
expenses from operations and changes in the valuation allowance are included
in other operating expenses.
11. MORTGAGE SERVICING RIGHTS
Rights to service mortgage loans for others are recognized as separate
assets. Fair values are estimated based on the estimated market price for
such rights. Mortgage servicing rights are then amortized in proportion to,
and over the period of, estimated net servicing revenues. The Bank's
servicing assets are approximately $186,000 and $142,000 as of December 31,
1999 and 1998.
12. STOCK BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "ACCOUNTING FOR
STOCK BASED COMPENSATION," requires entities to disclose the fair value of
their employee stock options, but permits entities to continue to account
for employee stock options under Accounting Principles Board ("APB") Opinion
No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." The Bank has determined
that it will continue to use the method prescribed by APB Opinion No. 25,
which recognizes compensation cost to the extent of the difference between
the quoted market price of the stock at the date of grant and the amount an
employee must pay to acquire the stock. The Bank grants stock options to
employees with an exercise price equal to the quoted market price of the
stock at the date of grant. Accordingly, no compensation cost is recognized
for stock option grants. Disclosure requirements in accordance with SFAS No.
123 are included at Note I.
15
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
13. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES."
This Statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value. The Bank
adopted this statement on July 30, 1998. On this date, the Bank transferred
nine securities with a carrying value of $7,134,009 and estimated fair value
of $7,156,529 to the available-for-sale portfolio from the held-to-maturity
portfolio. SFAS No. 133 allows a reclassification of held-to-maturity
securities to trading or available-for-sale on date of adoption.
14. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
information to conform to the 1999 presentation.
NOTE B - SECURITIES
Amortized cost and estimated fair values of securities as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. government agency $ 3,500,000 $ - $ (214,126) $ 3,285,874
State and political
subdivisions 533,963 - (58,684) 475,279
Mutual funds 2,131,208 - (54,603) 2,076,605
Corporate debt securities 2,879,557 - (78,225) 2,801,332
Mortgage-backed securities 2,881,337 - (102,787) 2,778,550
----------- ----------- ----------- -----------
Total $11,926,065 $ $ (508,425) $11,417,640
=========== =========== =========== ===========
Held-to-maturity securities:
State and political
subdivisions $ 2,457,210 $ 6,790 $ (111,268) $ 2,352,732
Mortgage-backed securities 9,479,925 92,419 (106,505) 9,465,839
----------- ----------- ----------- -----------
Total $11,937,135 $ 99,209 $ (217,773) $11,818,571
=========== =========== =========== ===========
</TABLE>
16
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - SECURITIES - CONTINUED
Proceeds from the sale of available-for-sale securities were $6,191,250
for 1999. Gross gains of $625 and gross losses of $66,973 were realized
on sales of securities during 1999.
The scheduled maturities of securities available-for-sale and
held-to-maturity as of December 31, 1999 are shown below. Actual
maturities may differ from contractual maturities because borrowers 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 Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due from one year to five years $ 3,879,557 $ 3,792,152 $ - $ -
Due from five years to ten years 500,000 469,978 - -
Due after ten years 2,533,963 2,300,355 2,457,210 2,352,732
Not due at a single date 5,012,545 4,855,155 9,479,925 9,465,839
----------- ----------- ----------- -----------
$11,926,065 $11,417,640 $11,937,135 $11,818,571
=========== =========== =========== ===========
</TABLE>
Amortized cost and estimated fair values of securities as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. government agency $ 9,984,198 $ 44,291 $ (1,874) $10,026,615
State and political
subdivisions 535,005 -- (770) 534,235
Mutual funds 2,017,120 -- (2,572) 2,014,548
Corporate debt securities 512,214 10,586 -- 522,800
Mortgage-backed securities 3,633,368 7,677 (8,876) 3,632,169
----------- ----------- ---------- ----------
Total $16,681,905 $ 62,554 $ (14,092) $16,730,367
=========== =========== ========== ===========
Held-to-maturity securities:
State and political
subdivisions $ 1,434,809 $ 2,200 $ - $ 1,437,009
Mortgage-backed securities 8,142,177 20,072 (20,658) 8,141,591
----------- ----------- ---------- -----------
Total $ 9,576,986 $ 22,272 $ (20,658) $ 9,578,600
=========== =========== ========== ===========
</TABLE>
17
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE B - SECURITIES - CONTINUED
On July 30, 1998, the Bank transferred nine securities with a carrying value
of $7,134,009 and estimated fair value of $7,156,529 to the
available-for-sale portfolio from the held-to-maturity portfolio. SFAS No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," allows
a one-time reclassification of held-to-maturity securities to trading or
available-for-sale on the date the statement is adopted. There were no sales
of these securities during the quarter ended September 30, 1998.
Proceeds from the sale of available-for-sale securities were $6,996,785
for 1998. Gross gains of $36,857 and gross losses of $2,861 were
realized on sales of securities during 1998.
NOTE C - LOANS
Loans as of December 31, consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Loans secured by one-to-four family dwellings $29,896,104 $25,871,164
Loans secured by multi-family dwellings - 287,956
Loans secured by residential lots 1,177,554 2,935,864
Loans secured by commercial real estate and other 22,031,469 17,225,522
Construction loans 10,506,712 7,495,102
Undisbursed loan funds (4,760,836) (3,316,905)
Line of credit loans 2,096,661 1,179,055
Loans on customer deposits 268,178 213,993
----------- -----------
Total loans 61,215,842 51,891,751
Allowance for loan losses (907,717) (555,907)
Deferred loan fees (272,790) (256,060)
----------- -----------
Loans, net $60,035,335 $51,079,784
=========== ===========
</TABLE>
The majority of the loans in the Bank's portfolio have variable interest
rates which adjust annually on their respective anniversary dates, subject
to certain limits on annual and lifetime adjustments and based upon changes
in the index of Average Contract Interest Rate for Previously Occupied Homes
or the 11th District Cost of Funds Index published by the Federal Home Loan
Bank of San Francisco. Loans originated with maturities greater than 15
years are originated for possible sale in the secondary market. Management
believes that this policy of investing in shorter term fixed rate and
variable-rate loans substantially reduces the Bank's exposure to interest
rate fluctuations that would otherwise exist because the duration of its
loan portfolio would be longer than the duration of its deposit portfolio.
18
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE C - LOANS - CONTINUED
The Bank's customers are primarily located in Tuolumne and Calavaras
Counties. Approximately 87% of the Bank's loans are related to real estate,
of which 36% is for commercial real estate and 51% is for residential real
estate. The Bank's service area has a significant number of retirees, many
of whom are loan customers of the Bank. Generally, real estate loans are
secured by real property and other loans are secured by funds on deposit, or
business or personal assets. The Bank has a first or second deed of trust on
substantially all collateral. Repayment is generally expected from
refinancing or sale of the related property for real estate and construction
loans, and from cash flows of the borrower for all other loans.
The activity in the allowance for loan losses for the years ended
December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Balance, beginning of period $555,907 $389,742 $300,593
Provision charged to expense 379,769 235,000 173,000
Loans charged off (64,197) (68,835) (88,283)
Recoveries 36,238 - 4,432
-------- -------- --------
Balance, end of period $907,717 $555,907 $389,742
======== ======== ========
</TABLE>
The balance of the impaired loans of December 31, 1999 and 1998, was
immaterial.
Impaired loans amounted to approximately $522,000 as of December 31, 1997,
for which no impairment reserve was recorded. The average recorded
investment in impaired loans during 1997 was approximately $195,000.
Impaired loans amounting to $50,000 were charged off in 1997, and a $50,000
provision for impaired loans was recorded. No cash was collected on impaired
loans during 1997. Interest income that would have been accrued on impaired
loans during 1997 was approximately $20,500.
19
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Buildings $ 862,990 $ 851,915
Land 207,521 207,521
Furniture and equipment 1,014,569 971,070
Leasehold improvements 139,801 139,801
----------- -----------
Total 2,224,881 2,170,307
Less accumulated depreciation and amortization (1,125,106) (953,166)
----------- -----------
$ 1,099,775 $ 1,217,141
=========== ===========
</TABLE>
NOTE E - CUSTOMER DEPOSITS
Customer deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- -------------------------------------
INTEREST RATE AMOUNT Interest Rate Amount
----------------- ----------- -------------------- -----------
<S> <C> <C> <C> <C>
Non-interest bearing
demand - $ 7,729,236 - $ 6,620,095
NOW accounts 1.01-2.25% 17,772,842 1.01-2.25% 15,713,015
Money market funds 2.25-3.75% 5,677,150 2.25-3.75% 6,279,632
Passbook accounts 2.00-4.50% 7,884,331 2.00-4.50% 6,575,102
Certificate accounts 3.75-5.50% 38,196,236 3.75-5.50% 39,070,265
5.51-7.01% 506,955 5.51-7.01% 5,463,544
----------- -----------
$77,766,750 $79,721,653
=========== ===========
Weighted average
interest rate 3.38% 3.74%
=========== ===========
</TABLE>
The scheduled maturities of certificate accounts are as follows at
December 31, 1999:
<TABLE>
<S> <C>
2000 $36,594,740
2001 1,990,866
2002 35,705
2003 29,734
2004 and thereafter 52,146
-----------
$38,703,191
===========
</TABLE>
Certificates of deposit exceeding $100,000 amount to $8,303,317 and
$8,469,171 as of December 31, 1999 and 1998, respectively.
20
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE F- OTHER BORROWING ARRANGEMENTS
At December 31, 1999, the Bank had a line of credit with the Federal Home
Loan Bank of San Francisco with a borrowing capacity of $18,000,735
collateralized by pledged loans of $26,175,696. The Bank has another line of
credit with the Federal Home Loan Bank of San Francisco with a borrowing
capacity of $14,162,751 collateralized by pledged securities with a book
value of $15,116,996 and an estimated fair value of $14,978,618. The Bank is
able to borrow 95% of the pledged securities' estimated fair value. At
December 31, 1999, the line of credit had a balance of $9,000,000, and a
weighted-average interest rate of 5.74%.
At December 31, 1998, the Bank had a line of credit with the Federal Home
Loan Bank of San Francisco with a borrowing capacity of $14,889,372
collateralized by pledged loans of $21,877,337. The Bank has another line of
credit with the Federal Home Loan Bank of San Francisco with a borrowing
capacity of $9,723,970 collateralized by pledged securities with a book
value of $10,233,661 and an estimated fair value of $10,235,758. The Bank is
able to borrow 95% of the pledged securities' estimated fair value.
NOTE G - LEASES
The Bank leases its two branches and a loan agency office under operating
leases. Rent expense amounted to $87,919, $84,386 and $71,936 in 1999, 1998
and 1997, respectively. Approximate future minimum rental payments due under
the terms of the leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000 $84,772
2001 83,842
2002 82,912
2003 84,112
2004 85,312
Thereafter 45,952
--------
$466,902
========
</TABLE>
21
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE H - INCOME TAXES
The provision for income taxes for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 185,000 $ 131,200 $ -
State 79,000 70,000 800
-------------- -------------- --------------
264,000 201,200 800
-------------- -------------- --------------
Deferred:
Federal (49,000) 134,800 (193,800)
State (29,000) 20,000 (32,000)
-------------- -------------- --------------
(78,000) 154,800 (225,800)
-------------- -------------- --------------
$ 186,000 $ 356,000 $ (225,000)
============== ============== ==============
</TABLE>
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% (34.0)%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 7.2 7.2 (7.2)
Tax exempt interest (9.4) (2.2) -
Other, net (4.9) (1.8) (0.1)
------ ------ ------
26.9% 37.2% (41.3)%
====== ====== ======
</TABLE>
22
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
NOTE H - INCOME TAXES - CONTINUED
The tax effect of temporary differences giving rise to the Bank's
deferred income tax asset, included in other assets, at December 31, is
as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 8,000 $ 18,000
Depreciation on premises and equipment 97,000 77,000
State income taxes 27,000 24,000
Foreclosed real estate 4,000 91,000
Allowance for loan losses 352,000 192,000
Core deposit premium 6,000 4,000
Unrealized loss on securities
available-for-sale 210,000 -
--------- ---------
704,000 406,000
--------- ---------
Deferred tax liabilities:
FHLB dividends (75,000) (64,000)
Reserve method conversion (23,000) (35,000)
Accumulated accretion (37,000) (26,000)
Unrealized gain on securities
available-for-sale - (20,000)
--------- ---------
(135,000) (145,000)
--------- ---------
Net deferred income tax asset $ 569,000 $ 261,000
========= =========
</TABLE>
Under the Internal Revenue Code, the Bank is allowed a statutory actual or
anticipated addition to bad debt reserves for income tax purposes for which
no provision for income taxes must be made. No provision has been made for
possible federal income tax on such retained earnings, which totaled
approximately $300,000 at December 31, 1999 and 1998.
23
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE I - STOCK OPTION PLANS
Under the terms of the Bank's 1993 stock option plan, up to 67,500 shares of
common stock are reserved for issuance. There are 35,267 incentive stock
options granted under the 1993 plan as of December 31, 1999. On May 30,
1996, the Board of Directors adopted the 1996 stock option plan. Under the
1996 plan, up to 62,024 shares of common stock are reserved for issuance.
There are 28,152 non-qualified stock options granted under the 1996 plan as
of December 31, 1999. On July 29, 1999, the Board of Directors adopted the
1999 stock option plan. Under the 1999 plan, up to 37,286 shares of common
stock are reserved for issuance. There are 10,984 non-qualified stock
options granted under the 1999 plan as of December 31, 1999.
The Bank's fixed stock option plans are accounted for under APB Opinion No.
25 and related Interpretations. Options under the 1993 plan have a term of
10 years when issued, are granted on various dates and vest 20% each year
beginning at the end of the first year. Options under the 1996 plan have a
10 year term when issued and vest immediately for grants of options to
directors. All other options vest 20% each year beginning at the end of the
first year after grant. The exercise price of each option is greater than or
equal to market price of the Bank's stock on the date of grant. Accordingly,
no compensation cost has been recognized for the plan. Had compensation cost
for the plan been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION", the Bank's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below. For those
options that are non-qualified stock options for income tax purposes, the
pro forma net earnings reflects the Bank's estimated future tax deduction
upon exercise of the options.
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $503,299 $600,610 $(319,997)
Pro forma $475,885 $588,950 $(333,152)
Earnings (loss) per share Basic:
As reported $ 1.04 $ 1.27 $ (.68)
Pro forma $ .99 $ 1.24 $ (.71)
Diluted:
As reported $ 1.00 $ 1.26 $ (.68)
Pro forma $ .95 $ 1.23 $ (.71)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes options-pricing model with the following weighted-average
assumptions used for grants awarded in 1999: dividend yield of 3.0 percent;
expected volatility of 26.4 percent; risk-free interest rate of 5.435
percent; and expected lives of nine years.
24
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE I - STOCK OPTION PLANS - CONTINUED
A summary of the status of the Bank's fixed stock option plans as of
December 31, 1999, and 1998, and changes during the years ending on those dates
is presented below.
<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>
Outstanding at beginning of year 56,737 $ 10.54 75,690 $ 10.45 75,690 $ 10.45
Granted 18,739 $ 15.84 - $ - - $ -
Exercised (1,073) $ 5.60 (12,282) $ 9.63 - $ -
Forfeited - $ (6,671) $ 11.16 - $ -
------- ------- -------
Outstanding at end of year 74,403 $ 11.95 56,737 $ 10.54 75,690 $ 10.45
======= ======= =======
Options exercisable at year end 55,378 $ 10.92 52,079 $ 10.53 64,461 $ 10.43
Weighted-average fair value of
shares granted during the year $ 4.65
</TABLE>
The following information applies to options outstanding at December 31,
1999:
<TABLE>
<S> <C>
Number outstanding 74,403
Range of exercise prices $6.27 - $17.50
Weighted-average exercise price $11.95
Weighted-average remaining contractual life 6.9 years
</TABLE>
NOTE J - EMPLOYEE BENEFIT PLAN
The Bank maintains a defined contribution 401(k) plan (the Plan) for all
employees who have completed at least 1,000 hours of service during a twelve
consecutive month period. The Bank may elect to make matching contributions
to the Plan. Employer contributions to the Plan amounted to $15,032, $16,916
and $16,288 in 1999, 1998 and 1997, respectively.
25
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form
of loans or through standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1999:
<TABLE>
<S> <C>
Undisbursed loan commitments $11,393,226
Undisbursed lines of credit 3,324,373
Standby letters of credit 102,215
-----------
$14,819,814
===========
</TABLE>
Undisbursed variable rate loan commitments with interest rate caps or floors
amount to $4,005,448 and undisbursed fixed rate loan commitments amount to
$6,125,889 as of December 31, 1999.
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. None of
the fixed rate loan commitments were designated to be sold in the secondary
market. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation. Collateral
held varies but may include real property, customer deposits, debt
securities, equity securities or business assets. Virtually all such
commitments are collateralized, and their credit risk is essentially the
same as that involved in extending loans to customers.
26
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS - CONTINUED
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance 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.
The estimated fair values of the Bank's financial instruments at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
------------- ------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 5,262,076 $ 5,262,076
Certificates of deposit 693,000 693,351
Securities available-for-sale 11,417,640 11,417,640
Securities held-to-maturity 11,937,135 11,818,571
Federal Home Loan Bank stock 455,500 455,500
Loans receivable 61,215,842 59,984,051
Accrued interest receivable 730,419 730,419
FINANCIAL LIABILITIES:
Deposits (77,766,750) (77,734,596)
Borrowings (9,000,000) (9,000,000)
Accrued interest payable (10,402) (10,402)
OFF-BALANCE-SHEET LIABILITIES:
Commitments and letters of credit - (250,000)
</TABLE>
27
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE K - FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Bank's financial instruments at December
31, 1998, are as follows:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
------------ -------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 8,144,215 $ 8,144,215
Certificates of deposit 2,079,000 2,103,886
Securities available-for-sale 16,730,367 16,730,367
Securities held-to-maturity 9,576,986 9,578,600
Federal Home Loan Bank stock 557,900 557,900
Loans receivable 51,891,751 52,076,482
Accrued interest receivable 810,489 810,489
FINANCIAL LIABILITIES:
Deposits (79,721,653) (79,773,650)
Borrowings (6,000,000) (6,000,000)
Accrued interest payable (15,761) (15,761)
OFF-BALANCE-SHEET LIABILITIES:
Commitments and letters of credit - (200,000)
</TABLE>
NOTE L - RELATED PARTIES
The Bank has entered into transactions with its directors, significant
shareholders, and their affiliates (related parties). The aggregate amount
of deposits from such related parties at December 31, 1999 was $636,145. The
aggregate amount of loan commitments to related parties at December 31,
1999, was $1,080,757.
NOTE M - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
28
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE M - REGULATORY MATTERS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of Tangible capital to average assets (as defined in the
regulations), total and Tier I capital (as defined) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1999, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the table
below.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Tangible Capital
(to Average Assets) $5,514,000 5.96% $1,389,000 >1.5% $ - -%
Total Capital
(to Risk Weighted Assets) $6,143,000 10.74% $4,577,000 >8.0% $5,721,000 > 10.0%
Tier I Capital
(to Risk Weighted Assets) $5,488,000 9.59% $2,289,000 >4.0% $3,433,000 >6.0%
Tier I Capital
(to Average Assets) $5,488,000 5.94% $3,696,000 >4.0% $4,620,000 >5.0%
December 31, 1998:
Tangible Capital
(to Average Assets) $5,208,000 5.70% $1,376,000 >1.5% $ - -%
Total Capital
(to Risk Weighted Assets) $5,738,000 11.01% $4,171,000 >8.0% $5,214,000 >10.0%
Tier I Capital
(to Risk Weighted Assets) $5,182,000 9.94% $2,085,000 >4.0% $3,128,000 >6.0%
Tier I Capital
(to Average Assets) $5,182,000 5.70% $3,669,000 >4.0% $4,587,000 >5.0%
</TABLE>
29
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE N - EARNINGS (LOSS) PER SHARE
The Bank computes earnings per share (EPS) in accordance with SFAS No. 128,
"EARNINGS PER SHARE". SFAS No. 128 requires the presentation of basic EPS,
which does not consider the effect of common stock equivalents, and diluted
EPS, which considers all dilutive common stock equivalents. In April 1999
the Bank had a 3 for 2 stock split.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -------------
<S> <C> <C> <C>
BASIC EPS
Net earnings $503,299 482,545 $ 1.04
-------- =======
EFFECT OF DILUTIVE SECURITIES
Stock options 19,478
DILUTED EPS
Net earnings plus assumed
conversions $503,299 502,023 $ 1.00
======== ======== =======
</TABLE>
Stock options totaling 10,984 are not included in the 1999 calculation
because their effect is antidilutive.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 - Restated for Stock Split
---------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ------------
<S> <C> <C> <C>
Net earnings $ 600,610 473,216 $ 1.27
----------- ===========
EFFECT OF DILUTIVE SECURITIES
Stock options 5,061
----------
DILUTED EPS
Net earnings plus assumed
conversions $ 600,610 478,277 $ 1.26
=========== ========== ===========
</TABLE>
30
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998 and 1997
NOTE N - EARNINGS (LOSS) PER SHARE - CONTINUED
The 1998 earnings per share have been restated due to the 3 for 2 stock split
that occurred in April 1999.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 - Restated for Stock Split
---------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -------------
<S> <C> <C> <C>
Basic and Diluted EPS $(319,997) 470,192 $ (.68)
========= =========== ===========
</TABLE>
Employee stock options are not included in the 1997 calculation
because their effect is antidilutive. The 1997 earnings per share have been
restated due to the 3 for 2 stock split that occurred in April 1999.
NOTE O - CONTINGENCIES
In 1996, the Bank was named as a defendant in a lawsuit by a former
employee. In July, 1997, a settlement was reached, which resulted in
$1,098,573 in settlement and accompanying legal expenses. Management is
vigorously pursuing its Employment Practices Liability insurance carrier to
recoup some of this loss, but the possibility of that being realized is
uncertain at this time.
The Bank is involved in other litigation arising in the normal course of
business. It is not possible to estimate the Bank's ultimate liability, if
any, in these matters. In the opinion of management, the results of such
litigation will not have a material effect on the financial position or
results of operations of the Bank.
NOTE P - ACQUISITION/MERGER
During December of 1999, the Bank entered into an agreement and plan of
reorganization and merger with Western Sierra Bancorp and Western Sierra
National Bank. The Bank will be acquired by Western Sierra Bancorp and
merged into Western Sierra National Bank in a stock transaction. The
transaction is subject to shareholder and regulatory approval, and the
transaction is expected to close in May 2000.
31
<PAGE>
Item 7. Financial Statements and Exhibits
(b) Pro Forma Financial Information.
Page
----
Combined Balance Sheets as of December 31, 1999 33
Combined Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Selected Historical and Pro Forma Financial Data
The following represents unaudited pro forma combined financial information
for Western Sierra Bancorp and subsidiaries and Sentinel Community Bank and
subsidiary. This information presents selected financial information based
upon historical financial statements of both parties. These unaudited
statements present information under the pooling-of-interests accounting
method and reflect the merger occurring at the beginning of the period
indicated or on December 31, 1999. There were no material pro forma
adjustments. These statements are for illustrative purposes only and do not
indicate the results of operations, or financial position that would have
occurred if the merger had been in effect as of the dates or for the periods
indicated or that may occur in the future.
32
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma
(Dollars in thousands) Western Sentinel Consolidated
Sierra Community Adjustments Balance Sheet
-------- --------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 15,738 $ 5,262 $ 21,000
Federal funds sold 6,075 6,075
Loans held for sale 964 964
Interest-bearing deposits in banks 198 693 891
Investment securities:
Available-for-sale 44,071 11,418 55,489
Held-to-maturity 2,268 11,937 14,205
Trading securities 175 175
--------- --------- ---------
Total investments 46,514 23,355 69,869
Loans and leases:
Commercial 29,174 29,174
Real estate 126,294 53,105 179,399
Real estate construction 36,012 5,746 41,758
Lease financing 1,763 1,763
Agricultural 15,370 15,370
Consumer 5,315 2,365 7,680
--------- --------- ---------
Total loans 213,928 61,216 275,144
Deferred fees and costs, net (515) (273) (788)
Allowance for loan and lease losses (2,886) (908) (3,794)
--------- --------- ---------
Net loans 210,527 60,035 270,562
Other real estate 715 715
Bank premises and equipment, net 8,871 1,100 9,971
Accrued interest receivable and other assets 9,658 2,178 11,836
--------- --------- ---------
$ 299,260 $ 92,623 $ 391,883
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 63,865 $ 7,729 $ 71,594
Interest-bearing 201,552 70,038 271,590
--------- --------- ---------
Total deposits 265,417 77,767 343,184
Other borrowings 6,300 9,000 15,300
Accrued interest payable and other liabilities 2,038 446 2,484
--------- --------- ---------
Total liabilities 273,755 87,213 360,968
Shareholders' equity:
Common stock 15,911 2,901 18,812
Retained earnings 11,534 2,807 14,341
Unearned ESOP shares (300) (300)
Unrealized gains on available-for-sale
investment securities, net of taxes (1,640) (298) (1,938)
--------- --------- ---------
Total shareholders' equity 25,505 5,410 30,915
--------- --------- ---------
$ 299,260 $ 92,623 $ 391,883
========= ========= =========
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
------------------------------------------------------
(Dollars in thousands Western Sentinel Pro Forma
except per share amounts) Sierra Community Adjustments Consolidated
------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $17,551 $ 5,296 $22,847
Interest on deposits in banks 114 98 212
Interest on investment securities 3,023 1,483 4,506
Interest on federal funds sold 826 117 943
------- ------- -------
Total interest income 21,514 6,994 28,508
Interest expense on deposits 7,589 2,802 10,391
Interest expense on short-term borrowings 138 329 467
------- ------- -------
Total interest expense 7,727 3,131 10,858
Net interest income 13,787 3,863 17,650
Provision for loan and lease losses 540 380 920
Net interest income after provision
for loan and lease losses 13,247 3,483 16,730
Noninterest income:
Service charges and fees 1,186 437 1,623
Gain on sale of loans 1,214 1,214
Other 703 40 743
------- ------- -------
Total noninterest income 3,103 477 3,580
Other expenses:
Salaries and employee benefits 6,089 1,701 7,790
Occupancy 877 286 1,163
Equipment 1,044 194 1,238
Other 4,120 1,090 5,210
------- ------- -------
Total other expenses 12,130 3,271 15,401
Income before income taxes 4,220 689 4,909
Income taxes 1,415 186 1,601
------- ------- -------
Net income $ 2,805 $ 503 $ 3,308
======= ======= =======
Basic earnings per share $ 1.12 $ 1.04 $ 1.03
Weighted average shares of common stock 2,500,976 482,545 3,220,451(1)
Diluted earnings per share $ 1.09 $ 1.00 $ 1.00
Weighted average shares of common stock
and common stock equivalents 2,575,694 502,023 3,324,210(1)
</TABLE>
----------
(1) Weighted average shares of common stock and common stock equivalents
for the pro forma consolidated entity were determined by adding the
weighted average shares for Sentinel Community before the combination
multiplied by the conversion rate of 1.4910 to the weighted average
shares Western Sierra before the combination.
34
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
(Dollars in thousands ---------------------------------------------------------
except per share amounts) Western Sentinel Pro Forma
Sierra Community Adjustments Consolidated
------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $15,944 $ 4,563 $20,507
Interest on deposits in banks 286 312 598
Interest on investment securities 2,749 1,831 4,580
Interest on federal funds sold 1,030 138 1,168
------- ------- -------
Total interest income 20,009 6,844 26,853
Interest expense on deposits 7,870 2,813 10,683
Interest expense on short-term borrowings 1 310 311
------- ------- -------
Total interest expense 7,871 3,123 10,994
Net interest income 12,138 3,721 15,859
Provision for loan and lease losses 775 235 1,010
Net interest income after provision
for loan and lease losses 11,363 3,486 14,849
Noninterest income:
Service charges and fees 1,272 371 1,643
Gain on sale of loans 1,839 1,839
Gain on sale of investment securities 8 8
Other 641 153 794
------- ------- -------
Total noninterest income 3,760 524 4,284
Other expenses:
Salaries and employee benefits 6,423 1,613 8,036
Occupancy 812 227 1,039
Equipment 1,140 155 1,295
Other 5,128 1,058 6,186
------- ------- -------
Total other expenses 13,503 3,053 16,556
Income before income taxes 1,620 957 2,577
Income taxes 519 356 875
------- ------- -------
Net income $ 1,101 $ 601 $ 1,702
======= ======= =======
Basic earnings per share $ 0.46 $ 1.27 $ 0.55
Weighted average shares of common stock 2,368,415 473,216 3,073,980(1)
Diluted earnings per share $0.44 $1.26 $0.53
Weighted average shares of common stock
and common stock equivalents 2,491,308 478,277 3,204,419(1)
</TABLE>
----------
(1) Weighted average shares of common stock and common stock equivalents
for the pro forma consolidated entity were determined by adding the
weighted average shares for Sentinel Community before the combination
multiplied by the conversion rate of 1.4910 to the weighted average
shares Western Sierra before the combination.
35
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------------------------------
(Dollars in Thousands Western Sentinel Pro Forma
except per share amounts) Sierra Community Adjustments Consolidated
------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans and leases $15,793 $ 3,973 $19,766
Interest on deposits in banks 233 518 751
Interest on investment securities 2,103 912 3,015
Interest on federal funds sold 756 229 985
------- ------- -------
Total interest income 18,885 5,632 24,517
Interest expense on deposits 7,275 2,579 9,854
Interest expense on short-term borrowings 2 2
------- ------- -------
Total interest expense 7,277 2,579 9,856
Net interest income 11,608 3,053 14,661
Provision for loan and lease losses 1,070 173 1,243
Net interest income after provision
for loan and lease losses 10,538 2,880 13,418
Noninterest income:
Service charges and fees 1,265 252 1,517
Gain on sale of loans 1,104 1,104
Gain on sale of investment securities 8 8
Other 630 225 855
------- ------- -------
Total noninterest income 3,007 477 3,484
Other expenses:
Salaries and employee benefits 5,422 1,416 6,838
Occupancy 790 181 971
Equipment 841 130 971
Settlement and related legal expenses 1,099 1,099
Other 3,392 1,076 4,468
------- ------- -------
Total other expenses 10,445 3,902 14,347
Income (loss) before income taxes 3,100 (545) 2,555
Income taxes (benefit) 1,149 (225) 924
------- ------- -------
Net income (loss) $ 1,951 $ (320) $ 1,631
======= ======= =======
Basic earnings per share $ 0.85 $ (.68) $ 0.55
Weighted average shares of common stock 2,285,445 470,192 2,986,501(1)
Diluted earnings (loss) per share $ 0.82 $ (.68) $ 0.53
Weighted average shares of common stock
and common stock equivalents 2,389,897 470,192 3,090,953(1)
</TABLE>
------------
(1) Weighted average shares of common stock and common stock equivalents
for the pro forma consolidated entity were determined by adding the
weighted average shares for Sentinel Community before the combination
multiplied by the conversion rate of 1.4910 to the weighted average
shares Western Sierra before the combination.
36
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN SIERRA BANCORP
July 27, 2000 By: /s/ Gary D. Gall
-------------------------------
Gary D. Gall
President & Principal Executive
Officer
37
