<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
Registration Statement Under the Securities Act of 1933
WESTERN SIERRA BANCORP
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 6021 68-0390121
- ---------------------------- ------------------------- -------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
3350 COUNTRY CLUB DRIVE, SUITE 202, CAMERON PARK, CALIFORNIA 95682,
(530)677-5600
-------------------------------------------------------------------
(Address and Telephone Number of Principal Executive Offices)
3350 COUNTRY CLUB DRIVE, SUITE 202, CAMERON PARK, CALIFORNIA 95682
------------------------------------------------------------------
(Address of Principal Place of Business)
GARY D. GALL, PRESIDENT & CEO
3350 COUNTRY CLUB DRIVE, SUITE 202, CAMERON PARK, CALIFORNIA 90064,
(530) 677-5600
-------------------------------------------------------------------
(Name, Address and Telephone of Agent for Service)
Copy to:
Gary Steven Findley, Esq., Gary Steven Findley & Associates
1470 North Hundley Street, Anaheim, California 92806, (714) 630-7136
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________________________.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________________________.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================
Title of each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Price Aggregate Amount of
be Registered Registered Per Unit Offering Price Registration Fee
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock(1) 831,877(2) Not applicable Not applicable(3) $1,403.17(3)
(No Par Value)
=========================================================================================
</TABLE>
(1) This Registration Statement relates to shares of Common Stock of the
Registrant issuable to holders of common stock, $10.00 par value
("Sentinel Common Stock") of Sentinel Community Bank ("Sentinel"), a
federal savings and loan association, in the proposed merger (the
"Merger") of Sentinel into Registrant's subsidiary Western Sierra
National Bank.
(2) Based upon the estimated maximum number of shares of Registrant's
Common Stock required to be issued under the agreement providing for
the Merger. This Registration Statement also includes any additional
shares of Registrant's Common Stock which may be issued to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
(3) Pursuant to Rule 457(f)(2), the registration fee was computed on the
basis of the sum of the book value of Sentinel Common Stock at February
29, 2000 ($5,315,017).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
JOINT PROXY STATEMENT OF
WESTERN SIERRA BANCORP AND SENTINEL COMMUNITY BANK
AND PROSPECTUS OF
WESTERN SIERRA BANCORP
We are proposing to merge Sentinel Community Bank with Western Sierra Bancorp.
- - TO WESTERN SIERRA SHAREHOLDERS: The Board of Directors of Western
Sierra is asking you to vote on the merger between Western Sierra and
Sentinel Community. Western Sierra will issue shares of its common
stock to shareholders of Sentinel Community in the merger. Western
Sierra expects that it will issue a maximum of 831,877 shares of its
common stock in the merger. Western Sierra is also holding its annual
meeting of shareholders to amend its Bylaws to eliminate cumulative
voting and to elect directors. More information on these matters is
included in the joint proxy statement/prospectus.
- - TO SENTINEL COMMUNITY SHAREHOLDERS: The Board of Directors of Sentinel
Community is asking you to vote on the merger between Western Sierra
and Sentinel Community. IF THE MERGER IS COMPLETED, SENTINEL COMMUNITY
SHAREHOLDERS WHO DO NOT EXERCISE DISSENTERS' RIGHTS WILL RECEIVE FROM
WESTERN SIERRA SHARES OF WESTERN SIERRA COMMON STOCK FOR THEIR SHARES
OF SENTINEL COMMUNITY COMMON STOCK. BASED ON THE SALES PRICE OF WESTERN
SIERRA COMMON STOCK AS OF _________, 2000, YOU WOULD RECEIVE THE
EQUIVALENT OF $____ PER SHARE FOR EACH SHARE OF SENTINEL COMMUNITY
COMMON STOCK. Western Sierra common stock is traded on the NASDAQ
National Market under the symbol WSBA.
THE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
THE PRINCIPAL INVESTED. FOR A DISCUSSION OF FACTORS IMPORTANT TO THE DECISION
TO APPROVE THE MERGER, SEE "RISK FACTORS" ON PAGE __. IN ADDITION, THE SHARES
OF COMMON STOCK OFFERED ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR THE WESTERN SIERRA COMMON STOCK TO BE ISSUED IN THE
MERGER, NOR HAVE THEY DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this joint proxy statement/prospectus is ___________, 2000 and
is first being mailed to shareholders on or about ___________, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers About the Merger..............................................................1
Summary ............................................................................................2
Risk Factors.......................................................................................13
Introduction.......................................................................................17
Matters to be Considered at the Shareholders' Meetings....................................17
Record Dates..............................................................................17
Outstanding Securities and Voting Rights..................................................18
Recommendations of the Boards of Directors................................................18
Revocability of Proxies...................................................................19
Cost of Solicitation of Proxies...........................................................20
Beneficial Ownership of Principal Shareholders and Management.............................20
Description of the Merger..........................................................................25
General...................................................................................25
Background and Reasons for the Merger.....................................................25
Conversion Rate and Exchange of Shares and Options........................................29
Interests of Certain Persons in the Merger and Material Contracts with
Sentinel Community and its Affiliates............................................33
Regulatory Approval and Completion of the Merger..........................................35
Conditions to the Merger..................................................................35
Waiver, Amendment, and Termination........................................................37
Liquidated Damages........................................................................38
Federal and California Income Tax Consequences............................................43
Rights of Dissenting Shareholders of Western Sierra and Sentinel Community................45
Description of the Capital Stock of Western Sierra and Sentinel Community..........................50
Western Sierra............................................................................50
Sentinel Community........................................................................51
Western Sierra Following the Merger.......................................................51
Market Prices......................................................................................52
Western Sierra............................................................................52
Sentinel Community........................................................................52
Dividends..........................................................................................54
Western Sierra............................................................................54
Sentinel Community........................................................................54
Western Sierra Following the Merger.......................................................55
<PAGE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Financial Statements.....................................................................56
The Merger................................................................................56
Regulatory Capital Adequacy........................................................................63
Description of Western Sierra......................................................................64
Description of Sentinel Community.................................................................102
Information Concerning Western Sierra and Sentinel Community......................................136
Description of Western Sierra Following the Merger................................................141
Western Sierra Proposal 2: Amendment of Bylaws to Eliminate Cumulative Voting....................144
Western Sierra Proposal 3: Election of Directors.................................................146
Change in Accountants.............................................................................148
Experts ..........................................................................................148
Legal Matters.....................................................................................149
Other Business....................................................................................149
Index to Financial Statements.....................................................................150
</TABLE>
Exhibit I Agreement and Plan of Reorganization and Merger by and among
Western Sierra and Sentinel Community and First Amendment
Exhibit II Opinion of Hoefer & Arnett to Sentinel Community
Exhibit III Sections 1300-1312 of the California General Corporation Law
Exhibit IV Sections 552.14 of the Regulations of the Office of Thrift
Supervision
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q1. Why is Sentinel Community being acquired by Western Sierra in the
merger?
A. We believe that shareholders of Sentinel Community and Western Sierra
will benefit from the merger because the potential for the combined
company exceeds what each company could accomplish individually. We
believe the similar and complementary financial products and services
provided by Western Sierra and Sentinel Community in different markets
in Northern California will contribute to the future performance of the
combined company and provide a larger number of shareholders. We
believe that having more shareholders will increase the liquidity of
the shares of Western Sierra common stock when the merger is completed.
Q2. What am I being asked to vote on?
A. You are being asked to approve the merger between Western Sierra and
Sentinel Community. If you are a shareholder of Western Sierra, you are
also being asked to approve an amendment of Western Sierra's Bylaws to
eliminate cumulative voting and to elect directors.
Q3. What do I need to do now?
A. You need to read this joint proxy statement/prospectus, complete and
sign your proxy card and mail it to us in the enclosed return envelope
as soon as possible.
Q4. Should I send in my stock certificates now?
A. No. If you are a Sentinel Community shareholder and the merger is
completed, Western Sierra will send you written instructions for
exchanging your shares of common stock.
Q5. Will I receive any cash if the merger is completed?
A. Yes. Even though the merger will occur through a stock for stock
exchange, a small amount of cash will be paid for fractional shares of
Western Sierra common stock to be issued in the merger. In addition,
cash will be paid to shareholders of Western Sierra and Sentinel
Community who exercise dissenters' rights.
Q6. What is Western Sierra's dividend policy?
A. Western Sierra has never paid any CASH dividends and does not have any
present intention to do so in the near future. However, Western Sierra
has paid STOCK dividends in the past and does anticipate continuing to
do so in the future.
Q7. When is the merger expected to be completed?
A. We expect the merger to be completed by ________, 2000.
1
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important. To understand the merger
fully and for a more complete description of the legal terms of the merger,
you should read this entire document and the documents to which we have
referred you. See also, "Who Can Help Answer Your Questions" on page _.
THE COMPANIES (PAGES ___ AND ___)
WESTERN SIERRA BANCORP
3350 Country Club Drive, Suite 202
Cameron Park, California 95682
(530) 677-5600
Western Sierra is a bank holding company headquartered in Cameron Park,
California. Western Sierra has three subsidiary banks, Western Sierra
National Bank which serves El Dorado, Sacramento and Placer Counties,
Roseville 1st National Bank which serves Placer County, and Lake Community
Bank which serves Lakeport and its surrounding communities. Western Sierra
has filed an application to merge Roseville 1st National Bank into Western
Sierra National Bank. The completion of the Roseville 1st National Bank
merger may occur prior to the merger with Sentinel Community. At December 31,
1999, Western Sierra National Bank had assets of $143.5 million and one head
office and six branch offices, Roseville 1st National Bank had assets of
$64.9 million and one head office and one branch office, and Lake Community
Bank had assets of $88.8 million and one head office and one branch office.
SENTINEL COMMUNITY BANK
229 South Washington Street
Sonora, California 95370
(209) 533-3011
Sentinel Community is a federal savings and loan association headquartered in
Sonora, California serving Sonora and the surrounding communities. At
December 31, 1999, Sentinel Community had $92.6 million in assets and one
head office and two branch offices.
THE MERGER (PAGE __)
The merger will combine the businesses of Western Sierra and Sentinel
Community under Western Sierra. Sentinel Community will be merged with
Western Sierra's subsidiary bank, Western Sierra National Bank. Sentinel
Community will no longer exist after the merger.
Sentinel Community shareholders will, after completion of the merger, receive
from Western Sierra shares of Western Sierra common stock for their shares of
Sentinel Community common stock. The number of shares of Western Sierra common
stock to be issued for the shares of Sentinel Community common stock will be
determined before the merger. However, Sentinel Community shareholders as a
group will receive no fewer than 558,138 shares and no more than
2
<PAGE>
831,877 shares of Western Sierra common stock, except in the event the
average trading price of Western Sierra common stock falls below $12.00 per
share, in which case more shares of Western Sierra common stock may be
issued. The equivalent dollar value of Western Sierra common stock to be
issued per share of Sentinel Community common stock based on the sales price
of Western Sierra common stock of $13.125 at February 29, 2000 would be
$19.57 per share of Sentinel Community common stock. The number of shares of
Western Sierra common stock to be issued will be based on the average closing
bid and ask price of Western Sierra common stock during the twenty
consecutive trading days ending with the end of the fifth trading day
immediately prior to the date of completion of the merger.
If the merger is completed, it is expected that Sentinel Community
shareholders will own between 18% and 25% of Western Sierra.
RECOMMENDATIONS TO SHAREHOLDERS (PAGES _____)
Western Sierra's and Sentinel Community's Boards of Directors unanimously
recommend a vote "FOR" approval of the merger. Western Sierra's Board of
Directors also unanimously recommends a vote "FOR" approval of the amendment
of the Bylaws to eliminate cumulative voting and "FOR" each of the nominees
for directors.
THE MEETINGS
The Western Sierra meeting will be held at the Cameron Park Country Club, 3201
Royal Drive, Cameron Park, California, at 4:30 p.m., on Tuesday, ________, 2000.
The Sentinel Community meeting will be held in the conference room at the Humane
Society of Tuolumne County located at 10040 Victoria Way, Jamestown, California,
at 9:00 a.m., on ______, ________, 2000.
RECORD DATE, VOTING POWER AND VOTE REQUIRED (PAGE __)
On ___________, 2000, the record date for the Western Sierra meeting, there were
2,522,409 shares of Western Sierra common stock outstanding. On ___________,
2000, the record date for the Sentinel Community meeting, there were 483,529
shares of Sentinel Community common stock outstanding.
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Western Sierra common stock and two-thirds
of the outstanding shares of Sentinel Community common stock.
SENTINEL COMMUNITY'S FINANCIAL ADVISOR ISSUES OPINION THAT MERGER CONSIDERATION
IS FAIR (PAGES _____)
Hoefer & Arnett has issued a fairness opinion that states that the terms of the
agreement are fair, from a financial point of view, to the shareholders of
Sentinel Community. Sentinel Community
3
<PAGE>
paid Hoefer & Arnett a fee of $25,000 for its opinion and will pay an
additional 1.50% of the aggregate consideration to be received by Sentinel
Community in the merger.
We encourage you to read this opinion carefully.
THE BOARDS EXPECT THE MERGER TO BE TAX FREE (PAGES _____)
Perry-Smith & Co., LLP has issued an opinion as to material federal and
California state income tax consequences for the merger. The opinion states
that Sentinel Community shareholders in the merger will not recognize gain or
loss for federal and California income tax purposes as a result of the
merger, unless they receive cash for fractional shares or dissenting shares.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER (PAGES _____)
Each Sentinel Community director has entered into a director's agreement with
Western Sierra which provides that the director agrees to vote all shares of
Sentinel Community common stock as to which the director has voting power in
favor of the merger. The directors of Sentinel Community collectively own 19%
of the outstanding shares of Sentinel Community common stock.
The directors' agreements also provide that the directors will not for a
period of two years after the completion of the merger, directly or
indirectly, without the prior written consent of Western Sierra, own more
than 1% of, organize, manage, operate, finance or participate in the
ownership, management, operation or financing of, or be connected as an
officer, director, employee, principal, agent or consultant to any financial
institution whose deposits are insured by the Federal Deposit Insurance
Corporation that has its head office or a branch office within 50 miles of
the head office of Sentinel Community.
Further, Western Sierra intends to enter into an employment contract with Don
Cusey, President and Chief Executive Officer of Sentinel Community. Mr. Cusey
is expected to serve as Regional President for Western Sierra National Bank
following the merger.
REQUIREMENTS TO BE MET IN THE MERGER (PAGES _____)
There are a number of requirements which must be met before the merger is
completed. Among these requirements are the following:
- - shareholder approvals of the agreement must be obtained;
- - all necessary banking regulatory agency approvals must be obtained;
- - Perry-Smith & Co., LLP must have issued a tax opinion that the merger
will qualify as a reorganization and an opinion that the merger may be
accounted for as a pooling of interests;
4
<PAGE>
- - opinions of counsel of the parties to the merger must be issued;
- - no lawsuit or threatened lawsuit regarding the merger can be pending;
- - dissenters' shares will not exceed 10% of the outstanding shares of
Sentinel Community; and
- - the shares of Western Sierra common stock shall be listed on the NASDAQ
National Market.
MERGER TO BE ACCOUNTED FOR AS POOLING OF INTERESTS (PAGE __)
Western Sierra will account for the merger as a pooling of interests. Pooling
of interests accounting treatment avoids the creation of goodwill in the
merger and allows Western Sierra to avoid charges against future earnings
from amortizing goodwill. This accounting method also means that after the
merger, Western Sierra will report financial results as if Sentinel Community
had always been combined with Western Sierra. If Western Sierra is not able
to use pooling of interests accounting in the merger, the merger will not be
completed.
APPRAISAL RIGHTS IN THE MERGER (PAGES _____, EXHIBIT III AND EXHIBIT IV)
If you are a shareholder of Western Sierra, you may be entitled to
dissenters' rights if you dissent from the merger and other conditions are
satisfied. You may dissent by voting against, abstaining or not voting in
favor of the merger. You must also write a letter to Western Sierra
requesting the purchase of your dissenting shares and send the letter so that
it is received within 30 days of the date of mailing of a notice that will be
sent to you announcing the approval by shareholders of the merger.
Dissenters' rights will not be available to shareholders of Western Sierra
unless demands for payment for the exercise of dissenters' rights are filed
by shareholders holding an aggregate of 5% or more of the outstanding shares
of Western Sierra common stock.
If you are a shareholder of Sentinel Community, you may dissent from the
merger and demand payment in cash equal to the fair value of your shares. You
may dissent by delivering to Sentinel Community before voting on the merger a
writing stating that you intend to demand appraisal of, and payment for, your
shares of Sentinel Community common stock. Valid dissenting shares of
Sentinel Community common stock will not be converted into shares of Western
Sierra common stock.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGES _____)
The provisions of Western Sierra's Articles of Incorporation contain
provisions not included in the Articles of Incorporation of Sentinel
Community which may prevent a change in control of Western Sierra.
Specifically, Western Sierra's Articles of Incorporation have a provision
which requires an approving vote of 66 2/3% of the outstanding shares of
Western Sierra common stock for some business combinations. In addition, if
the proposed amendment of Western Sierra's Bylaws is approved, there will no
longer be cumulative voting available in the election of directors.
5
<PAGE>
WESTERN SIERRA BYLAW AMENDMENT AND ELECTION OF DIRECTORS (PAGES ___ - ___)
Western Sierra shareholders will also be asked to vote on the amendment of
Bylaws to eliminate cumulative voting and to elect directors at the Western
Sierra meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact:
IF YOU ARE A WESTERN SIERRA SHAREHOLDER:
Western Sierra Bancorp
3350 Country Club Drive, Suite 202
Cameron Park, California 95682
Attention: Gary Gall, President & CEO
Telephone No.: (530) 677-5600
IF YOU ARE A SENTINEL COMMUNITY SHAREHOLDER:
Sentinel Community Bank
229 South Washington Street
Sonora, California 95370
Attention: Donald M. Cusey, President & CEO
Telephone No.: (209) 533-3011
6
<PAGE>
ORGANIZATIONAL CHART
Companies before the merger:
<TABLE>
<CAPTION>
-------------- --------------
Western Sentinel
Sierra Community
Bancorp Bank
-------------- --------------
- ----------------------------------------------
<S> <C> <C>
- --------------- ----------- ---------------
Western Lake Roseville 1st
Sierra Community National
National Bank Bank Bank
- --------------- ----------- ---------------
</TABLE>
Companies after the merger if the merger of Roseville 1st National Bank with
Western Sierra National Bank is not completed before the merger with Sentinel
Community:
<TABLE>
<CAPTION>
--------------
Western
Sierra
Bancorp
--------------
---------------------------------------------------------------
<S> <C> <C>
-------------- -------------- ---------------
Western Lake Roseville 1st
Sierra Community National
National Bank Bank Bank
-------------- -------------- ---------------
</TABLE>
Companies after the merger if the merger of Roseville 1st National Bank with
Western Sierra National Bank is completed before the merger with Sentinel
Community:
<TABLE>
<CAPTION>
--------------
Western
Sierra
Bancorp
--------------
- -----------------------------------------
<S> <C>
- -------------- --------------
Western Lake
Sierra Community
National Bank Bank
- -------------- --------------
</TABLE>
7
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The tables on pages __ and __ summarize the historical financial results of
Western Sierra and Sentinel Community. This information is provided to show
growth and earnings trends for each institution over the last five years. The
next table summarizes the pro forma financial information shown at "Pro Forma
Financial Statements" as if the merger had taken place at the beginning of
each period presented. The pro forma financial information combines the
historical financial information shown in the first two tables to reflect
what the results might have been had the institutions merged in each of the
earlier periods presented. The pro forma financial information does not take
into consideration operational efficiencies or additional expenses that might
have occurred as a result of combining the institutions, including merger
expenses. The management of Western Sierra and the management of Sentinel
Community believe its merger expenses in the merger will be approximately
$200,000 and $670,000, respectively. In addition, this pro forma information
is not necessarily indicative of the results that would have been realized
had the merger been completed at the beginning of the periods presented.
The financial information presented includes the following sections:
- - Summary of Earnings - This section shows the significant components of
earnings.
- - Financial Position - This section shows significant assets, liabilities
and shareholders' equity.
- - Per Share Data - This section shows net income, dividends and
shareholders' equity on a per share basis.
Basic income per share reflects net income divided by the
weighted-average shares of common stock outstanding during the period.
Diluted income per share reflects the potential reduction in income per
share that could occur if stock options currently outstanding were
exercised and resulted in the issuance of stock that also shared in net
income.
Book value is determined by dividing total shareholders' equity by the
number of shares outstanding at the end of the period presented.
- - Selected Financial Ratios - This section includes ratios showing the
return on average assets and return on average shareholders' equity,
which are commonly used to evaluate the performance of companies.
This summary should be read with the Financial Statements and notes to the
Financial Statements for Western Sierra and Sentinel Community included at the
end of this joint proxy statement/prospectus.
8
<PAGE>
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR WESTERN SIERRA
(UNAUDITED)
(Dollars in thousands,
except per share numbers)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Net interest income $ 13,787 $ 12,138 $ 11,608 $ 9,955 $ 9,131
Provision for credit losses 540 775 1,070 1,024 345
Noninterest income 3,103 3,760 3,007 2,598 2,034
Noninterest expense 12,130 13,503 10,445 9,136 8,374
Net income $2,805 $ 1,101 $ 1,951 $ 1,516 $ 1,630
FINANCIAL POSITION:
Total assets $299,260 $290,628 $244,968 $204,671 $193,902
Total net loans and leases 210,527 161,343 155,526 140,084 124,809
Total deposits 265,417 263,720 221,097 183,151 172,967
Total shareholders' equity $25,505 $ 23,930 $ 21,623 $19,644 $ 16,688
PER SHARE DATA:
Net income-basic $ 1.12 $ 0.46 $ 0.85 $ 0.72 $ 0.81
Net income-diluted 1.09 0.44 0.82 0.70 0.78
Cash dividends declared 0.00 0.00 0.14 0.11 0.12
Book value per share $ 10.14 $ 10.28 $ 9.40 $ 9.16 $ 8.72
SELECTED FINANCIAL RATIOS:
Return on average assets 0.98% 0.42% 0.86% 0.77% 0.92%
Return on average shareholders' equity 12.24% 4.84% 9.56% 8.52% 10.27%
</TABLE>
9
<PAGE>
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR SENTINEL COMMUNITY
(UNAUDITED)
(Dollars in thousands,
except per share numbers)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Net interest income $ 3,863 $ 3,721 $ 3,053 $ 2,617 $ 2,502
Provision for credit losses 380 235 173 382 104
Noninterest income 477 524 477 429 801
Noninterest expense 3,271 3,053 3,902 2,817 2,299
Net income (loss) $ 503 $601 $ (320) $ (93) $ 528
FINANCIAL POSITION:
Total assets $ 92,623 $ 91,876 $ 76,771 $ 62,834 $ 57,165
Total net loans and leases 60,035 51,080 38,770 35,950 39,978
Total deposits 77,767 79,722 71,357 57,306 51,409
Total shareholders' equity $5,410 $ 5,378 $ 4,763 $ 5,083 $ 5,291
PER SHARE DATA:
Net income (loss)-basic $ 1.04 $ 1.27 $ (.68) $ (.20) $ 1.13
Net income (loss)-diluted 1.00 1.26 (.68) (.20) 1.11
Cash dividends declared .31 .28 -- .26 .23
Book value per share $ 11.19 $ 11.15 $ 10.13 $ 10.81 $ 11.27
SELECTED FINANCIAL RATIOS:
Return on average assets .53% .70% (.45%) (.15%) 1.02%
Return on average
shareholders' equity 9.43% 11.91% (6.36%) (1.79%) 10.40%
</TABLE>
10
<PAGE>
PRO FORMA FINANCIAL DATA
BASED ON THE POOLING OF INTERESTS METHOD OF ACCOUNTING
WESTERN SIERRA AND SENTINEL COMMUNITY
(UNAUDITED)
(Dollars in thousands,
except per share numbers)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Net interest income $ 17,650 $ 15,859 $ 14,661 $ 12,572 $ 11,633
Provision for credit losses 920 1,010 1,243 1,406 449
Noninterest income 3,580 4,284 3,484 3,027 2,835
Noninterest expense 15,401 16,556 14,347 11,953 10,673
Net income $3,308 $ 1,702 $ 1,631 $ 1,423 $ 2,158
FINANCIAL POSITION:
Total assets $391,883 $382,504 $321,739 $267,505 $251,067
Total net loans and leases 270,562 212,423 194,296 176,034 164,787
Total deposits 343,184 343,442 292,454 240,457 224,376
Total shareholders' equity $30,915 $29,308 $ 26,386 $ 24,727 $ 21,979
PER SHARE DATA:
Net income-basic $ 1.03 $ 0.55 $ 0.55 $ 0.51 $ 0.79
Net income-diluted $ 1.00 $ 0.53 $ 0.53 $ 0.49 $ 0.77
Cash dividends declared $ 0.05 $ 0.04 $ 0.11 $ 0.13 $ 0.13
Book value per share $ 9.55 $ 9.62 $ 8.79 $ 8.71 $ 8.03
SELECTED FINANCIAL RATIOS:
Return on average assets .87% .49% .55% .55% .94%
Return on average
shareholders' equity 11.71% 6.13% 6.41% 6.20% 10.33%
</TABLE>
11
<PAGE>
MARKET PRICES OF WESTERN SIERRA COMMON STOCK AND SENTINEL COMMUNITY COMMON STOCK
Western Sierra common stock is listed on the NASDAQ National Market under the
symbol WSBA. The following tables show the average of the last reported bid
and asked price per share for Western Sierra common stock and Sentinel
Community common stock on December 24, 1999, the trading day prior to the
public announcement of the merger and equivalent pro forma market value per
share for Sentinel Community common stock. The equivalent pro forma market
value per share of Sentinel Community common stock is calculated by
multiplying the last reported sales price per share of Western Sierra common
stock by the conversion rate of 1.4910. THE ACTUAL CONVERSION RATE MAY BE
HIGHER OR LOWER THAN THAT SET FORTH ABOVE. See also, "Description of the
Merger--Conversion Rate and Exchange of Shares and Options."
<TABLE>
<CAPTION>
Historical Equivalent Pro Forma
Market Value Per Share Market Value
------------------------------------------- --------------------
Sentinel Community Western Sierra Sentinel Community
-------------------- ---------------- --------------------
<S> <C> <C> <C>
December 24, 1999 $16.00 $12.50 $18.64
</TABLE>
12
<PAGE>
RISK FACTORS
MERGER-RELATED RISK FACTORS
DIFFICULTIES OF INTEGRATING THE COMPANIES COULD HURT WESTERN SIERRA'S FUTURE
PERFORMANCE. The earnings, financial condition and prospects of Western
Sierra after the merger depend in large part on Western Sierra's ability to
successfully integrate the operations and management of Sentinel Community
with Western Sierra National Bank. We cannot guarantee that Western Sierra
will be able to effectively and profitably integrate the operations and
management of Sentinel Community and Western Sierra National Bank. In
addition, we cannot guarantee that Western Sierra will be able to realize any
revenue improvement or cost savings as a result of the merger. Furthermore,
any cost savings which are realized could be offset by losses in revenues or
other charges to earnings. In addition, existing customers may not be
retained by the combined company or additional expenses could be incurred in
retaining them. Failure to successfully integrate the operations of the
company acquired could materially adversely affect future results of
operations of Western Sierra following the merger.
ADVERSE PERFORMANCE OF COMBINED LOAN PORTFOLIOS COULD HURT WESTERN SIERRA'S
FUTURE PERFORMANCE. Western Sierra's performance and prospects after the
merger are largely dependent on the performance of the combined loan
portfolios of Sentinel Community and Western Sierra National Bank, and
ultimately on the financial condition of their respective borrowers and other
customers. The existing loan portfolios of Sentinel Community and Western
Sierra National Bank differ to some extent in the types of borrowers,
industries and credits represented. In addition, there are differences in the
documentation, classifications, credit ratings and management of the
portfolios. Failure of Western Sierra's management to effectively manage the
combined loan portfolio could have a material adverse effect on the business,
financial condition and results of operations of Western Sierra after the
merger. For information about Western Sierra's loan portfolio, see
"Description of Western Sierra--Western Sierra's Management's Discussion and
Analysis of Financial Condition and Results of Operations--Loan Portfolio."
For information about Sentinel Community's loan portfolio, see "Description
of Sentinel Community--Sentinel Community's Management's Discussion and
Analysis of Financial Condition and Results of Operations--Loan Portfolio."
LOSS OF DEPOSITS AFTER THE MERGER COULD HURT WESTERN SIERRA'S FUTURE
PERFORMANCE. The amount of deposits at any of Sentinel Community's branch
offices could decrease between the date of this joint proxy
statement/prospectus and the date the merger is completed, or at any time
after the merger. If the amount of the deposits declines before or after the
merger, Western Sierra's return on equity may be reduced because the amount
of leverage on Western Sierra's capital will be less than currently
anticipated by Western Sierra's management. Although Western Sierra
anticipates that as a result of the merger, some of Sentinel Community's
depositors will choose to move their deposits elsewhere, achievement of the
anticipated benefits of the merger is dependent upon a substantial portion of
the deposits remaining with Western Sierra after the merger. The market for
financial services is extremely competitive and we cannot guarantee that
Sentinel Community's current deposit customers will remain depositors of
Western Sierra National Bank after the merger. See "Risk Factors--Risk
Factors Related to Companies' Business and Operations--Financial Services
Business is Highly Competitive."
13
<PAGE>
ASSUMPTION OF SENTINEL COMMUNITY'S LEGAL LIABILITY AFTER MERGER COULD HURT
WESTERN SIERRA'S FUTURE PERFORMANCE. Sentinel Community is a named defendant
in at least two lawsuits. Sentinel Community has yet to be served in one
lawsuit; and in the other lawsuit, Sentinel Community's insurance carrier
believes that it may not be obligated to provide insurance coverage to
Sentinel Community. Assuming completion of the merger, Western Sierra will be
required to defend these lawsuits and will be responsible for expenses and
losses, if any, as a result of these lawsuits. See "Description of Sentinel
Community--Legal Proceedings."
RISKS RELATED TO COMPANIES' BUSINESS AND OPERATIONS
DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT PROFITABILITY OF BANKS.
The operations of Western Sierra and Sentinel Community are primarily located
in Northern California and are concentrated along the Highway 50 and
Interstate 80 corridors in the eastern Sacramento region, the Lake County
area and Tuolumne County. As a result of this geographic concentration,
Western Sierra's and Sentinel Community's results depend largely upon
economic conditions in these areas. Adverse local economic conditions in the
eastern Sacramento region, Lake County and/or Tuolumne County areas may have
a material adverse effect on the financial condition and results of
operations of Western Sierra and Sentinel Community.
FINANCIAL SERVICES BUSINESS IS HIGHLY COMPETITIVE WHICH COULD ADVERSELY
AFFECT THE BANKS' EARNINGS AND PROFITABILITY AND STOCK PRICE OF WESTERN
SIERRA. The banking and financial services business in California generally,
and Western Sierra's and Sentinel Community's market areas specifically, is
highly competitive. Western Sierra and Sentinel Community compete for loans,
deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services
than Western Sierra and Sentinel Community. There can be no assurance that
Western Sierra or Sentinel Community will be able to compete effectively in
their respective markets, and the results of operations of Western Sierra and
Sentinel Community could be materially and adversely affected if
circumstances affecting the nature or level of competition change. See
"Information Concerning Western Sierra and Sentinel Community--Competition."
LOAN AND LEASE LOSSES COULD HURT BANKS' OPERATING RESULTS. A significant
source of risk for financial institutions like Western Sierra and Sentinel
Community arises from the possibility that losses will be sustained because
borrowers, guarantors and related parties fail to perform in accordance with
the terms of their loans. Western Sierra and Sentinel Community have adopted
underwriting and credit monitoring procedures and credit policies, including
the establishment and review of the allowance for credit losses, that each
company's respective management believes are appropriate to minimize this
risk by assessing the likelihood of nonperformance, tracking loan performance
and diversifying the respective credit portfolios. These policies and
procedures, however, may not prevent unexpected losses which could materially
adversely affect the respective companies' results of operations. For
information about Western Sierra's loan loss experience, see "Description of
Western Sierra--Western Sierra's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Summary of Loan Loss
Experience."
14
<PAGE>
For information about Sentinel Community's loan loss experience, see
"Description of Sentinel Community--Sentinel Community's Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Summary of Loan Loss Experience."
DETERIORATION OF REAL ESTATE MARKET COULD HURT BANKS' PERFORMANCE. At
December 31, 1999, approximately 81% of Western Sierra's and Sentinel
Community's combined loans were secured by real estate. The ability of
Western Sierra to continue to originate real estate secured loans may be
impaired by adverse changes in local and regional economic conditions in the
real estate market, by increasing interest rates, or by acts of nature,
including earthquakes and flooding, either of which may cause uninsured
damage and other loss of value to real estate that secures Western Sierra's
and Sentinel Community's loans. Due to the concentration of real estate
collateral, these events could have a material adverse impact on the value of
the collateral in which case Western Sierra or Sentinel Community may not
recover adequate value from liquidation of collateral to cover the carrying
value of the loans. For information about Western Sierra's real estate loans,
see "Description of Western Sierra--Western Sierra's Management's Discussion
and Analysis of Financial Condition and Results of Operations--Distribution
of Loans" and "--Real Estate Loans." For information about Sentinel
Community's real estate loans, see "Description of Sentinel
Community--Sentinel Community's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Distribution of Loans" and
"--Real Estate Loans."
INTEREST RATE FLUCTUATIONS COULD HURT OPERATING RESULTS. The income of
Western Sierra and Sentinel Community depends to a great extent on "interest
rate differentials" and the resulting net interest margins, that is, the
difference between the interest rates earned on their respective
interest-earning assets such as loans and investment securities, and the
interest rates paid on their respective interest-bearing liabilities such as
deposits and borrowings. These rates are highly sensitive to many factors
which are beyond their control, including general economic conditions and the
policies of various governmental and regulatory agencies, in particular, the
Federal Reserve. Generally, both Western Sierra and Sentinel Community are
adversely affected by declining interest rates. In addition, changes in
monetary policy, including changes in interest rates, influence the
origination of loans, the purchase of investments and the generation of
deposits and affect the rates received on loans and investment securities and
paid on deposits, which could have a material adverse effect on Western
Sierra's business, financial condition and results of operations. For a
discussion of Western Sierra's interest rate sensitivity, see "Description of
Western Sierra--Western Sierra's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Regulatory
Matters--Quantitative and Qualitative Disclosures About Market Risk." For a
discussion of Sentinel Community's interest rate sensitivity, see
"Description of Sentinel Community--Sentinel Community's Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory Matters--Quantitative and Qualitative Disclosures
About Market Risk."
GOVERNMENT REGULATION AND LEGISLATION COULD HURT BUSINESS AND PROSPECTS OF
BANKS. Western Sierra and Sentinel Community are subject to extensive state
and federal regulation, supervision and legislation which govern almost all
aspects of their respective operations. Their businesses are particularly
susceptible to being affected by the enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business,
15
<PAGE>
modifying permissible activities or enhancing the competitive position of
other financial institutions. These laws are subject to change from time to
time and are primarily intended for the protection of consumers, depositors
and the deposit insurance funds and not for the protection of shareholders of
Western Sierra or Sentinel Community. Western Sierra cannot predict what
effect any presently contemplated or future changes in the laws or
regulations or their interpretations would have on its business and
prospects, but it could be material and adverse. For information about
supervision and regulation of banks, bank holding companies and legislation,
see "Information Concerning Western Sierra and Sentinel Community."
LOSS OF KEY EMPLOYEES COULD HURT PERFORMANCE OF WESTERN SIERRA NATIONAL BANK.
Western Sierra and Sentinel Community are dependent upon the continued
services of their respective key employees. The loss of the services of any
such employee, or the failure of Western Sierra to attract and retain other
qualified personnel, could have a material adverse effect on Western Sierra's
business, financial condition and results of operations. For information
about Western Sierra's key employees, see "Description of Western
Sierra--Management." For information about Sentinel Community's key
employees, see "Description of Sentinel Community--Management."
ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL LENDING COULD RESULT IN
LOSSES. In the course of business, Western Sierra and Sentinel Community have
each acquired, and may in the future acquire, through foreclosure, properties
securing loans they have originated or purchased which are in default. In
commercial real estate lending, there is a risk that hazardous substances
could be discovered on these properties after acquisition by Western Sierra
or Sentinel Community, as the case may be. In this event, Western Sierra or
Sentinel Community, as the case may be, might be required to remove these
substances from the affected properties at its sole cost and expense. The
cost of this removal could substantially exceed the value of affected
properties. Western Sierra or Sentinel Community, as the case may be, may not
have adequate remedies against the prior owner or other responsible parties
or could find it difficult or impossible to sell the affected properties, the
occurrence of any of which could have a material adverse effect on Western
Sierra's business, financial condition and operating results.
THE BANKS RELY HEAVILY ON TECHNOLOGY AND COMPUTER SYSTEMS AND COMPUTER
FAILURE COULD RESULT IN LOSS OF BUSINESS AND ADVERSELY AFFECT THE STOCK PRICE
OF WESTERN SIERRA. Advances and changes in technology can significantly
impact the business and operations of Western Sierra and Sentinel Community.
Western Sierra and Sentinel Community face many challenges including the
increased demand for providing computer access to bank accounts and the
systems to perform banking transactions electronically. Western Sierra's and
Sentinel Community's ability to compete depends on its ability to continue to
adapt their respective technology on a timely and cost-effective basis to
meet these demands. In addition, their respective businesses and operations
are susceptible to negative impacts from computer system failures,
communication and energy disruption and unethical individuals with the
technological ability to cause disruptions or failures of their respective
data processing systems.
16
<PAGE>
INTRODUCTION
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, INCLUDING STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "EXPECTS," "CONSIDERS" AND WORDS OF SIMILAR IMPORT.
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS OF WESTERN SIERRA OR SENTINEL
COMMUNITY OR THE MERGER TO BE MATERIALLY DIFFERENT FROM THE FUTURE RESULTS
EXPRESSED OR IMPLIED BY FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE,
AMONG OTHERS, THE FACTORS DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" ON
PAGE __ OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
SHAREHOLDERS SHOULD NOT RELY HEAVILY ON THE FORWARD-LOOKING STATEMENTS.
WESTERN SIERRA AND SENTINEL COMMUNITY DO NOT HAVE A DUTY TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY CHANGES
TO ANY OF THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
We are sending you this joint proxy statement/prospectus for the solicitation
of proxies by the Boards of Directors of Western Sierra and Sentinel
Community for use at their respective meetings of shareholders for the
purpose of considering and voting upon the matters set forth in their
respective notices of meeting.
The information contained in this joint proxy statement/prospectus concerning
Western Sierra has been furnished by Western Sierra and is its
responsibility. The information contained in this joint proxy
statement/prospectus concerning Sentinel Community has been furnished by
Sentinel Community and is its responsibility.
The mailing of this joint proxy statement/prospectus commenced on or about
___________, 2000.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETINGS
The Western Sierra meeting has been called so its shareholders can vote upon
the agreement, vote upon the amendment of the Bylaws to eliminate cumulative
voting and elect directors. The Sentinel Community meeting has been called so
its shareholders can vote upon the agreement. The merger will be accomplished
by the merger of Sentinel Community with Western Sierra National Bank, a
subsidiary of Western Sierra. After the merger, Sentinel Community will cease
to exist.
RECORD DATES
WESTERN SIERRA. The close of business on ___________, 2000, has been fixed as
the Western Sierra record date for the determination of Western Sierra
shareholders entitled to notice of, and to vote at, the Western Sierra
meeting.
SENTINEL COMMUNITY. The close of business on ___________, 2000, has been
fixed as the Sentinel Community record date for the determination of Sentinel
Community shareholders entitled to notice of, and to vote at, the Sentinel
Community meeting.
17
<PAGE>
OUTSTANDING SECURITIES AND VOTING RIGHTS
WESTERN SIERRA. There were 2,522,409 shares of Western Sierra common stock
outstanding as of the Western Sierra record date held by approximately 1,293
record holders. Each holder of Western Sierra common stock can cast one vote
for each share of Western Sierra common stock held as of the Western Sierra
record date on any matter presented for a vote of the shareholders at the
Western Sierra meeting. In addition, if Proposal 2 regarding the amendment of
the Bylaws of Western Sierra to eliminate cumulative voting is not approved,
then cumulative voting will be allowed in the election of directors under
Proposal 3. Cumulative voting allows a shareholder to cast a number of votes
equal to the number of shares held in his or her name as of the record date,
multiplied by the number of directors to be elected. These votes may be cast
for any one nominee, or may be distributed among as many nominees as the
shareholder sees fit. If Proposal 2 is not approved, then, in connection with
the election of directors, shares may be voted cumulatively if a shareholder
present at the Western Sierra meeting gives notice at the Western Sierra
meeting, prior to the voting for election of directors, of his or her
intention to vote cumulatively. If any shareholder of Western Sierra gives
this notice, then all shareholders eligible to vote will be entitled to
cumulate their shares in voting for election of directors.
Approval of the merger and approval of the amendment of Western Sierra's
Bylaws to eliminate cumulative voting requires the affirmative vote of the
holders of a majority of the outstanding shares of Western Sierra common
stock. The fifteen nominees for directors receiving the most votes will be
elected as directors.
The effect of broker nonvotes is that these votes are not counted as being
voted; however these votes are counted for purposes of determining a quorum.
The effect of a vote of abstention on any matter is that the vote is not
counted as a vote for or against the matter, but is counted as an abstention.
SENTINEL COMMUNITY. There were 483,529 shares of Sentinel Community common
stock outstanding as of the Sentinel Community record date held by
approximately 360 record holders. Each holder of Sentinel Community common
stock can cast one vote for each share of Sentinel Community common stock
held as of the Sentinel Community record date on any matter presented for a
vote of the shareholders at the Sentinel Community meeting.
Approval of the merger requires the affirmative vote of the two-thirds of the
outstanding shares of Sentinel Community common stock.
The effect of broker nonvotes is that these votes are not counted as being
voted; however these votes are counted for purposes of determining a quorum.
The effect of a vote of abstention on any matter is that the vote is not
counted as a vote for or against the matter, but is counted as an abstention.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Boards of Directors of Western Sierra and Sentinel Community have each
unanimously voted in favor of the proposals relating to the merger, and the
individual members of Sentinel
18
<PAGE>
Community's Board of Directors have indicated that they will vote all shares
of Sentinel Community common stock as to which they have voting power "FOR"
approval of the agreement. Both the Boards of Directors of Western Sierra and
Sentinel Community recommend that their respective shareholders also vote
"FOR" approval of the agreement. See "Introduction--Beneficial Ownership of
Principal Shareholders and Management."
As of the Western Sierra record date, the directors and executive officers of
Western Sierra held approximately 25% of the outstanding shares of Western
Sierra common stock entitled to vote at the Western Sierra meeting. Each of
these directors and executive officers has indicated that they intend to vote
"FOR" approval of the agreement.
As of the Sentinel Community record date, the directors and executive
officers of Sentinel Community held approximately 19% of the outstanding
shares of Sentinel Community common stock entitled to vote at the Sentinel
Community meeting and Sentinel Community directors holding approximately 19%
of the outstanding shares have entered into director's agreements providing
that they will each vote "FOR" approval of the agreement. As a result,
holders of an additional 48% of the outstanding shares of Sentinel Community
common stock are needed to approve the agreement. See "Description of the
Merger--Interests of Certain Persons in the Merger and Material Contracts
with Sentinel Community and its Affiliates."
REVOCABILITY OF PROXIES
A proxy for use at the Western Sierra meeting or the Sentinel Community
meeting, as the case may be, is enclosed. A shareholder executing and
returning a proxy may revoke it at any time before the vote is taken by
filing with the Secretary of Western Sierra or the Secretary of Sentinel
Community, as the case may be, an instrument revoking it or a duly executed
proxy bearing a later date. In addition, the powers of the proxyholders will
be suspended if the person executing the proxy is present at the Western
Sierra meeting or the Sentinel Community meeting, as the case may be, and
elects to vote in person by advising the chairman of the Western Sierra
meeting or the Sentinel Community meeting, as the case may be, of his or her
election to vote in person, and voting in person at the Western Sierra
meeting or the Sentinel Community meeting, as the case may be. Subject to
revocation or suspension, all shares represented by a properly executed proxy
received in time for the Western Sierra meeting or the Sentinel Community
meeting, as the case may be, will be voted by the proxyholders in accordance
with the instructions specified on the proxy. If no directions are given to
the contrary on the proxy, the shares of Western Sierra common stock
represented by the proxy will be voted at the Western Sierra meeting "FOR"
approval of the agreement, "FOR" approval of the amendment of Bylaws to
eliminate cumulative voting and "FOR" the election of each of the nominees
for directors. If no directions are given to the contrary on the proxy, the
shares of Sentinel Community represented by the proxy will be voted at the
Sentinel Community meeting "FOR" approval of the agreement. It is not
anticipated that any matters will be presented at the Western Sierra meeting
or the Sentinel Community meeting other than as set forth in the respective
notices of the meetings. If, however, other matters are properly presented at
any of the meetings, the proxy will be voted in accordance with the best
judgment and discretion of the proxyholders.
19
<PAGE>
COST OF SOLICITATION OF PROXIES
Western Sierra and Sentinel Community shall each pay its own expenses of
preparing, assembling, printing and mailing this joint proxy
statement/prospectus and the material used in this solicitation of proxies.
It is contemplated that proxies will be solicited through the mail, but
officers, directors and regular employees of Western Sierra and Sentinel
Community may solicit proxies for their respective meetings personally.
Although there is no formal agreement to do so, Western Sierra and Sentinel
Community may reimburse banks, brokerage houses and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding these
proxy materials to their principals. In addition, Western Sierra and Sentinel
Community may pay for and utilize the services of individuals or companies
not regularly employed by any of them in the solicitation of Proxies for
their respective meetings if the Board of Directors of Western Sierra or
Sentinel Community determines that this is advisable.
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 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.
20
<PAGE>
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)
- ---------------- --------------------------- -----------
<S> <C> <C>
Directors and Named Executive Officers:
- ---------------------------------------
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.
(Footnotes continued on the following page.)
21
<PAGE>
(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.
(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.
As of March 15, 2000, no director or executive officer of Western Sierra owned
any shares of Sentinel Community common stock.
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<PAGE>
SENTINEL COMMUNITY PRINCIPAL SHAREHOLDERS. Sentinel Community's Board of
Directors knows of no person who owns beneficially more than 5% of the
outstanding shares of Sentinel Community common stock as of March 15, 2000
except for the persons in the following table:
<TABLE>
<CAPTION>
Sentinel Community
Common Stock
Beneficially Owned
-------------------------
Relationship Number of Percent
Name and Address(1) with Sentinel Community Shares of Class
- ----------------------- ------------------------- ----------- -----------
<S> <C> <C> <C>
Alan J. Kleinert Chairman 25,240 5.2
Joe Martin Director 25,985 5.3
Paul von Savoye Director 25,008 5.1
- -------------------
</TABLE>
(1) Messrs. Kleinert's, Martin's and Savoye's addresses are c/o Sentinel
Community Bank, 229 South Washington Street, Sonora, California 95370.
SENTINEL COMMUNITY MANAGEMENT. The following table shows as of March 15, 2000,
the number of shares of Sentinel Community common stock beneficially owned by
each director and named executive officer and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Sentinel Community
Common Stock Percent
Beneficial Owner Beneficially Owned of Class(1)
- ---------------- ------------------- -----------
<S> <C> <C>
Directors and Named Executive Officers:
- ---------------------------------------
James D. Costello 1,886(2) *
Donald M. Cusey 23,731(3) 4.7
Kim C. Daters 6,569(4) 1.3
Gary P. Dambacher 1,700(5) *
Lary A. Davis 10,893(6) 2.2
Robert Johnson 19,742(7) 4.0
Alan J. Kleinert 25,240(8) 5.2
Joe Martin 25,985(9) 5.3
Paul von Savoye 25,008(10) 5.1
All Directors and Executive Officers
as a Group (13 in all) 145,543(11) 27.1
</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.
(Footnotes continued on the following page.)
23
<PAGE>
(2) Includes 200 shares acquirable upon the exercise of stock options.
(3) Includes 19,983 shares acquirable upon the exercise of stock options.
(4) Includes 4,892 shares acquirable upon the exercise of stock options.
(5) Includes 200 shares acquirable upon the exercise of stock options.
(6) Includes 4,892 shares acquirable upon the exercise of stock options.
(7) Includes 4,892 shares acquirable upon the exercise of stock options.
(8) Includes 4,892 shares acquirable upon the exercise of stock options.
(9) Includes 4,892 shares acquirable upon the exercise of stock options.
(10) Includes 4,892 shares acquirable upon the exercise of stock options.
(11) Includes 52,606 shares acquirable upon the exercise of stock options.
As of March 15, 2000, no director or principal officer of Sentinel Community
owned any shares of Western Sierra common stock.
PRINCIPAL SHAREHOLDERS OF WESTERN SIERRA FOLLOWING THE MERGER. The Boards of
Directors of Western Sierra and Sentinel Community anticipate that if the merger
is completed, no one will own beneficially more than 5% of Western Sierra common
stock. See "Description of the Merger--Conversion Rate and Exchange of Shares
and Options."
24
<PAGE>
DESCRIPTION OF THE MERGER
GENERAL
This section of the joint proxy statement/prospectus contains information
furnished by the Boards of Directors of Western Sierra and Sentinel Community in
their respective solicitations of proxies for the Western Sierra meeting and the
Sentinel Community meeting to approve the agreement. The agreement sets out the
terms of the merger of Sentinel Community with Western Sierra National Bank, a
wholly-owned subsidiary of Western Sierra.
The Boards of Directors of Western Sierra and Sentinel Community are asking
their respective shareholders to vote upon the agreement. Under the terms of the
agreement, Sentinel Community will be merged with and into Western Sierra
National Bank and Western Sierra National Bank shall be the surviving financial
institution of the merger. Upon completion of the merger, each share of Sentinel
Community common stock, other than shares held by shareholders who exercise and
perfect dissenters' rights, shall be converted into the right to receive from
Western Sierra the number of shares of Western Sierra common stock equal to the
conversion rate. See "Description of the Merger--Conversion Rate and Exchange of
Shares and Options." As a result of the merger, Sentinel Community will cease to
exist.
A copy of the agreement is attached to this joint proxy statement/prospectus as
Exhibit I and is included in this joint proxy statement/prospectus.
BACKGROUND AND REASONS FOR THE MERGER
WESTERN SIERRA'S ANALYSIS. During the past two years, Western Sierra has been
expanding its services to the businesses and residents of El Dorado, Sacramento,
Lake and Placer Counties through its banking operations. During March 1999,
Western Sierra had preliminary discussions with Sentinel Community regarding a
potential merger of the two institutions. After consideration, Western Sierra's
Board of Directors and Senior Management determined that the merger of Sentinel
Community with and into Western Sierra National Bank provided an opportunity for
Western Sierra to serve the Tuolumne County market area through the acquisition
of a bank with offices in Sonora and Twain Harte. In addition, Western Sierra's
Board of Directors believes the merger will help Western Sierra to achieve
increased benefits through asset diversification; will provide an opportunity to
increase the number of outstanding shares and liquidity of Western Sierra common
stock; and is expected to be accretive to the shareholders of Western Sierra.
Western Sierra's Board of Directors believes that having more shareholders and
more outstanding shares of Western Sierra common stock will increase the
liquidity of the shares of Western Sierra common stock owned by Western Sierra
and Sentinel Community shareholders after the merger is completed. In addition,
management of Western Sierra estimated that the merger would be accretive to the
shareholders based upon an estimated increase in earnings per share of eight
percent per year, based upon historical experience of Western Sierra and
Sentinel Community and potential cost savings resulting from the consolidation
of data processing, reduction in professional fees and reduction in personnel
costs and other noninterest expense. This estimate was based on an internal
analysis prepared by
25
<PAGE>
Western Sierra's management and the actual results may vary significantly for
numerous reasons, including the factors set forth in "Risk Factors" at page
__.
After discussions between Western Sierra and Sentinel Community, the parties
executed a Confidentiality Agreement dated May 7, 1999. On December 27, 1999,
Western Sierra and Sentinel Community entered into the agreement. Under the
terms of the agreement, Sentinel Community will be merged with and into Western
Sierra National Bank, a subsidiary of Western Sierra.
The Board of Directors of Western Sierra believes the merger to be in the best
interests of Western Sierra, its shareholders and banking customers. The Board
of Directors of Western Sierra expects Western Sierra, following the merger, to
be stronger in terms of capital, management, growth opportunities and
profitability than is either corporation at present.
Western Sierra has been profitable and has shown strong asset growth over the
past several years. Following the merger, Sentinel Community will have the
advantage of the consolidation and centralization of certain management
functions and certain resulting economies of scale. Management of Western Sierra
estimated that the costs savings as a result of the merger would be
approximately 30% of Sentinel Community's noninterest expense based upon
reduction in personnel costs, consolidation of data processing and reduction in
professional fees and other noninterest expense which are normal for bank merger
transactions. This estimate was based on an internal analysis prepared by
Western Sierra's management and the actual results may vary significantly for
numerous reasons, including the factors set forth in "Risk Factors" at page __.
Furthermore, it is believed that the merger will result in a bank which will be
a strong and viable independent financial institution better able to compete
with the major banks in the areas now served by Sentinel Community.
SENTINEL COMMUNITY'S ANALYSIS. During the past three years, Sentinel Community
has been slowly changing its business focus toward becoming more like a
community bank. During this same period, Sentinel Community was able to realize
rapid growth, both in deposits and in loans. Because of this rapid growth, and
because of commercial lending restrictions due to its savings and loan charter,
Sentinel Community's Board of Directors faced the challenges of trying to
convert its charter to a state or national bank charter, while at the same time
raising capital to support additional growth. Both of these challenges were
viewed as expensive and time consuming.
Further, early in 1999, the Financial Accounting Standards Board announced its
intention to eliminate the pooling of interests method of accounting for
business combinations. Based on information gathered by Sentinel Community
Directors and management, Sentinel Community believed that its value would
decline after this favorable accounting treatment disappears, which was
anticipated to occur by December 31, 2000.
Based upon the above, Sentinel Community engaged the services of the investment
banking firm of Hoefer & Arnett, to determine if there were any interested
financial institutions with which Sentinel Community could merge and which would
be compatible with Sentinel Community's history of being committed to the
communities it serves. Hoefer & Arnett approached several
26
<PAGE>
different financial institutions on Sentinel Community's behalf. Sentinel
Community had preliminary discussions with three community financial
institutions, including Western Sierra, regarding a potential merger of
Sentinel Community. Only one of these financial institutions proposed a
serious stock offer besides Western Sierra. Sentinel Community received a
letter of intent from one of the two other financial institutions which was
subsequently withdrawn. During October, 1999, extensive negotiations
commenced with Western Sierra. During the course of negotiations, the Board
of Directors consulted with respective senior management and its financial
advisor, as well as its legal counsel. A continuing consideration was a stock
structure that would result in a tax-free stock exchange for Sentinel
Community shareholders. The agreement was signed by both parties on December
27, 1999, calling for the currently agreed upon pricing and stock exchange
ratios.
Over the course of these negotiations and discussions, Sentinel Community's
Board of Directors and senior management determined that the merger might
provide the following opportunities:
- Expansion of Sentinel Community's lending limits in Tuolumne
County, from its current amount of approximately $925,000, to
a proposed amount of approximately $3 million;
- Improved earnings through consolidation of certain back office
functions, such as accounting, computer processing, personnel
and stock transactions;
- Further diversity of Sentinel Community's asset base,
especially in the areas of commercial deposits and loans;
- Increased stability of capital, through acquisition of a
larger shareholder balance and base;
- Favorable acquisition price and increased liquidity for
Sentinel Community shareholders; and
- Retention, to the greatest degree possible, of local staff and
possibly the Sentinel Community name.
The Sentinel Community Board of Directors also considered the potential problems
of management compatibility, the complexity of the data processing conversion,
the integrating of a loan portfolio primarily based on real estate and the
ability to effectively combine the operations of Sentinel Community and Western
Sierra National Bank. Meetings between Sentinel Community's and Western Sierra
National Bank's management teams and Boards of Directors brought out the
similarity of banking and customer attention philosophies which the two entities
share.
27
<PAGE>
At the Board of Directors' meeting approving the merger, Sentinel Community's
financial advisor orally presented its analysis. The following material factors
were considered at the meeting:
- The economic conditions and prospects for the markets in which
Sentinel Community operates, and competitive pressures in the
financial services industry in general and the banking
industry in particular;
- The enhancement of Sentinel Community's competitiveness and
Sentinel Community's ability to serve its customers,
depositors, creditors, other constituents and the communities
in which Sentinel Community operates as a result of a business
combination with a national bank such as Western Sierra
National Bank;
- Information concerning the business, results of operations,
asset quality and financial condition of Sentinel Community on
a stand-alone basis and on a combined basis with Western
Sierra National Bank, and the future growth prospects
following the merger;
- The cost savings in operations which the management of
Sentinel Community believes may be achieved as a result of the
merger;
- An assessment that, in the current economic environment, a tax
free exchange common stock acquisition is most economically
advantageous to Sentinel Community's shareholders when
compared to other alternatives, such as dilution of
shareholder value through additional capital raising, or a
conversion to a national bank charter;
- The terms and conditions of the merger agreement and related
agreements;
- The potential downside of the merger. These were principally
the challenges of merging two distinctively different entities
into one well-managed institution and related credit risk if a
severe economic downturn were to occur in the near future; and
- Sentinel Community's financial advisor's analysis of the
financial condition, results of operations, business,
prospects and stock prices and comparison of Sentinel
Community and Western Sierra compared to other California
banks and bank holding companies operating in Northern
California.
Sentinel Community's Board of Directors and management believe that the issuance
of shares of Western Sierra stock in exchange for all of the shares of Sentinel
Community common stock will increase the liquidity of the shares held by
Sentinel Community's shareholders. Sentinel Community's Board of Directors and
management also believe the merger will be beneficial to shareholders because of
the potential cost savings resulting from the consolidation of data processing,
reduction of professional fees and reduction in personnel costs and other
noninterest expense.
28
<PAGE>
The above discussion of the factors considered by the Sentinel Community Board
of Directors is not intended to be exhaustive. In view of the variety and nature
of the factors considered, the Sentinel Community Board of Directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
CONVERSION RATE AND EXCHANGE OF SHARES AND OPTIONS
CONVERSION RATE. Each share of Sentinel Community common stock which is
outstanding immediately prior to the merger, other than shares to which its
holders have exercised and perfected dissenters' rights, will automatically be
canceled and will be converted into the right to receive from Western Sierra the
number of shares of Western Sierra common stock equal to the conversion rate.
The Boards of Directors of Western Sierra and Sentinel Community determined the
formula for calculating the conversion rate in an arms length negotiation.
Specifically, the conversion rate shall mean the result of a fraction
- the numerator of which is equal to the per share merger price;
and
- the denominator of which is equal to the average closing bid
and ask price for a share of Western Sierra common stock as
reported on the NASDAQ National Market during the twenty
consecutive trading days ending on the fifth trading day
immediately before the merger. However, for purposes of the
calculation, the denominator shall not be less than $13.8710
or more than $17.9167 unless the average closing bid and ask
price for a share of Western Sierra common stock is less than
$12 and Western Sierra determines in its sole discretion to
continue with the merger, then the lower average closing bid
and ask price will be used.
However, in the event that Western Sierra announces the acquisition of a
majority interest in Western Sierra common stock by means of a merger with a
party other than Sentinel Community prior to the completion of the merger, the
denominator shall be not less than $15.6364.
The per share merger price is equal to the total of $20.6819 less the amount, if
any, of the quotient of the adjustment to Sentinel Community's shareholders'
equity divided by 514,943.
The adjustment to Sentinel Community's shareholders' equity account will be the
amount by which its shareholders' equity as of the last business day of the
calendar month immediately before the month in which the merger takes place is
less than $5,600,000. However, the $5,600,000 amount provides for an adjustment
up to a maximum of
- $100,000 for legal and accounting fees in the merger,
- $368,000 for termination of the FISERV agreement,
- $75,000 for investment banking fees,
29
<PAGE>
- $235,000 for unrealized losses on securities available for
sale, and
- adjustments made to the loan loss reserves or other reserves
requested by Western Sierra National Bank under the terms of
the agreement.
The $5,600,000 in shareholders' equity requirement also excludes any payment
received by Sentinel Community for the purchase of shares of Sentinel Community
common stock upon the exercise of any outstanding Sentinel Community stock
option between March 17, 2000 and the date of completion of the merger.
The calculation of aggregate merger price shall be performed by Western Sierra's
accountants, Perry-Smith & Co., LLP and agreed to by Sentinel Community's
accountants, Moss Adams LLP.
For purposes of illustration only, assuming
- - February 29, 2000 is used as the date for calculating the conversion
rate;
- - the average bid and ask price of Western Sierra common stock is
$13.125, therefore, the amount of $13.8710 is used; and
- - the adjusted Sentinel Community shareholders' equity is $5,600,000 or
more;
then the conversion rate would be 1.4910. Therefore, if the assumptions used in
arriving at this sample conversion rate were to remain unchanged until the
completion of the merger, each share of Sentinel Community common stock would be
converted into 1.4910 shares of Western Sierra common stock. Assuming the
holders of all of the outstanding shares of Sentinel Community common stock
convert their shares into shares of Western Sierra common stock at the
conversion rate of 1.4910, there would be approximately 3,243,351 shares of
Western Sierra common stock outstanding immediately following completion of the
merger, made up of 2,522,409 shares of Western Sierra common stock outstanding
prior to the merger and approximately 720,942 shares of Western Sierra common
stock to be issued in the merger. If any of the above assumptions used in
arriving at this pro forma conversion rate were to change prior to completion of
the merger, the conversion rate would most likely be different.
30
<PAGE>
The following table shows the conversion rate based upon the average closing bid
and ask price of Western Sierra common stock in increments of $0.25 and the
adjusted Sentinel Community shareholders' equity at a high of $5.6 million and
reducing in $.2 million increments, ending at a low of $5.0 million.
<TABLE>
<CAPTION>
Sentinel Community
Western Sierra Adjusted Shareholders' Equity
Average Bid -----------------------------------------------------------------
and Ask Price $5.6 Million $5.4 Million $5.2 Million $5.0 Million
- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$10.00 2.0682 2.0294 1.9905 1.9517
$10.25 2.0178 1.9799 1.9420 1.9041
$10.50 1.9697 1.9327 1.8957 1.8587
$10.75 1.9239 1.8878 1.8516 1.8155
$11.00 1.8802 1.8449 1.8096 1.7743
$11.25 1.8384 1.8039 1.7693 1.7348
$11.50 1.7984 1.7647 1.7309 1.6971
$11.75 1.7602 1.7271 1.6941 1.6610
$12.00 1.4910 1.4630 1.4350 1.4070
$12.25 1.4910 1.4630 1.4350 1.4070
$12.50 1.4910 1.4630 1.4350 1.4070
$12.75 1.4910 1.4630 1.4350 1.4070
$13.00 1.4910 1.4630 1.4350 1.4070
$13.25 1.4910 1.4630 1.4350 1.4070
$13.50 1.4910 1.4630 1.4350 1.4070
$13.75 1.4910 1.4630 1.4350 1.4070
$14.00 1.4773 1.4495 1.4218 1.3941
$14.25 1.4514 1.4241 1.3969 1.3696
$14.50 1.4263 1.3996 1.3728 1.3460
$14.75 1.4022 1.3758 1.3495 1.3232
$15.00 1.3788 1.3529 1.3270 1.3011
$15.25 1.3562 1.3307 1.3053 1.2798
$15.50 1.3343 1.3093 1.2842 1.2591
$15.75 1.3131 1.2885 1.2638 1.2392
$16.00 1.2926 1.2683 1.2441 1.2198
$16.25 1.2727 1.2488 1.2249 1.2010
$16.50 1.2535 1.2299 1.2064 1.1828
$16.75 1.2347 1.2116 1.1884 1.1652
$17.00 1.2166 1.1937 1.1709 1.1480
$17.25 1.1990 1.1764 1.1539 1.1314
$17.50 1.1818 1.1596 1.1374 1.1152
$17.75 1.1652 1.1433 1.1214 1.0995
$18.00 or more 1.1543 1.1327 1.1110 1.0893
</TABLE>
31
<PAGE>
THE ACTUAL CONVERSION RATE MAY BE HIGHER OR LOWER THAN SET FORTH ABOVE.
No fractional shares of Western Sierra common stock will be issued in the
merger. Instead, shareholders of Sentinel Community will receive an amount in
cash equal to the product, rounded to the nearest hundredth, obtained by
multiplying
- - the closing price of Western Sierra common stock as of the last trading
day prior to the completion of the merger by
- - the fraction of a share of Western Sierra common stock to which the
holder would be entitled if fractional shares were issued.
EXCHANGE PROCEDURE. Each holder of a certificate representing shares of Sentinel
Community common stock shall surrender the certificate, duly endorsed as Western
Sierra may require, to American Securities Transfer and Trust which will act as
the exchange agent. Each holder shall then receive from Western Sierra in
exchange for the certificate:
- - a certificate representing the number of whole shares of Western Sierra
common stock to which the holder shall have become entitled based upon
the conversion rate, and
- - a check for any fractional share.
When a Sentinel Community shareholder surrenders his or her certificates for
shares of Sentinel Community common stock, along with the letter of transmittal
which will be sent to each of the Sentinel Community shareholders, the exchange
agent shall, promptly after the completion of the merger, deliver to that
shareholder certificates for shares of Western Sierra common stock and a check
for payment of fractional shares.
Until the Sentinel Community shareholder surrenders his or her certificates,
each outstanding certificate for shares of Sentinel Community common stock shall
be deemed to represent the number of shares of Western Sierra common stock into
which the number of shares of Sentinel Community common stock will be converted.
No dividends or other distributions which are declared on Western Sierra common
stock will be paid to a Sentinel Community shareholder until the shareholder
surrenders his or her certificates to the exchange agent. However, when the
certificate is surrendered, all dividends or other distributions, from and after
the completion of the merger, will be paid to that shareholder. No shareholder
will be entitled to receive any interest on the dividends or other
distributions.
No shareholder will be liable for any transfer taxes unless a certificate for
Western Sierra common stock is to be issued in a name other than the
shareholder's. If a Sentinel Community shareholder requests that a certificate
for shares of Western Sierra common stock be issued in a different name, that
shareholder must properly endorse his or her certificate for shares of Sentinel
Community common stock and pay to either Western Sierra or the exchange agent
any transfer taxes owed for that transfer or for any prior transfer or establish
to the satisfaction of Western Sierra or the exchange agent that the taxes have
been paid or are not payable.
32
<PAGE>
If any shareholder of Sentinel Community common stock is unable to surrender his
or her certificates for shares of Sentinel Community common stock because the
certificates have been lost or destroyed, that shareholder may instead deliver
an affidavit and indemnity undertaking and, if required, with surety, which is
satisfactory to the exchange agent and Western Sierra.
EXCHANGE OF OUTSTANDING STOCK OPTIONS FOR SHARES OF SENTINEL COMMUNITY COMMON
STOCK. All outstanding rights to acquire Sentinel Community common stock under
existing stock options for shares of Sentinel Community common stock will be
substituted for stock options to acquire shares of Western Sierra common stock
at the conversion rate with an appropriate adjustment in the option price.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
AND MATERIAL CONTRACTS WITH SENTINEL COMMUNITY AND ITS AFFILIATES
In considering the recommendations of the Boards of Directors of Western Sierra
and Sentinel Community for approval of the merger, the shareholders of Western
Sierra and Sentinel Community should be aware that certain members of the Boards
of Directors of Western Sierra and Sentinel Community may have a substantial
interest in the merger as described below.
Upon completion of the merger,
- - one director of Sentinel Community shall be appointed as a director of
both Western Sierra and Western Sierra National Bank,
- - one director of Sentinel Community shall be appointed as a director of
Western Sierra, and
- - one director of Sentinel Community shall be appointed as a director of
Western Sierra National Bank.
The Sentinel Community directors to be appointed to Western Sierra's and Western
Sierra National Bank's boards shall be determined by Western Sierra and Sentinel
Community. In addition, one of the two directors of Sentinel Community who is
appointed to the Board of Directors of Western Sierra shall also be appointed to
Western Sierra's executive committee.
At the time of the merger, there will be 17 members of the Board of Directors of
Western Sierra, consisting of the then existing 15 members of the current Board
of Directors of Western Sierra, and two new members from the Board of Directors
of Sentinel Community. At the time of the merger, there shall also be 13 members
of the Board of Directors of Western Sierra National Bank, consisting of the
then existing 11 members of the current Board of Directors of Western Sierra
National Bank, and two new members from the Board of Directors of Sentinel
Community.
Western Sierra has also agreed to use its best efforts to appoint the two new
Sentinel Community directors to the Board of Directors of Western Sierra
National Bank on an annual basis and to nominate the two new Sentinel Community
directors to the Board of Directors of Western Sierra at its annual meeting of
shareholders. It is presently anticipated that Alan J. "Pete" Kleinert and
33
<PAGE>
Lary Davis will be appointed as directors of Western Sierra, and that Alan J.
"Pete" Kleinert and Kim C. Daters will be appointed as directors of Western
Sierra National Bank.
In addition, each director of Sentinel Community has entered into a director's
agreement with Western Sierra which provides that the director agrees:
- - to recommend that the shareholders of Sentinel Community approve the
agreement, and to advise Sentinel Community's shareholders to reject
any subsequent proposal or offer received by Sentinel Community
relating to any purchase, sale, acquisition, merger or other form of
business combination involving Sentinel Community or any of its assets,
equity securities or debt securities and to proceed with the merger
with Western Sierra, unless the director of Sentinel Community has been
advised by outside legal counsel that he should not take that action;
- - not to take any action that will alter or affect in any way the right
to vote the shares of Sentinel Community common stock, except with the
prior written consent of Western Sierra or to change the right from
that of a shared right of the director to vote the shares of Sentinel
Community common stock to a sole right of the director to vote the
shares of Sentinel Community common stock; and
- - to vote all shares of Sentinel Community common stock which the
director has power to vote in favor of the merger.
The director's agreements also provide that the directors shall not for a period
of two years after the completion of the merger, directly or indirectly, without
the prior written consent of Western Sierra, own more than 1% of, organize,
manage, operate, finance or participate in the ownership, management, operation
or financing of, or be connected as an officer, director, employee, principal,
agent or consultant to any financial institution whose deposits are insured by
the FDIC that has its head office or a branch office within 50 miles of the head
office of Sentinel Community.
Gary D. Gall, who is currently the President and Chief Executive Officer of
Western Sierra and Western Sierra National Bank, Richard C. Seeba, who is
currently the Executive Vice President of Western Sierra and the President and
Chief Executive Officer Roseville 1st National Bank, Kirk Dowdell, who is
currently the Executive Vice President and Chief Credit Officer of Western
Sierra and Western Sierra National Bank, Lesa Fynes, who is currently the Senior
Vice President and Chief Financial Officer of Western Sierra, Western Sierra
National Bank and Roseville 1st National Bank, Thomas C. Warren, who is
currently the Senior Vice President and Manager of Information Systems of
Western Sierra, and Douglas A. Nordell, who is currently the President and Chief
Executive Officer of Lake Community Bank, are expected to serve in those same
positions with the companies following the merger. In addition, Donald M. Cusey,
who is currently the President and Chief Executive Officer of Sentinel
Community, is expected to serve as the Regional President of Western Sierra
National Bank following the merger. In addition, the Board of Directors of
Western Sierra will appoint from time to time such other officers of Western
Sierra and the subsidiary banks as may be necessary. It is anticipated that most
other present officers and employees of Western Sierra and Sentinel Community
will initially continue
34
<PAGE>
in the same or similar capacities with Western Sierra and Western Sierra
National Bank at the same or comparable compensation levels. For information
regarding Western Sierra's employee benefit plans see the descriptions of
Western Sierra's employee benefit plans below in "Description of Western
Sierra--Management--Compensation of Directors and Executive Officers."
REGULATORY APPROVAL AND COMPLETION OF THE MERGER
The merger was approved by the Office of the Comptroller of the Currency on
March 8, 2000 and by letter dated February 23, 2000, the Office of Thrift
Supervision advised the parties that it did not object to the merger. THE
APPROVAL OF THE MERGER BY THE OFFICE OF THE COMPTROLLER OF THE CURRENCY AND THE
NONOBJECTION TO THE MERGER BY THE OFFICE OF THRIFT SUPERVISION IS NOT A
RECOMMENDATION OR ENDORSEMENT OF THE MERGER BY EITHER OF THEM. The merger is
anticipated to take place on a day which shall not be later than 30 days after:
- - the receipt of the last required regulatory approval and expiration of
all applicable waiting periods, and
- - satisfaction of the conditions precedent to the obligations of each of
Western Sierra and Sentinel Community or the written waiver of the
conditions by Western Sierra or Sentinel Community, as applicable.
Western Sierra National Bank will submit a request to the Office of the
Comptroller of the Currency for the effective time of the merger. The merger
will be deemed completed at the time specified in the certificate issued by the
Office of the Comptroller of the Currency approving the merger. It is presently
anticipated that the merger will be completed during the second quarter of this
year.
CONDITIONS TO THE MERGER
The agreement provides that the completion of the merger is subject to various
conditions which must be satisfied before the completion of the merger,
including the following:
- - The agreement and the merger shall have been approved by the vote of
the holders of a majority of the outstanding stock of Western Sierra
and two-thirds of the outstanding stock of Sentinel Community,
respectively;
- - All approvals or permits required to be obtained, and all waiting
periods required to expire, for the merger shall have been obtained or
expired, without the imposition of any materially burdensome condition
on any party to the merger as determined by the party affected;
- - There shall not be any action taken, or any law, regulation or order
enacted, enforced or deemed applicable to the merger, by any government
entity which:
- makes the completion of the merger illegal;
35
<PAGE>
- requires the divestiture by Western Sierra of any material
asset or of a material portion of the business of Western
Sierra; or
- imposes any condition upon Western Sierra or its subsidiaries
which in the judgment of Western Sierra would be materially
burdensome;
- - Western Sierra's Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness
of the Registration Statement shall have been issued and shall remain
in effect. No action or proceeding shall have been instituted to
restrain or prohibit the transactions contemplated in the agreement;
- - Western Sierra and Sentinel Community shall have received a
determination from Perry-Smith & Co., LLP that the merger will qualify
for the pooling of interests accounting method;
- - The representations and warranties of each of Western Sierra and
Sentinel Community set forth in the agreement shall be true in all
material respects as of the date of completion of the merger; each of
Western Sierra and Sentinel Community shall have duly performed and
complied in all material respects with all agreements required by the
agreement, except where the failure to so perform and comply would not
have or would not be reasonably likely to have a material adverse
effect on Western Sierra, Sentinel Community or Western Sierra
National Bank as the surviving corporation of the merger; and none of
the events or conditions entitling either party to terminate the
agreement shall have occurred and be continuing;
- - Western Sierra and Sentinel Community shall have received certificates
of officers of the other party stating that the representations and
warranties as set forth in the agreement are true and correct, and
opinions of counsel for the other party;
- - No action, suit or proceeding shall have been instituted or threatened
before any court or governmental body seeking to challenge or restrain
the transactions contemplated by the agreement which presents a
substantial risk that the transactions will be restrained or that
either Western Sierra or Sentinel Community may suffer material
damages;
- - The holders of no more than 10% of the outstanding shares of Sentinel
Community common stock have exercised dissenters' rights. Dissenters of
Western Sierra shall be included in the calculation;
- - There shall not have been any change in the consolidated financial
condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of Western Sierra and its
subsidiaries, taken as a whole, from December 31, 1998 to the date of
completion of the merger that results in a material adverse effect as
to Western Sierra and its subsidiaries, taken as a whole;
- - No event or circumstance shall have occurred which has had or could
reasonably be expected to have a material adverse effect on Sentinel
Community; and
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- - Sentinel Community shall have received a written opinion from Hoefer &
Arnett confirming the fairness of the terms of the merger to Sentinel
Community and its shareholders from a financial perspective, and this
opinion shall not have been withdrawn prior to the date of completion
of the merger.
On March 8, 2000, the Office of the Comptroller of the Currency approved the
merger subject to approval of the shareholders of Western Sierra National Bank
and Sentinel Community, and by letter dated February 23, 2000, the Office of
Thrift Supervision advised the parties that it did not object to the merger. In
addition, on March 17, 2000, Hoefer & Arnett rendered its written opinion to
Sentinel Community's Board of Directors that the merger consideration to be
received in the merger is fair, from a financial point of view, to the
shareholders of Sentinel Community.
WAIVER, AMENDMENT, AND TERMINATION
Any term or provision of the agreement, other than regulatory approval or any of
the provisions required by law, may be waived in writing at any time by the
party which is, or whose shareholders are, entitled to the benefits of the term
or provision.
The agreement provides that it may be terminated prior to the completion of the
merger:
- - By mutual consent of the Boards of Directors of Western Sierra and
Sentinel Community;
- - By Western Sierra or Sentinel Community upon the failure to satisfy any
conditions specified in the agreement if the failure is not caused by
any action or inaction of the party requesting termination;
- - By Western Sierra or Sentinel Community if an acquisition event, as
defined below, involving the other party shall have occurred;
- - By either Western Sierra or Sentinel Community if there shall have been
a material breach of any of the representations or warranties of the
other party, which breach, in the reasonable opinion of the terminating
party, by its nature cannot be cured or is not cured prior to the
closing and which breach would, in the reasonable opinion of the
terminating party, individually or in the aggregate, have, or be
reasonably likely to have, a material adverse effect on the breaching
party, or upon the completion of the merger;
- - By Western Sierra or Sentinel Community after the occurrence of a
default by the other party and the continuance of the default for a
period of 20 business days after written notice of the default, if the
default, in the reasonable opinion of the terminating party, cannot be
cured prior to the completion of the merger;
- - By Western Sierra or Sentinel Community if the updated schedules to the
agreement prepared and delivered by the other party disclose the
occurrence of an event or the existence of any facts or circumstances,
not previously disclosed, that has had or could reasonably be expected
to have a material adverse effect on the other party, or on the
completion of the merger; or
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- - By Western Sierra or Sentinel Community upon the failure of any
of the conditions specified in the agreement to have been satisfied
prior to June 30, 2000.
An "acquisition event" is defined as an authorization, recommendation, public
proposal or public announcement of an intention or entering into a letter of
intent or an agreement for a merger or sale of assets of either Sentinel
Community or Western Sierra or the sale of at least 15 percent of the shares of
either Sentinel Community or Western Sierra.
LIQUIDATED DAMAGES
If an acquisition event occurs involving Sentinel Community, then Sentinel
Community shall pay to Western Sierra the sum of Five Hundred Thousand Dollars
($500,000) in cash. If an acquisition event occurs involving Western Sierra,
then Western Sierra shall pay to Sentinel Community the sum of Five Hundred
Thousand Dollars ($500,000) in cash.
If the agreement is terminated by Sentinel Community as a result of the
revocation of the Sentinel Community fairness opinion; or a termination of the
agreement by Western Sierra because
- - Sentinel Community's shareholders do not approve the agreement, or
- - of a breach of Sentinel Community's representations or warranties, a
default by Sentinel Community, or disclosure in the updated schedules
to the agreement of a material adverse event,
then, Sentinel Community shall pay to Western Sierra the sum of Two Hundred
Thousand Dollars ($200,000), in cash. However, if Sentinel Community enters into
an acquisition agreement within one hundred eighty (180) days following
termination by Western Sierra, Sentinel Community shall pay to Western Sierra an
additional Three Hundred Thousand Dollars ($300,000) in cash.
If the agreement is terminated by Western Sierra because:
- - Western Sierra's shareholders do not approve the agreement, or
- - of a breach of Western Sierra's representations and warranties, a
default by Western Sierra, or disclosure in the updated schedules to
the agreement of a material adverse event,
then, Western Sierra shall pay to Sentinel Community the sum of Two Hundred
Thousand Dollars ($200,000), in cash.
OPINION OF SENTINEL COMMUNITY'S FINANCIAL ADVISOR
GENERAL. On November 24, 1999, Sentinel Community engaged Hoefer & Arnett to act
as its exclusive financial advisor in connection with the merger. Hoefer &
Arnett agreed to assist Sentinel Community in analyzing, structuring,
negotiating, and effecting a transaction with
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Western Sierra. Sentinel Community selected Hoefer & Arnett because Hoefer &
Arnett is a nationally recognized investment-banking firm with substantial
experience in transactions similar to the merger and is familiar with
Sentinel Community and its business. As part of its investment banking
business, Hoefer & Arnett is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions.
As part of its engagement, representatives of Hoefer & Arnett attended the
meeting of the Sentinel Community Board held on December 23, 1999 during which
the Board considered and approved the agreement. At the December 23, 1999
meeting, Hoefer & Arnett rendered an oral opinion (subsequently confirmed in
writing) that, as of that date, the merger consideration was fair to Sentinel
Community and its shareholders from a financial point of view. That opinion was
reconfirmed in writing as of the date of this joint proxy statement/prospectus.
The full text of Hoefer & Arnett's updated written opinion is attached as
Exhibit II to this joint proxy statement/prospectus and is incorporated herein
by reference. You are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken by Hoefer & Arnett.
Hoefer & Arnett's opinion is directed to the Sentinel Community's Board of
Directors and addresses only the merger consideration. It does not address the
underlying business decision to proceed with the merger and does not constitute
a recommendation to you as to how you should vote at the Sentinel Community
meeting with respect to the merger or any matter related thereto.
In rendering its opinion, Hoefer & Arnett:
- - Reviewed, among other things:
-- the agreement;
-- Annual Reports to Shareholders of Sentinel Community and
Western Sierra;
-- Consolidated Reports of Sentinel Community filed with
regulatory agencies;
-- Quarterly Reports on Form 10-Q of Western Sierra; and
-- certain internal financial data for Sentinel Community and
Western Sierra prepared by their respective managements.
- - Held discussions with members of senior management of Sentinel
Community and Western Sierra regarding:
-- past and current business operations;
-- regulatory relationships;
-- financial condition; and
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-- future prospects of the respective companies.
- - Compared certain financial and stock market information for Sentinel
Community and Western Sierra with similar information for certain other
companies with publicly traded securities;
- - Reviewed the financial terms of certain recent business combinations in
the banking industry; and
- - Performed other studies and analyses that it considered appropriate.
The projections furnished to Hoefer & Arnett and used by it in certain of its
analyses were prepared by the senior management of Sentinel Community. Sentinel
Community does not publicly disclose internal management projections of the type
provided to Hoefer & Arnett in connection with its review of the merger. As a
result, such projections were not prepared with a view towards public
disclosure. The projections were based on numerous variables and assumptions
which are inherently uncertain, including factors related to general economic
and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in the projections.
The following is a summary of the material analyses performed that Hoefer &
Arnett presented to the Sentinel Community Board on December 23, 1999 in
connection with its December 23, 1999 oral opinion:
SUMMARY OF PROPOSAL. Hoefer & Arnett calculated the merger consideration to be
paid pursuant to the conversion rate as a multiple of Sentinel Community's
trailing twelve months earnings per share, book value per share, tangible book
value per share, and one month prior stock price. This computation assumed
Sentinel Community's trailing twelve months earnings per share of $1.01, book
value per share of $11.12, tangible book value per share of $10.85, one month
prior stock price of $16.00 and a proposed conversion rate of 1.49100 for each
Sentinel Community share. Based on those assumptions, this analysis indicated
that Sentinel Community shareholders would receive shares of Western Sierra
common stock worth $19.38 for each share of Sentinel Community common stock
held.
DISCOUNTED DIVIDEND ANALYSIS. Hoefer & Arnett estimated the present value of
future cash flows that would accrue to a holder of a share of Sentinel Community
common stock assuming that the shareholder held the stock of five years and then
sold it. The analysis was based on balance sheet and earnings forecasts prepared
by management on a stand-alone, independent basis beginning October 1999 and
ending in December 2003. Annual dividend cash flows were assumed for Sentinel
Community based on a minimum required tangible common equity to tangible assets
ratio of 8.0%. Sentinel Community's value at the end of 2003 was determined by
using terminal price to earnings multiples from 11.0 times to 13.0 times. The
terminal value and the dividends received were discounted at a rate of 12.5% and
15.0%. These rates were selected because, in Hoefer & Arnett's experience, it
represents the risk-adjusted rates of return that investors in securities such
as the Sentinel Community common stock would require. On the
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basis of these assumptions, Hoefer & Arnett calculated a range of present
values ranging from $6.72 to $9.44. These values were compared to the $19.38
offer from Western Sierra.
SELECTED TRANSACTIONS ANALYSIS. Hoefer & Arnett reviewed certain financial data
related to comparable nationwide thrift transactions from January 1, 1999 to
December 23, 1999 with announced transaction values less than $50.0 million,
return on average assets equal to or less than 1.0%, and equity to assets ratio
less than 10.0%.
Hoefer & Arnett compared multiple of price to various factors for the Sentinel
Community/Western Sierra merger to the same multiples for this comparable
group's mergers at the time those mergers were announced. The results were as
follows:
Multiple of Price to Factor
<TABLE>
<CAPTION>
Comparable Comparable Sentinel Community/
Group Group Western Sierra
Factor Considered Low Median Merger
-------------------- ------------ ---------- -------------------
<S> <C> <C> <C>
Trailing Twelve
Months Earnings 12.9x 22.0x 19.6x
Book Value 1.5x 1.9x 1.8x
Tangible Book Value 1.5x 1.9x 1.8x
One Month Prior
Market Price Premium 28.6% 36.4% 24.0%
</TABLE>
No company or transaction used as a comparison in the above analysis is
identical to Sentinel Community, Western Sierra or the merger. Accordingly, an
analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
CONTRIBUTION ANALYSIS. Hoefer & Arnett reviewed the relative contribution of
each Sentinel Community and Western Sierra to certain pro forma balance sheet
and income statement items of the combined entity. The contribution analysis
showed:
<TABLE>
<S> <C>
Sentinel Community Contribution To:
Combined Shareholders' Equity 17.7%
Combined 1999 Estimated Net Income without Cost Savings 18.0%
Combined Total Assets 23.1%
Sentinel Community Estimated Pro Forma Ownership 23.2%
</TABLE>
Hoefer & Arnett compared the relative contribution of the balance sheet and
income statement items with the estimated pro forma ownership for Sentinel
Community shareholders based on a conversion rate of 1.49100.
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SELECTED PEER GROUP ANALYSIS. Hoefer & Arnett compared the financial performance
and market performance of Western Sierra to those of a group of comparable banks
and bank holding companies. The comparisons were based on:
- - various financial measures, including:
- earnings performance;
- operating efficiency;
- capital adequacy; and
- asset quality.
- - various measures of market performance, including;
- market to book values and
- price to earnings.
To perform this analysis, Hoefer & Arnett used the financial information as of
and for the nine months and quarter ended September 30, 1999 and market price
information as of December 16, 1999. The companies in the peer group were
California regional banks that had total assets ranging from $150.0 million to
$600.0 million.
Hoefer & Arnett's analysis showed the following concerning Western Sierra's
financial performance:
<TABLE>
<CAPTION>
Western Group
Performance Measure Sierra Averages
- ------------------- ------ --------
<S> <C> <C>
Most Recent Quarter Return on Equity, annualized 1.02% 1.38%
Most Recent Quarter Return on Assets, annualized 12.29% 15.4%
Net Interest Margin, year to date 5.40% 5.65%
Efficiency Ratio, year to date 71.1% 60.3%
Equity to Assets 8.1% 9.0%
Nonperforming Assets and Past Due
Loans to Total Assets 0.65% 0.51%
Loan Loss Reserve to Nonperforming
Assets and Past Due Loans 138.0% 301.7%
Price to Trailing Twelve Months Earnings 9.7x 16.7x
Price to Book Value Multiples 1.12x 2.18x
</TABLE>
OTHER ANALYSES: Hoefer & Arnett reviewed the relative financial and market
performance of Sentinel Community and Western Sierra to a variety of relevant
industry peer groups and indices. Hoefer & Arnett also reviewed earnings
estimates, balance sheet composition, historical stock performance and other
financial data for Western Sierra.
In connection with its opinion dated as of the date of this joint proxy
statement/prospectus, Hoefer & Arnett performed procedures to update, as
necessary, certain of the analyses described above. Hoefer & Arnett reviewed the
assumptions on which the analyses described above were
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based and the factors considered in connection therewith. Hoefer & Arnett did
not perform any analysis in addition to those described above in updating its
December 23, 1999 oral opinion.
Hoefer & Arnett has not independently verified the information described above
and for purposes of this opinion has assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the joint proxy
statement/prospectus, Hoefer & Arnett has assumed that such information reflects
the best currently available estimates and judgments of the management of
Sentinel Community and Western Sierra, respectively, as to the likely future
financial performance of Sentinel Community and Western Sierra. Hoefer & Arnett
also assumed, without independent verification, that the aggregate allowances
for loan losses for Sentinel Community and Western Sierra are adequate to cover
those losses. Hoefer & Arnett did not make or obtain any evaluations or
appraisals of the property of Sentinel Community or Western Sierra, and Hoefer &
Arnett did not examine any individual credit files.
The Sentinel Community Board of Directors has retained Hoefer & Arnett as an
independent contractor to act as financial advisor to Sentinel Community
regarding the merger. As part of its investment banking business, Hoefer &
Arnett is continually engaged in the valuation of banking businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. Hoefer & Arnett has experience in, and knowledge of, the
valuation of banking enterprises. In the ordinary course of its business as a
broker-dealer, Hoefer & Arnett may, from time to time, purchase securities from,
and sell securities to, Sentinel Community and Western Sierra. As a market maker
in securities Hoefer & Arnett may from time to time have a long or short
position in, and buy or sell, debt or equity securities of Sentinel Community
and Western Sierra for Hoefer & Arnett's own account and for the accounts of its
customers.
Sentinel Community and Hoefer & Arnett have entered into an agreement relating
to the services to be provided by Hoefer & Arnett in connection with the merger.
Sentinel Community has agreed to pay Hoefer & Arnett, at the time of closing, a
cash fee equal to 1.50% of the market value of the aggregate consideration
offered in exchange for the outstanding shares of common stock of Sentinel
Community in the merger. Pursuant to the Hoefer & Arnett engagement agreement,
Sentinel Community also agreed to reimburse Hoefer & Arnett for reasonable
out-of-pocket expenses and disbursements incurred in connection with its
retention and to indemnify Hoefer & Arnett against certain liabilities,
including liabilities under the federal securities laws.
FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES
The following is a description of all material federal and California income tax
consequences of the merger. This following is not a complete description of all
tax consequences of the merger. Each shareholder's individual circumstances may
affect the tax consequences of the merger to him or her. In addition, the
following description does not address the tax consequences of the merger under
applicable state or local laws, other than California law. CONSEQUENTLY, EACH
SENTINEL COMMUNITY SHAREHOLDER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER.
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An opinion of Perry-Smith & Co., LLP, independent accountants for Western
Sierra, has been delivered to Western Sierra which states that for federal and
related California income tax purposes, under current law, assuming that the
merger and related transactions will take place as described in the agreement,
the merger will constitute a reorganization under Section 368 of the Code.
Assuming the opinion is not withdrawn or changed due to changes in laws, or
otherwise, prior to the date of the merger, material federal and related
California income tax consequences of the merger, in the opinion of Perry-Smith
& Co., LLP, will be as follows:
- - No gain or loss will be recognized by Sentinel Community or Western
Sierra in the merger;
- - The basis and holding periods of the assets of Sentinel Community will
carry over to Western Sierra;
- - No gain or loss will be recognized by the holders of Sentinel Community
common stock upon their receipt of Western Sierra common stock upon
conversion of their Sentinel Community common stock;
- - The receipt of cash in lieu of fractional share interests of Western
Sierra common stock by holders of Sentinel Community common stock will
result in gain or loss equal to the difference between the payment and
the tax basis allocated to their fractional share interests. Whether
the gain or loss will constitute capital gain or loss for a particular
shareholder will depend upon whether that shareholder's Sentinel
Community common stock is held as a capital asset at the date of the
merger;
- - The receipt of cash upon exercise of dissenters rights by holders of
Western Sierra common stock or Sentinel Community common stock will
result in gain or loss equal to the difference between the payment and
the tax basis of their shares. Whether the gain or loss shall
constitute capital gain or loss for a particular shareholder will
depend upon whether that shareholder's Western Sierra common stock or
Sentinel Community common stock is held as a capital asset at the date
of the merger, and whether the requirements of Section 302(b) of the
Code are met in the shareholder's exchange;
- - The tax basis of Western Sierra common stock received by the holders of
Sentinel Community common stock will be the same as the tax basis of
the Sentinel Community common stock converted in the merger; and
- - The holding period of Western Sierra common stock in the hands of the
shareholders of Sentinel Community will include the period during which
the Sentinel Community common stock converted in the merger was held,
provided the Sentinel Community common stock was held as a capital
asset on the date of the merger.
In developing its opinion, Perry-Smith & Co., LLP relied upon facts and
representations provided to it by Western Sierra's management and Sentinel
Community's management and made no independent determination of the facts and
representations. The representations that Western Sierra's management and
Sentinel Community's management made were factual in nature. In addition,
Perry-Smith & Co., LLP's opinion was based upon the analysis of the current
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Code, the California and Revenue Taxation Code, the Regulations under the tax
codes, current case law and published rulings. The foregoing are subject to
change, and any change may be retroactively effective. If so, Perry-Smith & Co.,
LLP's opinion may be affected and may not be relied upon. Perry-Smith & Co., LLP
assumes no responsibility to update its opinion after the date of the merger
because of such change. Further any variation or differences in the facts or
representations, for any reason, may affect Perry-Smith & Co., LLP's opinion,
perhaps in an adverse manner, and make it inapplicable.
RIGHTS OF DISSENTING SHAREHOLDERS OF WESTERN SIERRA AND SENTINEL COMMUNITY
WESTERN SIERRA. Shareholders of Western Sierra who do not vote in favor of the
merger either by voting against the merger or by abstaining from voting may be
entitled to certain rights under Chapter 13 of the California General
Corporation Law. Chapter 13 is reprinted in Exhibit III to this joint proxy
statement/prospectus. Please note that all references in Chapter 13 and in this
section to a "shareholder" are to the record holder of dissenting shares. A
person having a beneficial interest in shares of Western Sierra common stock
held of record in the name of another person, like a broker or nominee, and
wishing to exercise his or her dissenter's rights should act promptly to cause
the shareholder of record to follow the steps summarized below properly and in a
timely manner to perfect his or her dissenter's rights.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by Exhibit III which is
included in this joint proxy statement/ prospectus. This discussion and Exhibit
III should be reviewed carefully by any shareholders who wish to exercise
dissenters' rights or who wish to preserve the right to do so since failure to
comply with the procedures set forth in Chapter 13 will result in the loss of
dissenters' rights.
If the merger is completed, those shareholders of Western Sierra who elect to
exercise their dissenters' rights and who properly and timely perfect such
rights may be entitled to receive the "fair market value", in cash, of their
shares. Pursuant to Section 1300(a) of the California General Corporation Law,
"fair market value" would be determined as of December 24, 1999, the trading day
before the first announcement of the terms of the merger, excluding any
appreciation caused by the merger. See "Market Prices." Since the shares of
Western Sierra common stock are listed on the NASDAQ National Market,
dissenters' rights will be available only if demands for payment for the
exercise of dissenters' rights are filed by shareholders holding an aggregate of
5% or more of the outstanding shares of Western Sierra common stock.
If the agreement is approved at the Western Sierra meeting and the Sentinel
Community meeting, Western Sierra will within 10 days of the approval mail a
notice to the holders of record of shares of Western Sierra common stock which
were not voted in favor of the agreement stating that the required shareholder
approval of the merger was obtained. The notice of approval will set forth the
price determined by Western Sierra to represent the "fair market value" of any
dissenting shares, and will set forth the procedures (which are also described
below) to be followed by dissenting shareholders who wish to pursue further
their statutory rights. The procedures include a timely written demand that must
be made on Western Sierra in order to perfect the right to dissent. The notice
of approval will include a copy of Sections 1300 through 1304 of the California
General Corporation Law.
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Under Section 1301(a) of the California General Corporation Law, the statement
in the notice of approval of the determination of the fair market value of
Western Sierra common stock may constitute an offer by Western Sierra to
purchase from its shareholders any dissenting shares at the price stated,
assuming the merger is completed and Western Sierra receives demands for payment
by shareholders holding an aggregate of 5% or more of the outstanding shares of
Western Sierra common stock. However, the determination by Western Sierra of
fair market value is not binding on its shareholders, and if a dissenting
shareholder chooses not to accept that offer, he or she may have the right
during a period of six months following the mailing of the notice of approval to
commence a lawsuit to have the fair market value, as described in Section
1300(a), determined by a court. The fair market value as determined by the court
in those circumstances could be higher or lower than the amount offered by
Western Sierra in the notice of approval, and any such determination would be
binding on both the dissenting shareholder or shareholders involved in the
lawsuit and Western Sierra.
ANY HOLDER OF RECORD OF WESTERN SIERRA COMMON STOCK WHO WISHES TO EXERCISE
DISSENTER'S RIGHTS, OR TO PRESERVE THE RIGHT TO DO SO, MUST MAKE A WRITTEN
DEMAND UPON WESTERN SIERRA THAT WESTERN SIERRA PAY THE SHAREHOLDER IN CASH THE
FAIR MARKET VALUE OF HIS OR HER DISSENTING SHARES, AS DEFINED ABOVE.
The demand by holders of Western Sierra common stock should be sent to Western
Sierra Bancorp, 3350 Country Club Drive, Suite 202, Cameron Park, California
95682, Attention: President. The written demand must state the number of shares
held of record by the shareholder and the number of shares which the shareholder
demands that Western Sierra purchase for cash and must also contain a statement
of the amount which the shareholder claims to be the fair market value of the
dissenting shares, as of the day before the announcement of the proposed merger.
That statement will constitute an offer by the shareholder to sell his or her
dissenting shares to Western Sierra at that price. The certificates for shares
of Western Sierra common stock must also be included with the written demand.
A proxy card directing a vote against the merger is not sufficient to meet the
requirements for a written demand. THE WRITTEN DEMAND AND THE DISSENTING
SHAREHOLDER'S SHARE CERTIFICATE(S) MUST BE RECEIVED BY WESTERN SIERRA WITHIN
THIRTY (30) DAYS AFTER THE DATE ON WHICH THE NOTICE OF APPROVAL WAS MAILED TO
THE SHAREHOLDER. The certificate(s) will be stamped or endorsed with a statement
that the shares are dissenting shares and returned to the dissenting
shareholder.
IN ADDITION, THOSE SHAREHOLDERS MAY NOT HAVE VOTED IN FAVOR OF APPROVAL OF THE
AGREEMENT, EITHER IN PERSON OR BY PROXY. A shareholder may vote in favor of
approval of the agreement as to part of his or her shares without jeopardizing
the dissenting status of those shares not voted in favor of approval of the
agreement. However, a shareholder should clearly specify the number of shares
not voted in favor of approval of the agreement.
If shareholders holding an aggregate of 5% or more of the outstanding shares of
Western Sierra common stock do not exercise dissenters' rights, then no
shareholder of Western Sierra will be entitled to exercise dissenters' rights.
If the shareholder votes in favor of approval of the agreement, either in person
or by proxy, or if Western Sierra does not receive his or her written demand
within thirty (30) days after the notice of approval was mailed to the
shareholder, or if
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the shareholder otherwise fails to comply in a timely manner with the
procedures of Chapter 13 as described herein or contained in Exhibit III,
that shareholder shall be bound by the terms of the agreement and shall lose
the right to receive the fair market value of his or her shares in cash.
Dissenting shares may lose their status as such if any of the following occurs:
the merger is abandoned; shareholders holding an aggregate of 5% or more of the
outstanding shares of Western Sierra common stock do not demand payment for
their shares; the shares are transferred before being submitted to Western
Sierra for endorsement; the shareholder withdraws his or her demand with the
consent of Western Sierra in the absence of an agreement between the shareholder
and Western Sierra as to the price of his or her shares; or the shareholder
fails to file suit against Western Sierra or otherwise fails to become a party
to the suit within six months following the mailing of the notice of approval.
Assuming dissenters' rights are available, Western Sierra will pay the fair
market value of dissenting shares at the later of 30 days following an agreement
as to the amount to be paid or within 30 days after all statutory and
contractual conditions to the merger are satisfied; provided that in the event
that the payment cannot be made due to the provisions set forth in California
Financial Code Section 640 et seq. or California General Corporation Law Section
500 et seq. dealing with restrictions on a corporation's ability to distribute
funds or assets to a shareholder, then those shareholders holding dissenting
shares shall become creditors of Western Sierra and their claims will be payable
as soon as permissible under the provisions. See "Description of the Capital
Stock of Western Sierra and Sentinel Community" and "Market Prices."
The foregoing summarizes certain provisions of Chapter 13 of the California
General Corporation Law, but shareholders of Western Sierra considering the
exercise of their rights under those sections should read in full Chapter 13,
which is reproduced in Exhibit III and should consult their own legal advisors.
The receipt of cash payment for dissenting shares will result in recognition of
gain or loss for federal income tax purposes by the dissenting shareholders. See
"Description of the Merger--Federal and California Income Tax Consequences,"
above.
SENTINEL COMMUNITY. Shareholders of Sentinel Community may elect to exercise
dissenters' rights by delivering to Sentinel Community, before voting on the
merger, a writing which identifies the shareholder and states that the
shareholder intends to demand appraisal of, and payment for, the shareholder's
shares of Sentinel Community common stock. The demand must be in addition to,
and separate from, the proxy. The rights of Sentinel Community shareholders to
dissent are set forth in Section 552.14 of the regulations of the Office of
Thrift Supervision. Section 552.14 is reprinted in Exhibit IV to this joint
proxy statement/prospectus. A person having a beneficial interest in shares of
Sentinel Community common stock held of record in the name of another person,
like a broker or nominee, and wishing to exercise his or her dissenter's rights
should act promptly to cause the shareholder of record to follow the steps
summarized below properly and in a timely manner to perfect his or her
dissenter's rights.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by Exhibit IV which is
included in this joint proxy statement/ prospectus. This discussion and Exhibit
IV should be reviewed carefully by any shareholder who wishes to exercise
dissenters' rights or who wishes to preserve the right to do so since failure
47
<PAGE>
to comply with the procedures set forth in Section 552.14 will result in the
loss of dissenters' rights.
If the merger is completed, those shareholders of Sentinel Community who elect
to exercise their dissenters' rights and who properly and timely perfect such
rights will be entitled to receive a sum of cash equal to the appraised value of
the shares of Sentinel Community common stock held by the shareholder at the
time the merger is completed. The sum may be more or less than the fair market
value of Western Sierra common stock to be received in the merger.
If the merger is completed, Western Sierra shall, within 10 days of the
completion of the merger, mail a notice to the holders of record of shares of
Sentinel Community common stock who have complied with the provisions stated
above, of the completion of the merger. In the notice, Western Sierra will also
make a written offer to each dissenting shareholder of Sentinel Community to pay
for dissenting shares at a price deemed by Western Sierra to be the fair value.
The notice will also inform each dissenting shareholder of Sentinel Community
that, within sixty (60) days of the date of the completion of the merger, each
dissenting shareholder must file a petition with the Office of Thrift
Supervision and submit his or her stock certificates to the exchange agent. A
current balance sheet of Sentinel Community and a statement of income and
interim financial statements of Sentinel Community will be included with the
notice.
If within sixty (60) days of the completion of the merger, the fair value is
agreed upon between the dissenting shareholder and Western Sierra, the payment
shall be made by Western Sierra within ninety (90) days of the completion of the
merger.
If within sixty (60) days of the completion of the merger, the dissenting
shareholder and Western Sierra do not agree as to the fair value, then the
dissenting shareholder may file a petition with the Office of Thrift
Supervision, with a copy by registered or certified mail to Western Sierra,
demanding a determination of the fair market value of the stock of all the
dissenting shareholders. A dissenting shareholder who fails to file the petition
within sixty days of the completion of the merger shall be deemed to have
accepted the terms offered under the merger.
Within sixty (60) days of the completion of the merger, each dissenting
shareholder shall submit to the exchange agent his or her stock certificates for
notation on the certificate that an appraisal and payment have been demanded
with respect to the stock and that appraisal proceedings are pending. Any
dissenting shareholder who fails to submit his or her stock certificates for
notation shall no longer be entitled to appraisal rights and shall be deemed to
have accepted the terms offered under the merger.
Notwithstanding the above, at any time within sixty (60) days after the
completion of the merger, any dissenting shareholder shall have the right to
withdraw his or her demand for appraisal and to accept the terms offered under
the merger.
The Director of the Office of Thrift Supervision shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office of Thrift Supervision to appraise the shares to determine their fair
market value of the completion of the merger, exclusive of any element of value
arising from the accomplishment or expectation of the merger.
48
<PAGE>
Appropriate staff of the Office of Thrift Supervision shall review and
provide an opinion on appraisals prepared by independent persons as to the
suitability of the appraisal methodology and the adequacy of the analysis and
supportive data. The Director of the Office of Thrift Supervision, after
consideration of the appraisal report and the advice of the appropriate
staff, shall, if he or she concurs in the valuation of the shares, direct
payment by Western Sierra of the appraised fair market value of the shares,
upon surrender of the certificates representing the stock. Payment shall be
made together with interest from the date of completion of the merger at a
rate deemed equitable by the Director of the Office of Thrift Supervision.
The costs and expenses of any proceeding for appraisal may be apportioned and
assessed by the Director of the Office of Thrift Supervision as he or she may
deem equitable against all or some of the parties. In making this determination,
the Director of the Office of Thrift Supervision shall consider whether any
party has acted arbitrarily, vexatiously or not in good faith in respect to the
rights provided by Section 552.14.
Any dissenting shareholder who has demanded appraisal rights shall neither be
entitled to vote the stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to, or a vote to be taken by shareholders or record of
Sentinel Community at a date which is on or prior to, the date of completion of
the merger); provided, however, that if any shareholder of Sentinel Community
becomes unentitled to appraisal and payment of appraised value with respect to
the stock and accepts or is deemed to have accepted the terms offered under the
merger, that shareholder shall be entitled to vote and receive the distributions
described above.
ANY HOLDER OF RECORD OF SENTINEL COMMUNITY COMMON STOCK WHO WISHES TO EXERCISE
DISSENTERS' RIGHTS, OR TO PRESERVE THE RIGHT TO DO SO, MUST MAKE A WRITTEN
DEMAND UPON SENTINEL COMMUNITY THAT SENTINEL COMMUNITY PAY THE SHAREHOLDER IN
CASH THE FAIR VALUE OF HIS OR HER DISSENTING SHARES, AS DEFINED ABOVE.
The demand must be in addition to and separate from the proxy. The letter should
be sent to Sentinel Community Bank, 229 South Washington Street, Sonora,
California 95370, Attention: President. A proxy card directing a vote against
the merger is not sufficient to meet the requirements for a written demand.
The foregoing summarizes certain provisions of Section 552.14, but shareholders
of Sentinel Community considering the exercise of their rights under that
section should read in full Section 552.14, which is reproduced in Exhibit IV
and should consult their own legal advisors. The receipt of cash payment for
dissenting shares will result in recognition of gain or loss for federal income
tax purposes by the dissenting shareholders. See "Description of the
Merger--Federal and California Income Tax Consequences," above.
49
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK OF
WESTERN SIERRA AND SENTINEL COMMUNITY
WESTERN SIERRA
The authorized capital stock of Western Sierra consists of 10,000,000 shares of
Western Sierra common stock, no par value per share and 10,000,000 shares of
Western Sierra preferred stock, of which 2,522,409 shares of Western Sierra
common stock and no shares of Western Sierra preferred stock were outstanding as
of March 15, 2000. In addition, 490,605 shares of Western Sierra common stock
were reserved for issuance pursuant to stock options and other employee stock
plans. Each share has the same rights, privileges and preferences as every other
share and would share equally in Western Sierra's net assets upon liquidation or
dissolution. The shares of Western Sierra common stock have no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions. Each share is entitled to one vote, except that in the
election of directors, Western Sierra shareholders may vote their shares
cumulatively, except if Proposal 2 to eliminate cumulative voting is approved.
All of the outstanding shares of Western Sierra common stock are fully paid and
nonassessable and each participates equally in dividends, which are payable when
and as declared by Western Sierra's Board of Directors out of funds legally
available therefor.
Western Sierra's Articles of Incorporation (the "Western Sierra Articles") also
incorporate provisions which may have the effect of delaying, deferring or
preventing a change in control of Western Sierra in certain circumstances. These
provisions will be controlling upon completion of the merger and after the
merger shareholders of Sentinel Community will be subject to these provisions.
Specifically, Western Sierra Articles provide that the shareholder vote required
to approve a "Business Combination" (as defined) shall be at least 66-2/3% of
Western Sierra's outstanding shares of voting stock voting together as a single
class. A "Business Combination" is defined as any
- - merger or consolidation of Western Sierra or a subsidiary of Western
Sierra where the shareholders of Western Sierra immediately prior to the
merger or consolidation will own immediately after the merger or
consolidation (A) no equity securities of the surviving entity after the
merger or consolidation or (B) equity securities (excluding options,
warrants and rights) of the surviving entity after the merger or
consolidation with less than 50% of the voting power of the surviving
entity after the merger or consolidation or
- - any sale, exchange, transfer or other disposition of 50% or more of the
assets of Western Sierra or combined assets of Western Sierra and its
subsidiaries.
The amendment or repeal of this provision of Western Sierra's Articles requires
the affirmative vote of the holders of 66 2/3% or more of the outstanding
shares.
50
<PAGE>
SENTINEL COMMUNITY
The authorized capital stock of Sentinel Community consists of 1,000,000 shares
of Sentinel Community common stock, $10.00 par value per share, of which 483,529
shares of Sentinel Community common stock were outstanding as of March 15, 2000.
In addition, 74,403 shares of Sentinel Community common stock were reserved for
issuance pursuant to outstanding stock options under the Sentinel Community
1983, 1993, 1996 and 1999 Stock Option Plans. Holders of shares of Sentinel
Community common stock are entitled to cast one vote for each share held of
record on all matters to be voted on, except that holders are entitled to
cumulate their votes in the election of directors upon compliance with certain
conditions. The holders of Sentinel Community common stock are entitled to
receive dividends, if any, as may be declared from time to time by Sentinel
Community's Board of Directors in its discretion from funds legally available
therefor. Upon liquidation or dissolution of Sentinel Community, the holders of
Sentinel Community common stock are entitled to receive pro rata all assets
remaining available for distribution to shareholders. The Sentinel Community
common stock has no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions. All the outstanding
shares of Sentinel Community common stock are fully paid and nonassessable.
WESTERN SIERRA FOLLOWING THE MERGER
The Articles of Incorporation and Bylaws of Western Sierra will continue as the
Articles of Incorporation and Bylaws of Western Sierra following the merger. The
authorized capital stock of Western Sierra following the merger will consist of
10,000,000 shares of Western Sierra common stock and 10,000,000 shares of
Western Sierra preferred stock. The rights, preferences and privileges of
Western Sierra common stock following the merger will be the same as those
described above for Western Sierra common stock, except if Proposal 2 is
approved, in which case there will no longer be cumulative voting available in
the election of directors.
51
<PAGE>
MARKET PRICES
WESTERN SIERRA
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:
<TABLE>
<CAPTION>
Bid Prices
----------------------- Quarter
Quarter High Low Volume
---------------- -------- -------- -------
<S> <C> <C> <C>
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
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
</TABLE>
The last sales price of Western Sierra common stock on or before December 24,
1999, the trading day prior to the date of the first public announcement of the
proposed merger, was $12.50, which reflects a sale that occurred on December 24,
1999. The last sales price of Western Sierra common stock on or before
__________, 2000, the last practicable date before printing of this joint proxy
statement/prospectus, was $_____, which reflects a sale that occurred on
__________, 2000. The "bid" and "asked" prices of Western Sierra common stock on
________, 2000 were $_____ and $_____, respectively.
As of March 15, 2000, the outstanding shares of Western Sierra common stock were
held by approximately 1,293 record holders.
SENTINEL COMMUNITY
Trading in Sentinel Community common stock has not been extensive and the trades
cannot be characterized as amounting to an active trading market. Sentinel
Community common stock is not listed on any exchange, nor is it listed with
NASDAQ. Sentinel Community common stock is quoted on the OTC Bulletin Board
under the symbol SENC. Management of Sentinel
52
<PAGE>
Community is aware that various brokers facilitate trades in Sentinel
Community common stock. The following table summarizes those trades in the
market of which Sentinel Community's management has knowledge setting forth
the approximate high and low sale prices for the periods indicated. These
quotations reflect the price that would be received by the seller, without
retail mark-up, mark-down or commissions:
<TABLE>
<CAPTION>
Sales Prices
--------------------- Quarter
Quarter High Low Volume
---------------- ------- ------- ----------
<S> <C> <C> <C>
4th Quarter 1999 $16.00 $15.00 2,400
3rd Quarter 1999 $17.50 $15.00 2,600
2nd Quarter 1999 $18.00 $14.25 4,900
1st Quarter 1999 $17.33 $12.67 35,550
4th Quarter 1998 $13.50 $13.50 0
3rd Quarter 1998 $13.50 $11.00 31,500
2nd Quarter 1998 $11.66 $ 8.66 21,900
1st Quarter 1998 $10.33 $10.33 750
</TABLE>
The last sales price of Sentinel Community common stock on or before December
24, 1999, the day prior to the date of the first public announcement of the
proposed merger, was $16.00, which reflects a sale that occurred on November 9,
1999. The last sales price of Sentinel Community common stock on or before
__________, 2000, the last practicable date before printing of this joint proxy
statement/prospectus, was $_____, which reflects a sale that occurred on
_________, ____. The "bid" and "asked" prices of the Sentinel Community common
stock on __________, 2000 were $_____ and $_____, respectively. As of
___________, 2000, the outstanding shares of Sentinel Community common stock
were held by approximately 360 record holders.
53
<PAGE>
DIVIDENDS
WESTERN SIERRA
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 agreement, 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.
SENTINEL COMMUNITY
The shareholders of Sentinel Community are entitled to cash dividends when and
as declared by Sentinel Community's Board of Directors out of funds legally
available therefor, governed by federal prompt corrective action capital
regulations.
Sentinel Community has paid cash dividends on its shares of Sentinel Community
common stock. On January 4, 2000, the Board of Directors of Sentinel Community
declared a cash dividend of $0.34 per share payable to shareholders of record as
of December 31, 1999. The amount and payment of dividends by Sentinel Community
are set by Sentinel Community's Board of Directors with numerous factors
involved including Sentinel Community's earnings, financial condition, and the
need for capital for expanded growth and general economic
54
<PAGE>
conditions. No assurance can be given that cash or stock dividends will be
paid in the future. Under the agreement, Sentinel Community has agreed that
it will not declare or pay any dividend on its shares of Sentinel Community
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.
WESTERN SIERRA FOLLOWING THE MERGER
If the merger is completed, no assurance can be given that the trading market
for Western Sierra common stock will be more active than that which currently
exists for Western Sierra common stock. While it is anticipated that Western
Sierra following the merger will continue to consider declaring cash and stock
dividends based upon the recommendations of the Board of Directors of Western
Sierra, there can be no assurance that either cash or stock dividends will be
declared. The payment of dividends will depend, in any event, upon Western
Sierra's earnings, financial condition, the need for capital for expanded growth
and general economic conditions.
55
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED BELOW. THEREFORE, THE
INFORMATION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS SHOULD BE
CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF WESTERN SIERRA
AND SENTINEL COMMUNITY ON AN INDIVIDUAL AND CONSOLIDATED BASIS.
Western Sierra will account for the merger as a pooling of interests. Pooling of
interests accounting treatment avoids the creation of goodwill in the merger and
allows Western Sierra to avoid charges against future earnings from amortizing
goodwill. This accounting method also means that after the merger, Western
Sierra will report financial results as if Sentinel Community had always been
combined with Western Sierra. If Western Sierra is not able to use pooling of
interests method of accounting in the merger, the merger will not be completed.
The Statement of Income tables that follow contain information that is
calculated by using "weighted average shares." The weighted average share
calculation takes into consideration both the number of shares outstanding and
the length of time the shares were outstanding during the period. The weighted
average share calculation is then used to calculate basic and diluted earnings
per share.
THE MERGER
The following pro forma financial information combines the historical financial
information of Western Sierra and Sentinel Community to reflect what the results
might have been had the institutions merged in each of the earlier periods
presented. The pro forma financial information does not take into consideration
operational efficiencies or additional expenses that might have occurred as a
result of combining the institutions. The following tables show the pro forma
consolidated condensed balance sheets of Western Sierra following the merger as
of December 31, 1999 and pro forma consolidated condensed income statements of
Western Sierra following the merger for the years ended December 31, 1999, 1998
and 1997 (collectively referred to as the " Merger Pro Forma Financial
Information.")
The Merger Pro Forma Financial Information and related notes are based on the
historical financial statements of Western Sierra and Sentinel Community, giving
effect to the merger under the pooling of interests method of accounting and the
assumptions and adjustments in the accompanying notes to the Merger Pro Forma
Financial Information. The pro forma consolidated condensed balance sheets
assume the merger was completed on December 31, 1999 and the pro forma
consolidated condensed income statements assume the merger was completed at the
beginning of each period. The Merger Pro Forma Financial Information further
assumes the issuance of approximately 720,942 shares of Western Sierra common
stock in exchange for all of the outstanding shares of Sentinel Community common
stock at December 31, 1999. The Merger Pro Forma Financial Information is not
necessarily indicative of the financial position or
56
<PAGE>
results of operations of Western Sierra following the merger as it may be in
the future or as it might have been had the merger been effected on the
assumed dates.
The Merger Pro Forma Financial Information should be read in conjunction with
the historical financial statements of Western Sierra and Sentinel Community and
the notes related thereto, presented elsewhere in this joint proxy
statement/prospectus. See "Index to Financial Statements."
MERGER PRO FORMA FINANCIAL INFORMATION
BASED ON POOLING OF INTERESTS METHOD OF ACCOUNTING
EXISTING AND PRO FORMA CONSOLIDATED CAPITALIZATION
(UNAUDITED)
The following table shows the existing capitalization of Western Sierra and
Sentinel Community and the pro forma consolidated capitalization of Western
Sierra following the merger at December 31, 1999 (dollars in thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Surviving
Western Sierra Sentinel Community Adjustments(1) Western Sierra(1)
-------------- ------------------ -------------- -----------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Common stock $ 15,911 $ 2,901 $ 18,812
Retained earnings 11,534 2,807 14,341
Unearned ESOP shares (300) (300)
Net unrealized gains on
available-for-sale
securities (1,640) (298) (1,938)
------------- ------------- -------------
Total shareholders'
equity $ 25,505 $5,410 $ 30,915
============= ============= =============
Authorized shares of
common stock 10,000,000 1,000,000 10,000,000
============= ============= ============= =============
Outstanding shares 2,515,192 483,529 3,236,134
============= ============= ============= =============
</TABLE>
- -----------------
(1) Assumes that holders of 100% of Sentinel Community common stock convert
their shares into Western Sierra common stock and that an aggregate of
720,942 shares of Western Sierra common stock are issued in the merger.
57
<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>
58
<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. THE ACTUAL CONVERSION
RATE MAY BE HIGHER OR LOWER THAN 1.4910.
59
<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. THE ACTUAL CONVERSION
RATE MAY BE HIGHER OR LOWER THAN 1.4910.
60
<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. THE ACTUAL CONVERSION
RATE MAY BE HIGHER OR LOWER THAN 1.4910.
61
<PAGE>
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table shows the selected historical financial information for
Western Sierra and Sentinel Community and pro forma consolidated financial
information in the merger. The table assumes that the merger was completed at
the beginning of the periods presented, and that each outstanding share of
Sentinel Community common stock is converted into 1.4910 shares of Western
Sierra common stock. THE ACTUAL CONVERSION RATE MAY BE HIGHER OR LOWER THAN THAT
SET FORTH ABOVE. See "Description of the Merger--Conversion Rate and Exchange of
Shares and Options."
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Amounts per common share:
Western Sierra historical
Net income(1)(2) $ 1.09 $ 0.44 $ 0.82
Book value(3) $10.14 $10.28 $ 8.63
Dividends declared $.00 $ .00 $ 0.14
Sentinel Community historical
Net income (loss)(1)(2) $ 1.00 $ 1.26 $(0.68)
Book value(3) $11.19 $11.15 $10.13
Dividends declared $ 0.31 $ 0.28 $ .00
Pro forma amounts per
common share of Western Sierra
Net income(1)(4) $ 1.00 $ 0.53 $ 0.53
Book value(5) $ 9.55 $ 9.62 $ 8.79
Pro forma amounts per
common share of Sentinel Community
Net income(1)(6) $ 1.49 $ 0.79 $ 0.79
Book value(6) $14.24 $14.34 $13.11
</TABLE>
- ------------------
(1) All net income (loss) per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common
stock and common stock equivalent shares outstanding for each period
for Western Sierra and Sentinel Community.
(3) Book value per share is based on the actual number of shares
outstanding at the end of the period.
(4) Pro forma net income per share is determined in the same manner as
footnote (2) above except the Sentinel Community common shares are
multiplied by the conversion rate of 1.4910.
(5) Pro forma book value per share is determined in the same manner as
footnote (3) above except the Sentinel Community common shares are
multiplied by the conversion rate of 1.4910.
(6) Sentinel Community pro forma equivalents are computed by multiplying
the pro forma per share data of the consolidated entity by the
conversion rate of 1.4910.
62
<PAGE>
REGULATORY CAPITAL ADEQUACY
The following table shows, as of December 31, 1999, the regulatory capital
ratios of Western Sierra and Sentinel Community on a historical basis, Western
Sierra on a pro forma basis assuming completion of the merger, and the minimum
regulatory capital ratios.
<TABLE>
<CAPTION>
Western Sentinel
Minimum Sierra Community
------- ------- ---------
<S> <C> <C> <C>
Leverage ratio 5.0% 9.3% 5.9%
Tier 1 risk-based
capital ratio 4.0% 11.3% 9.6%
Total risk-based
capital ratio 8.0% 12.6% 10.7%
Western Sierra
Minimum Following the Merger
------- --------------------
<S> <C> <C>
Leverage ratio 5.0% 8.5%
Tier 1 risk-based
capital ratio 4.0% 11.0%
Total risk-based
capital ratio 8.0% 12.2%
</TABLE>
63
<PAGE>
DESCRIPTION OF WESTERN SIERRA
BUSINESS
GENERAL. 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. The completion of the
Roseville 1st National Bank merger may occur prior to the merger with Sentinel
Community.
Lake Community Bank was incorporated as a banking corporation under the laws of
the State of California on March 9, 1984. Lake Community 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.
64
<PAGE>
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 offer 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), issues drafts and standby letters of credit, sells
travelers' checks (issued by an independent entity), offers ATM's tied in with
major statewide and national networks, extends 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 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
holds 5.85% of Western Sierra National Bank's deposits.
65
<PAGE>
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.
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
66
<PAGE>
presently for a term expiring June 30, 2002. The office space at this branch
consists of approximately 6,500 square feet.
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.
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
67
<PAGE>
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.
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.
68
<PAGE>
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.
SUMMARY OF EARNINGS
The following consolidated Summary of Earnings of Western Sierra and
subsidiaries for the three years ended December 31, 1999 has been derived
from financial statements audited by Perry-Smith & Co., LLP, independent
certified public accountants, as described in their report included elsewhere
in this joint proxy statement/prospectus. These statements should be read in
conjunction with the Financial Statements and the Notes relating thereto
which appear elsewhere herein.
69
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, Year Ended December 31,(1)
except per share data) ------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income $ 21,514 $ 20,009 $ 18,885
Interest expense 7,727 7,871 7,277
Net interest income 13,787 12,138 11,608
Provision for loan and lease losses 540 775 1,070
Net interest income after
provision for loan and lease losses 13,247 11,363 10,538
Other noninterest income 3,103 3,760 3,007
Noninterest expense 12,130 13,503 10,445
Earnings before income taxes 4,220 1,620 3,100
Provision for income taxes 1,415 519 1,149
Net income 2,805 1,101 1,951
Basic earnings per share $ 1.12 $ 0.46 $ 0.85
Number of shares used in basic
earnings per share calculation 2,500,976 2,368,415 2,285,445
Diluted earnings per share $ 1.09 $ 0.44 $ 0.82
Number of shares used in diluted
earnings per share calculation 2,575,694 2,491,308 2,389,897
</TABLE>
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited) Year Ended December 31,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings to average
shareholders' equity 12.24% 4.84% 9.56%
Net earnings to average
total assets 0.98% 0.42% 0.86%
Total interest expense to
total interest income 35.92% 39.34% 38.53%
Other operating income to
other operating expense 25.58% 27.85% 28.79%
</TABLE>
WESTERN SIERRA'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is Western Sierra's management's discussion and analysis of the
significant changes in income and expense accounts presented in the Summary
of Earnings 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
70
<PAGE>
financial statements and notes thereto and the other financial information
appearing elsewhere in this joint proxy statement/prospectus.
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.
71
<PAGE>
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>
(Dollars in thousands) Year Ended December 31,
---------------------------------------------------------------------------
1999 Versus 1998 1998 Versus 1997
---------------------------------- -----------------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
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-
earnings assets 1,505 (1,379) 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.
72
<PAGE>
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.
<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>
73
<PAGE>
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
increases 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.
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 Other
Year Ended Average and 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
74
<PAGE>
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 less
unrealized 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.
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.
75
<PAGE>
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>
76
<PAGE>
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.
77
<PAGE>
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, 1998 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>
78
<PAGE>
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.
79
<PAGE>
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. See also "Risk Factors--Risks Related to Companies'
Business and Operations."
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>
(Dollars in Less than One Year to After
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>
80
<PAGE>
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. 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, 1999 and 1998, Western Sierra had $0 and $289 thousand,
respectively, in troubled debt restructured loans. 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 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.
81
<PAGE>
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>
<CAPTION>
December 31,
----------------
(Dollars in thousands) 1999 1998
------- ------
<S> <C> <C>
Commercial $ 0 $ 293
Real estate 543 1,113
------ ------
Total $ 543 $1,406
</TABLE>
82
<PAGE>
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
83
<PAGE>
their loans. Estimates of future economic conditions and their impact on various
industries and 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:
84
<PAGE>
<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
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>
85
<PAGE>
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:
86
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------
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.
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.
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<PAGE>
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.
88
<PAGE>
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
89
<PAGE>
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.
90
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------
Over Three
Months Over
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.
91
<PAGE>
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.
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<PAGE>
MANAGEMENT
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
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
Year First
Appointed
Director or
Name Age Officer Title
- ------------------------------- -------- --------------- ----------------------------------------------------------
<S> <C> <C> <C>
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>
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.
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<PAGE>
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.
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
95
<PAGE>
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.
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<PAGE>
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.
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 $100,000 during Western Sierra's 1999
fiscal year.
97
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(3)
Position Year ($) ($) ($) ($) SARs(2) ($) ($)
- ------------------------------------------ ---- ------- -------- -------- ------------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary D. Gall, President, 1999 155,219 87,972 12,922 0 23,100 0
CEO and Director 1998 140,500 106,486 11,147 0 0 0 9,129
of Western Sierra and Western Sierra 1997 127,500 67,529 8,497 0 28,875 0 10,773
National Bank
Kirk Dowdell, Executive 1999 100,980 23,424 9,570 0 1,575 0
Vice President and 1998 89,900 6,100 8,305 0 0 0 180
Chief Credit Officer of 1997 23,816 16,100 0 0 6,930 0 96
Western Sierra and
Western Sierra National Bank(4)
</TABLE>
(1) These amounts represent perquisites consisting of country club fees for
all officers and automobile allowance and family health insurance
premiums for Mr. Gall.
(2) These amounts are adjusted for stock dividends. Western Sierra has no
SARs.
(3) This amount represents Western Sierra's contribution for the cost of
premiums for life insurance and 401(k) Plan and ESOP.
(4) Mr. Dowdell began his employment with Western Sierra National Bank in
September, 1997.
98
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Individual Grants(1)
- --------------------------- ------------------ ---------------------------------- ------------------- ---------------------
(a) (b) (c) (d) (e)
- --------------------------- ------------------ ---------------------------------- ------------------- ---------------------
Options/SARs % of Total Options/SARs Exercise or
Granted Granted to Employees Base Price Expiration
Name (#) in Fiscal Year ($/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.
99
<PAGE>
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.
100
<PAGE>
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.
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.
101
<PAGE>
DESCRIPTION OF SENTINEL COMMUNITY
BUSINESS
GENERAL. Sentinel Community was incorporated under the laws of the State of
California on December 24, 1980, and commenced operations on April 2, 1982. The
corporation was formed as a State Chartered Savings and Loan Association.
Sentinel Community converted its charter to a Federal Savings and Loan
Association on June 9, 1989. In October of 1996, Sentinel Community changed its
name to Sentinel Community Bank, while remaining chartered as a Federal Savings
and Loan Association. Sentinel Community is a member of the Federal Reserve
System and the Federal Home Loan Bank of San Francisco, and its deposits are
insured to the maximum amount permitted by law under the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Its primary regulator is the Office of Thrift Supervision ("OTS"), a division of
the Department of the Treasury. Sentinel Community conducts its operations at
its main office located at 229 S. Washington Street, Sonora, California 95370.
Its branch offices are located at 13753-A Mono Way, Sonora, California 95370,
and 18711 Tiffeni Drive, Twain Harte, California 95383. Sentinel Community also
has a Loan Production Office in Calaveras County, which is located at 1111
Dunbar Road, Suite 100A, Arnold, California. Sentinel Community has an inactive
subsidiary, Sentinel Associates, Inc., which is administered out of the main
office. Sentinel Associates, Inc., was formed in October, 1983, for the purpose
of developing single family residential real estate.
BANKING SERVICES. Sentinel Community is a locally owned and operated savings and
loan association, and its primary service area is the Western Tuolumne County
communities of Sonora, Twain Harte, Columbia and Jamestown. Sentinel Community
also services Calaveras County through its Loan Production Office in Arnold.
The mission of Sentinel Community is to profitably deliver high quality customer
services that meet the financial needs of its community, its businesses and its
citizens. Products are designed and employees are hired and trained to meet the
needs of customers.
Sentinel Community offers a broad range of products and services, including
commercial checking, business loans (secured and unsecured), merchant banking,
treasury tax deposits, coin and currency service, SBA loans, and consumer loans,
as well as all the traditional personal deposits and loans of a savings and loan
association.
Sentinel Community's marketing stresses the "local" aspect of its operations.
Sentinel Community makes loan decisions locally, offers competitive interest
rates, offers friendly, flexible service and is committed to the community.
Sentinel Community takes pride in providing personalized service to the local
community. Sentinel Community offers a wide variety of business and personal
loans designed to meet individual financial needs, including commercial loans,
equipment loans, lines of credit, consumer loans and real estate construction
and long term financing. Sentinel Community offers traditional personal
services, such as certificates of deposit, IRA accounts, direct deposit and
102
<PAGE>
several types of checking accounts, business checking and merchant account
services, as well as ATM's at each branch.
Sentinel Community also offers automatic payments of loans and a 24-hour-a-day,
seven-day-a-week voice response system to obtain account balances, transfer
funds or find out other information about transactions on customer accounts.
Most of Sentinel Community's deposits have traditionally been obtained from
individuals, professionals and small businesses. At December 31, 1999, Sentinel
Community had a total of 10,606 accounts consisting of noninterest-bearing
accounts with an average balance of approximately $3,482, interest-bearing
checking accounts with an average balance of approximately $6,377, money market
checking and savings accounts with an average balance of approximately $3,454,
regular certificates of deposit with an average balance of approximately $22,927
and jumbo certificates of deposit with an average balance of approximately
$72,422. Sentinel Community has not obtained any deposits through deposit
brokers and has no present intention of using brokered deposits. There is no
concentration of deposits or any customer with 5% or more of Sentinel
Community's deposits.
Sentinel Community conducts a commercial savings and loan business which
includes accepting demand, savings and time deposits and making commercial, real
estate and installment loans. It also offers installment note collections,
issues cashier's checks, sells traveler's checks and provides safe deposit boxes
and other customary banking services. Sentinel Community does not offer trust
services or international banking services and does not plan to do so in the
near future. There have been no significant changes in the kinds of services
rendered, the principal markets for or the methods of distribution of such
services during the last three fiscal years.
EMPLOYEES. At December 31, 1999, Sentinel Community employed 52 employees (47.25
full-time equivalents). Sentinel Community believes its employee relations are
excellent.
PROPERTIES. Sentinel Community owns the real property located at 225 & 229 S.
Washington Street, Sonora, California 95370. The buildings situated on this
property consist of approximately 6,000 square feet, and house Sentinel
Community's main branch, as well as its administrative offices. Sentinel
Community also owns real property located at 231 S. Shepherd Street, Sonora,
California 95370. This building houses Sentinel Community's loan administration
functions, including underwriting, processing and servicing.
Sentinel Community leases the premises of Sentinel Community's Junction Branch
office located at 13753-A Mono Way, Sonora, California 95370. The lease is
presently for a term expiring December 31, 2005. The office space at this branch
consists of approximately 2,000 square feet.
Sentinel Community leases the premises of Sentinel Community's Twain Harte
Branch office located at 18711 Tiffeni Drive, Twain Harte, California 95383. The
lease is presently for a term expiring September 30, 2004. The office space at
this branch consists of approximately 2,900 square feet.
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<PAGE>
The Arnold Loan Production Office was under a one year operating lease which
expired on June 30, 1999, and is now being rented on a month to month basis. The
office space is approximately 300 square feet.
Total lease expenses for all of Sentinel Community's leased premises were
$87,919 and $84,386 for the years ended December 31, 1999 and 1998,
respectively.
LEGAL PROCEEDINGS. In the normal course of business, Sentinel Community is
occasionally made a party to legal proceedings. Sentinel Community is involved
in the following legal proceedings.
On December 14, 1998, John Wade Fisher & Kimeron Fisher filed suit against
Sentinel Community and certain of its officers, including Mr. Cusey, and Mr.
Dambacher, a director of Sentinel Community, in the United States Bankruptcy
Court, Eastern District of California, Bankruptcy Case No. 97-28263-B-7.
Plaintiffs are alleging twelve causes of action of which seven are for willful
violation of the two bankruptcy stays, and the remaining causes include federal
civil rights claims, conspiracy with Tuolumne County district attorney's office,
breach of oral contract, negligent interference with a prospective economic
advantage, negligence and fraud all related to the Fishers' personal and
business bankruptcy. Plaintiffs are seeking compensatory damages, attorney fees
and punitive damages in the aggregate of $9 million which is in an amount in
excess of the Sentinel Community's insurance coverage. Further, not all of the
plaintiff's twelve causes of action are covered by insurance. Currently,
although the case is being defended by Sentinel Community's insurance carriers,
the insurance carriers have sent a letter to Sentinel Community stating that
they may seek a determination as to whether or not they are required to defend
and insure Sentinel Community.
The Fisher proceeding is in its initial stages and discovery has been
initiated. No assurances can be given Sentinel Community will be successful
in the defense of the case or that Sentinel Community's insurance carriers
will continue to be responsible for the expenses and payment of losses, if
any, related to this case. An adverse decision in this proceeding may have a
material adverse effect on Sentinel Community's financial condition.
On February 17, 1999, a complaint was file against Sentinel Community in Amador
County (No. 99 CV 0056) entitled WELLER VS. NEW YORK RANCH. The plaintiff
alleges that as a result of an assignment of a construction contract, Sentinel
Community is responsible for payment of a contractor's billing in the amount of
$147,797. This lawsuit has not been served on Sentinel Community. If Sentinel
Community is served with the complaint, it will be required to defend this suit
and incur the attendant fees and costs.
Sentinel Community has filed suit against its insurance liability carrier,
Lloyd's of London, in the Tuolumne Superior Court (Case No. CV 44919) for
declaratory relief and bad faith regarding Lloyd's failure to pay for defense
cost and indemnification in a lawsuit filed by Sentinel Community's former Chief
Executive Officer, Pat Hennessy in 1996, and settled in 1997. In December 1998,
the court granted Lloyd's Motion for Summary Judgment against Sentinel
Community. On January 5, 1999, Sentinel Community filed a motion to appeal. The
appeal is in its initial stage.
104
<PAGE>
SUPERVISION AND REGULATION. As a federally chartered savings and loan
association, Sentinel Community is subject to regulation, supervision and
periodic examination by the Office of Thrift Supervision. Sentinel Community is
not a member of the Federal Reserve System, but is nevertheless subject to
certain regulations of the FRB. Sentinel Community's deposits are insured by the
FDIC to the maximum amount permitted by law, which is currently $100,000 per
depositor in most cases.
Federal savings and loan associations, such as Sentinel Community, specialize in
real estate lending, particularly loans for single-family homes and other
residential properties. These institutions originally offered only savings
accounts or time deposits. Over the past two decades, however, savings and loan
associations have acquired a wider range of financial powers, and now offer
checking accounts (demand deposits) and make business and consumer loans as well
as mortgages. Generally, savings and loan associations are insured by the SAIF
of the FDIC. The Office of Thrift Supervision, a bureau of the U.S. Treasury,
regulates and supervises the nation's thrift industry.
To ensure their emphasis on the provision of home mortgage credit, savings and
loan associations are subject to several specific lending constraints. For
example, a thrift institution must pass the qualified thrift lender (QTL) test,
which requires that at least 65 percent of a thrift's portfolio assets be
residential mortgages and related investments. The Economic Growth and
Regulatory Paperwork Reduction Act of 1996, enacted on September 30, 1996,
somewhat relaxed the QTL test by expanding the list of qualified investments to
include small-business loans, and by increasing the amount of consumer-oriented
loans that can be counted as qualifying assets, such as education loans, small
business loans and credit card loans. Additional lending constraints require
that loans made by thrifts secured by nonresidential real estate may not exceed
400 percent of capital. Commercial loans may not exceed 20 percent of assets,
and amounts in excess of 10 percent must be used for small-business loans.
Unsecured residential construction loans may not exceed the greater of 5 percent
of assets or 100 percent of capital. As a corollary of the QTL test, in
combination, consumer loans, commercial paper and corporate debt securities may
not exceed 35 percent of assets. In addition, federal savings associations may
invest up to 3 percent of their assets in service corporations which may engage
in such activities reasonably related to the activities of a federal savings
association as the Office of Thrift Supervision may determine and approve.
Federal savings associations are required to be members of the Federal Home Loan
Bank System. Banks may also join the Federal Home Loan Bank System if they meet
certain requirements, most notably if at least 10 percent of their assets is in
residential mortgage loans.
Although their lending powers are more restricted, federal thrifts retain a few
options not available to banks, such as broader powers for their holding
companies and service corporations, and more expansive branching powers. The
federal thrift charter confers the broadest geographic expansion authority of
any federally insured depository institution charter. Federally chartered
savings and loan associations that meet the QTL test can branch nationally with
no state "opting in" or "opting out" requirement as applied to banks. Savings
and loan associations also are not subject to any intrastate branching
restrictions whereas banks are subject to a range of restrictions on their
statewide branching. However, these branching advantages that thrifts have
historically enjoyed over banks have been diminished considerably by recent
legislation. The Riegle-Neal
105
<PAGE>
Interstate Banking and Branching Efficiency Act of 1994 reduced much of the
historical branching advantage of savings institutions. Under the terms of
the Riegle-Neal legislation, adequately capitalized and managed bank holding
companies may now acquire a bank in any state.
The regulations of these state and federal bank regulatory agencies govern most
aspects of Sentinel Community's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the maximum rates of interest allowed on certain
deposits. Sentinel Community is also subject to the requirements and
restrictions of various consumer laws and regulations.
SUMMARY OF EARNINGS
The following Summary of Earnings of Sentinel Community for the three years
ended December 31, 1999 has been derived from financial statements audited by
Moss Adams LLP, independent certified public accountants for the year ended
December 31, 1999, and Grant Thornton LLP, independent certified public
accountants for the two years ended December 31, 1998, as described in their
reports included elsewhere in this joint proxy statement/prospectus. These
statements should be read in conjunction with the Financial Statements and the
Notes relating thereto which appear elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in thousands, Year Ended December 31,(1)
except per share data) -----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income $ 6,994 $ 6,844 $ 5,632
Interest expense 3,131 3,123 2,579
Net interest income 3,863 3,721 3,053
Provision for loan and lease losses 380 235 173
Net interest income after
provision for loan and lease losses 3,483 3,486 2,880
Other noninterest income 477 524 477
Noninterest expense 3,271 3,053 3,902
Earnings before income taxes 689 957 (545)
Provision for income taxes(2) 186 356 (225)
Net income (loss) 503 601 (320)
Basic earnings (loss) per share $ 1.04 $ 1.27 $ (0.68)
Number of shares used in basic
earnings per share calculation(3) 482,545 473,216 470,192
Diluted earnings (loss) per share $ 1.00 $ 1.26 $ (0.68)
Number of shares used in diluted
earnings per share calculation(4) 502,023 478,277 470,192
</TABLE>
- -------------------
(1) See Notes to Financial Statements for a summary of significant
accounting policies and other related data.
(Footnotes continued on the following page.)
106
<PAGE>
(2) See Notes to Financial Statements for an explanation of income taxes.
(3) Basic earnings (loss) per share information is based on the weighted
average number of shares of common stock outstanding during each
period.
(4) Diluted earnings (loss) per share information is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period.
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Year Ended
(Unaudited) December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) to average
shareholders' equity 9.43% 11.91% (6.36%)
Net earnings (loss) to average
total assets .53% .70% (.45%)
Total interest expense to
total interest income 44.76% 45.62% 45.79%
Other operating income to
other operating expense 14.58% 17.15% 12.22%
</TABLE>
SENTINEL COMMUNITY'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN THIS "SENTINEL COMMUNITY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." THEREFORE, THE INFORMATION SET FORTH HEREIN SHOULD BE CAREFULLY
CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF SENTINEL COMMUNITY.
The following is Sentinel Community's management's discussion and analysis of
the significant changes in income and expense accounts presented in the Summary
of Earnings 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 Sentinel Community's financial condition, results
of operations, liquidity, capital resources and interest rate sensitivity. It
should be read in conjunction with Sentinel Community's audited financial
statements and notes thereto and the other financial information appearing
elsewhere in this joint proxy statement/prospectus.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income increased
from $5.6 million in 1997 to $6.8 million in 1998, and to $7.0 million in 1999,
representing a 21.5% increase in 1998 over 1997 and a 2.2% increase in 1999 over
1998. The increase in interest income from 1997 to 1998 resulted from an
increase in average interest-earning assets from
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<PAGE>
$67.1 million to $81.6 million. The increase from 1998 to 1999 resulted from
an increase in average interest-earning assets from $81.6 million to $88.1
million. Total interest expense increased from $2.6 million in 1997 to $3.1
million in 1998 and was $3.1 million in 1999, representing a 21.1% increase
in 1998 over 1997 and a 0.2% increase in 1999 over 1998.
Sentinel Community's net interest margin (net interest income divided by average
earning assets) was 4.55% in 1997, 4.56% in 1998, and 4.38% in 1999. Total
interest expense increased from 1998 to 1999 due primarily to an increase in
borrowings during that period. Sentinel Community's net interest income
increased from $3.1 million in 1997 to $3.7 million in 1998 and to $3.9 million
in 1999, representing a 21.9% increase in 1998 over 1997 and a 3.8% increase in
1999 over 1998.
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>
(Dollars in thousands) Year Ended December 31,
------------------------------------------------------------------------
1999 Versus 1998 1998 Versus 1997
-------------------------------- ----------------------------------
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume
-------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
CDs in other institutions $ (213) $ (58) $ (155) $ (206) $ 95 $ (301)
Federal funds sold (20) 20 (40) (92) (6) (86)
Investment securities (344) (181) (163) 927 317 610
Loans, gross 732 84 648 590 (579) 1,169
Other investments (5) (2) (3) (7) (8) 1
Total interest-
earnings assets 150 (137) 287 1,212 (181) 1,393
FHLB borrowings 19 (137) 156 310 0 310
NOW, MMDA 34 -- 34 45 (2) 47
Savings 56 35 21 (188) (220) 32
Certificates of deposit (101) 209 (310) 377 (11) 388
Total interest-
bearing liabilities 8 107 (99) 544 (233) 777
Net interest income $ 142 $ (244) $ 386 $ 668 $ 52 $ 616
</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 Sentinel
Community for the years ended December 31, 1999 and 1998. In the opinion of
Sentinel Community's management, the following summary of changes in earnings
reflects all adjustments which Sentinel Community 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.
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<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
(Dollars in Thousands) 1999 Over 1998 1998 Over 1997
----------------------- ----------------------
(Unaudited) Amount of % of Amount of % of
Change Change(1) Change Change(1)
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 732 16.0% $ 590 14.9%
Interest on securities (344) (19.1%) 927 106.2%
Interest of certificates
of deposit (213) (68.4%) (206) (39.8%)
Interest on federal funds sold (20) (14.7%) (92) (40.0%)
Interest on other investments (5) (2.2%) (7) (18.3%)
Total interest income 150 2.2% 1,212 21.5%
INTEREST EXPENSE
Interest on deposits (11) (0.4%) 234 9.0%
Interest on FHLB advances 19 6.2% 310 N/A
Net interest income 142 3.8% 668 21.9%
PROVISION FOR
LOAN LOSSES 145 61.6% 62 35.8%
Net interest income after
provision for loan losses (3) (0.1%) 606 21.1%
NONINTEREST INCOME
Service charges 54 18.1% 85 40.2%
Loan servicing fees 13 17.2% 34 85.8%
Gain or loss on sale of assets (102) (286.4%) 36 N/A
Gain or loss on sale of
foreclosed real estate (81) (761.5%) (97) (90.2%)
Other income 69 65.8% (11) (9.1%)
Total noninterest income (47) (8.9%) 47 9.8%
OTHER EXPENSES
Salaries and related benefits 75 5.1% 178 14.0%
Occupancy and
operations expense 62 10.4% 55 10.2%
Data processing 57 17.2% 6 1.8%
Payroll taxes and insurance 14 8.4% 19 13.2%
Professional services 50 43.1% 29 32.7%
Settlement and related
legal expenses -- -- (1,099) (100.0%)
Provision for losses on
foreclosed real estate (53) (69.0%) (64) (45.5%)
Other 12 4.1% 27 9.5%
Total other expenses 217 7.1% (849) (21.7%)
Income before income taxes (267) (27.9%) 1,502 275.5%
PROVISION FOR
INCOME TAXES (170) (47.8%) 581 258.2%
NET INCOME (97) (16.2%) 921 287.7%
</TABLE>
- -----------------
(1) Increase or (decrease) over previous year amount.
109
<PAGE>
NONINTEREST INCOME. Noninterest income increased from $477 thousand in 1997 to
$524 thousand in 1998 and decreased to $477 thousand in 1999, representing a
9.8% increase in 1998 over 1997 and an 8.9% decrease in 1999 from 1998.
OTHER EXPENSES. Other expenses are comprised of salaries and related benefits,
occupancy, equipment and other expenses. Other expenses decreased from $3.9
million in 1997 to $3.1 million in 1998, and increased to $3.3 million in 1999,
representing a 21.7% decrease in 1998 from 1997 and a 7.1% increase in 1999 over
1998. The decrease in other expenses in 1998 from 1997 related primarily to a
legal settlement and legal expenses relating to the settlement which occurred in
1997. The single largest component of other expenses is salary and employee
benefits expense, which was $1.5 million, $1.5 million and $1.3 million in 1999,
1998 and 1997, respectively. The number of full-time equivalent employees was
47, 47 and 44 at December 31, 1999, 1998 and 1997, respectively.
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 Other
Average and Related Occupancy & Operating
Period Assets(1) Benefits Operations Expenses
- --------------- --------- ----------- ----------- ---------
Year Ended
December 31,
- ---------------
<S> <C> <C> <C> <C>
1999 $93,495 1.63% 0.70% 1.16%
1998 $87,479 1.66% 0.68% 1.15%
1997 $70,934 1.80% 0.76% 2.94%
</TABLE>
- ------------------
(1) Based on the average of daily balances.
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 $380 thousand as a provision for loan losses in 1999, $235
thousand in 1998 and $173 thousand in 1997. Loans charged off net of recoveries
in 1999 were $28 thousand, $69 thousand in 1998 and $84 thousand in 1997. The
ratio of the allowance for loan losses to total gross loans was 1.48% in 1999,
1.07% in 1998, and 0.99% 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.
INCOME TAXES (BENEFIT). Income taxes (benefit) were $186 thousand in 1999, $356
thousand in 1998 and $(225) thousand in 1997.
110
<PAGE>
NET INCOME (LOSS). The net income (loss) and basic earnings (loss) per share of
Sentinel Community were $503 thousand and $1.04 per share in 1999, $601 thousand
and $1.27 per share in 1998, and ($320) thousand and ($.68) per share in 1997.
The income for these periods was primarily due to net interest income, service
charges and fees.
LIQUIDITY. Sentinel Community has an asset and liability management program
allowing Sentinel Community to maintain its interest margins during times of
both rising and falling interest rates and to maintain sufficient liquidity.
Liquidity of Sentinel Community at December 31, 1999 was 15.5%, at December 31,
1998 was 28.0%, and at December 31, 1997 was 35.6% based on liquid assets
(consisting of cash and due from banks, deposits in other financial
institutions, investments not pledged, federal funds sold and loans
available-for-sale) divided by total liabilities. Sentinel Community's
management believes it maintains adequate liquidity levels.
CAPITAL RESOURCES. The shareholders' equity accounts of Sentinel Community
increased from $4.8 million at December 31, 1997, to $5.4 million at December
31, 1998 and was $5.4 million at December 31, 1999. The increase was primarily
attributable to earnings of Sentinel Community in 1998 and 1999 adjusted for
cash dividends paid to shareholders. Sentinel Community 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, Sentinel Community must meet specific capital guidelines that
involve quantitative measures of Sentinel Community's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. Sentinel Community'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 Sentinel Community 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 Sentinel Community exceeds all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC categorized
Sentinel Community as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Sentinel Community
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events since
that notification which management believes have changed Sentinel Community's
category.
111
<PAGE>
Sentinel Community's actual capital ratios are presented below.
<TABLE>
<CAPTION>
Minimum
Minimum Well Actual
Capital Capitalized December 31,
Requirement Requirement 1999
----------- ----------- ------------
Capital ratios:
<S> <C> <C> <C>
Tier 1 risk-based to
risk-weighted assets 4% 6% 9.59%
Total risk-based to
risk-weighted assets 8% 10% 10.74%
Leverage to total
average assets 4-5% 5% 5.94%
</TABLE>
112
<PAGE>
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the unaudited average balances of Sentinel Community's assets, liabilities
and shareholders' equity accounts and the percentage distribution of the items,
computed using the monthly 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 $ 4,439 4.75% $ 4,538 5.19% $ 2,405 3.39%
Certificates of deposit 1,564 1.67% 5,030 5.75% 8,248 11.63%
Investment securities 25,372 27.14% 28,225 32.26% 14,077 19.85%
Federal funds sold 2,391 2.56% 2,748 3.14% 4,373 6.16%
Federal Home Loan Bank stock 478 .51% 502 .58% 323 .46%
Loans:
Commercial 4,343 4.65% 2,678 3.06% 712 1.00%
Consumer 1,970 2.11% 1,452 1.66% 1,311 1.85%
Real estate 51,996 55.61% 40,931 46.79% 38,056 53.65%
Less deferred costs (285) (.30%) (247) (.28%) (279) (.39%)
Less allowance for loan and lease losses (703) (.75%) (466) (.53%) (347) (.49%)
Net loans 57,321 61.32% 44,348 50.70% 39,453 55.62%
Bank premises and equipment, net 1,160 1.24% 853 .98% 765 1.08%
OREO 483 .52% 675 .76% 900 1.27%
Other assets 287 .29% 560 .64% 390 .54%
-------- ------- -------- ------- -------- -------
TOTAL ASSETS $ 93,495 100.00% $ 87,479 100.00% $ 70,934 100.00%
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Demand $ 7,730 8.27% $ 6,648 7.60% $ 3,250 4.58%
NOW and money market 22,578 24.15% 18,397 21.03% 16,385 23.10%
Savings 7,945 8.50% 6,300 7.20% 7,916 11.16%
Time 31,300 33.48% 33,745 38.57% 29,655 41.81%
Time > $100,000 10,800 11.55% 9,105 10.41% 8,199 11.56%
-------- ------- -------- ------- -------- -------
Total deposits 80,353 85.95% 74,195 84.81% 65,405 92.21%
Other liabilities 7,805 8.35% 8,239 9.42% 497 .70%
-------- ------- -------- ------- -------- -------
Total liabilities 88,158 94.30% 82,434 94.23% 65,902 92.91%
Shareholders' equity:
Common stock 2,159 2.31% 2,007 2.29% 1,973 2.78%
Retained earnings 3,323 3.55% 3,032 3.47% 3,059 4.31%
Unrealized gain (loss) on AFS
investment securities, net (145) (.16%) 6 .01% -- --
-------- ------- -------- ------- -------- -------
Total shareholders' equity 5,337 5.70% 5,045 5.77% 5,032 7.09%
-------- ------- -------- ------- -------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 93,495 100.00% $ 87,479 100.00% $ 70,934 100.00%
</TABLE>
- -------------------
(1) Percentages of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
113
<PAGE>
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distributions and yields of Sentinel Community's investment securities at
carrying value 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>
U.S. Government agencies $ $ 991 7.00 $470 6.48 $ 1,825 6.76 $ 3,286 6.79
Municipals 2,932 5.03 2,932 5.03
Corporate Notes/Bonds 2,801 5.89 2,801 5.89
Mortgage-backed securities 695 6.82 761 6.48 10,803 5.93 12,259 6.01
Mutual funds 2,077 5.95 2,077 5.95
Total $ 0 0 $4,487 6.28 $1,231 6.48 $17,637 5.87 $23,355 5.95
</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>
U.S. Government agencies $ $ $6,792 6.68 $ 3,235 6.77 $10,027 6.71
Municipals 1,969 4.69 1,969 4.69
Corporate Notes/Bonds 523 6.11 523 6.11
Mortgage-backed securities 1,176 6.46 1,089 5.83 950 5.77 8,558 6.78 11,773 6.58
Mutual funds 2,015 5.89 2,015 5.89
Total $1,176 6.46 $1,612 5.92 $7,742 6.57 $15,777 6.40 $26,307 6.43
</TABLE>
114
<PAGE>
YEAR-END BALANCE. The following table summarizes the year-end carrying value
and distributions of Sentinel Community's investment securities held on
December 31, 1999 and 1998. (Dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
U.S. Government agencies $ 3,286 $10,027
Municipals 2,932 1,969
Corporate Notes/Bonds 2,801 523
Mortgage-backed securities 12,259 11,773
Mutual funds 2,077 2,015
------- -------
Total $23,355 $26,307
</TABLE>
LOAN PORTFOLIO. Sentinel Community's largest historical lending categories are
real estate loans, commercial loans and consumer loans. These categories
accounted for approximately 91.2%, 6.2% and 2.6%, respectively, of Sentinel
Community's total loan portfolio at December 31, 1998, approximately 88.4%, 7.8%
and 3.8%, respectively, of Sentinel Community's total loan portfolio at December
31, 1999. Loans are carried at face amount, less payments collected and the
allowance for loan losses. Interest on all loans is accrued daily on a simple
interest basis. Typically, once a loan is placed on nonaccrual status, Sentinel
Community reverses interest accrued through the date of transfer. Loans are
placed on a nonaccrual basis 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. Problem loans are maintained on
accrual status only when management of Sentinel Community 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 Sentinel Community's published lending rate and vary
as Sentinel Community's lending rate varies. At December 31, 1998, approximately
58.2% of Sentinel Community's loan portfolio was comprised of variable interest
rate loans and at December 31, 1999, approximately 52.1% of Sentinel Community's
loan portfolio was comprised of variable interest rate loans.
115
<PAGE>
DISTRIBUTION OF LOANS. The distribution of Sentinel Community's total loans by
type of loan as of the dates indicated is shown in the following table:
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands)
December 31,
--------------------------------------------------------
TYPE OF LOAN 1999 1998 1997
- --------------------------- -------- -------- --------
<S> <C> <C> <C>
Real estate $ 54,078 $ 47,310 $ 37,704
Commercial 4,795 3,219 1,009
Consumer 2,343 1,363 720
-------- -------- --------
TOTAL 61,216 51,892 39,433
Less:
Deferred loans fees (273) (256) (273)
Allowance for loan losses (908) (556) (390)
TOTAL NET LOANS $ 60,035 $ 51,080 $ 38,770
</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.
Sentinel Community also extends lines of credit to business customers. On
business credit lines, Sentinel Community 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
Sentinel Community. The purpose for which such loans will be used and the
security therefor, if any, are generally determined before Sentinel Community's
commitment is extended. Normally, Sentinel Community 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.
All of Sentinel Community's real estate construction loans consist of loans
secured by first trust deeds on the construction of owner-occupied 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 80%.
CONSUMER LOANS. Most consumer loans are short-term loans, made for a period
of up to five years. Automobile loans are normally made with up to a
five-year amortization period.
116
<PAGE>
MATURITY OF LOANS AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The
following table sets forth the amounts of loans outstanding 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.
<TABLE>
<CAPTION>
(Dollars in Less Than One Year to After
thousands) One Year Five Years Five Years Total
-------- ---------- ---------- -------
<S> <C> <C> <C>
DECEMBER 31, 1999
Fixed rate $ 3,883 $ 9,889 $15,546 $29,318
Variable 15,647 12,696 3,555 31,898
------- ------- ------- -------
Total $19,530 $22,585 $19,101 $61,216
</TABLE>
LOAN COMMITMENTS. The following table shows Sentinel Community's loan
commitments at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
(Dollars in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Commercial $ 1,610 $ 858 $ 3,018
Real estate 11,355 9,423 12,937
Consumer 1,855 1,159 1,318
------- ------- -------
Total commitments $14,820 $11,440 $17,273
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 90% of the commitments at December 31, 1999 will
be exercised during 2000. All commercial commitments in the preceding table are
commitments to grant such loans.
SUMMARY OF LOAN LOSS EXPERIENCE. As a natural corollary to Sentinel Community'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. Sentinel Community attempts to
minimize its credit risk exposure by use of thorough loan application and
approval procedures.
Sentinel Community maintains a program of systematic review of its existing
loans. Loans are graded for their overall quality. Those loans which Sentinel
Community'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 Sentinel Community's Internal Asset Review (IAR).
Loans for which it is probable that Sentinel Community will be unable to collect
all amounts due (including principal and interest) are considered to be
impaired. The recorded investment in impaired loans totaled $235 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
117
<PAGE>
approximately $235 thousand were on nonaccrual status as of December 31,
1999. Sentinel Community also classifies certain loans on nonaccrual status
as impaired. Accordingly, certain loans on nonaccrual status at December 31,
1999 are included with the impaired loans disclosed above.
Financial difficulties encountered by certain borrowers may cause Sentinel
Community to restructure the terms of their loans to facilitate loan payments.
As of December 31, 1999 and 1998, Sentinel Community had no troubled debt
restructured loans. Interest foregone on nonaccrual loans and troubled debt
restructurings outstanding during the years ended December 31, 1999 and 1998
amounted to approximately $5 thousand and $0, respectively.
Sentinel Community 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
Sentinel Community's allowance for loan losses.
The following table sets forth the amount of loans on Sentinel Community'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>
Real estate $ 205 $2,026
Consumer 101 8
------ ------
Total $ 306 $2,034
====== ======
</TABLE>
The following table sets forth the amount of loans on Sentinel Community's books
which were on nonaccrual status at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------
(Dollars in thousands) 1999 1998
---- ----
<S> <C> <C>
Commercial $ $
Real estate 235 160
Consumer 0 17
---- ----
Total $235 $177
==== ====
</TABLE>
118
<PAGE>
The following table summarizes Sentinel Community's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
(Unaudited) --------------------------------------------
(Dollars in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
BALANCES
Loans:
Average loans $ 58,309 $ 45,061 $ 40,079
Loans at end of period 61,216 51,892 39,433
Loans charged off (64) (69) (88)
Recoveries of loans
previously charged off 36 0 4
Net loans charged off (28) (69) (84)
Allowance for loan losses 908 556 390
Provisions for loan losses $ 380 $ 235 $ 173
Ratios:
Net loan charge-offs to
average loans .05% .15% .21%
Net loan charge-offs to
loans at end of period .05% .13% .21%
Allowance for loan
losses to average loans 1.56% 1.23% .97%
Allowance for loan losses
to loans at end of period 1.48% 1.07% .99%
Net loan charge-offs to
allowance for loan losses 3.08% 12.38% 21.51%
Net loan charge-offs to
provision for loan losses 7.36% 29.29% 48.47%
</TABLE>
Sentinel Community's allowance for loan losses is to provide for loan losses
which can be reasonably anticipated. The allowance for loan losses is
established through charges to operating expenses in the form of provisions for
loan losses. Provisions for possible loan losses amounted to $380 thousand in
1999 and $235 thousand in 1998. The provision increased in 1998 and 1999 as a
result of identified losses in the loan portfolio totaling $69 thousand and $64
thousand, respectively, which were charged-off. Actual loan losses or recoveries
are charged or credited, respectively, directly to the allowance for loan
losses. The amount of the allowance is determined by the management of Sentinel
Community. Among the factors considered in determining the allowance for loan
losses are the current financial condition of Sentinel Community'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 individual borrowers are
also taken into consideration, as are Sentinel Community'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 Sentinel Community may not sustain loan losses substantially higher
in relation to the size of the allowance for loan losses or that
119
<PAGE>
subsequent evaluation of the loan portfolio may not require substantial
changes in such allowance.
At December 31, 1999, 1998 and 1997, the allowance was 1.48%, 1.07% and 0.99% 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 Sentinel Community reviews with the Board of Directors the
adequacy of the allowance for loan losses on a monthly basis and adjusts the
loan loss provision upward where specific items reflect a need for such an
adjustment. Management of Sentinel Community charged off approximately $64
thousand in 1999 and $69 thousand in 1998. Recoveries of loans previously
charged off were $36 thousand in 1999 and $0 in 1998. Management also believes
that Sentinel Community has adequately reserved for all individual items in its
portfolio which may result in a loss material to Sentinel Community.
INVESTMENT SECURITIES. Sentinel Community has invested $24 million in federal
instruments, securities issued by states and political subdivisions, other debt
securities and bank certificates of deposit, which yielded approximately 5.95%
per annum during 1999. Sentinel Community's present investment policy is to
invest excess funds in federal funds, certificates of deposits in financial
institutions, securities issued by the U.S. Government, investment-grade
corporate securities and securities issued by states and political subdivisions.
120
<PAGE>
<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 $ 2,391 $ 2,748 $ 4,373
Average yield 4.89% 5.02% 5.24%
Interest income $ 117 $ 138 $ 229
Certificates of deposit:
Average outstanding $ 1,564 $ 5,030 $ 8,248
Average yield 6.27% 6.20% 6.28%
Interest income $ 98 $ 312 $ 518
Investment securities:
Average outstanding $25,372 $28,225 $14,077
Average yield 5.74% 6.38% 6.34%
Interest income $ 1,456 $ 1,803 $ 892
Loans:
Average outstanding $58,309 $45,061 $40,079
Average yield 9.08% 10.13% 9.46%
Interest income $ 5,296 $ 4,563 $ 3,973
FHLB stock:
Average outstanding $ 478 $ 502 $ 323
Average yield 5.64% 5.58% 6.19%
Interest income $ 27 $ 28 $ 20
Total interest-earning assets:
Average outstanding $88,114 $81,566 $67,100
Average yield 7.94% 8.39% 8.39%
Interest income $ 6,994 $ 6,844 $ 5,632
Interest-bearing liabilities:
NOW and money market demand accounts:
Average outstanding $22,578 $18,397 $16,385
Average yield 1.68% 1.68% 1.66%
Interest expense $ 381 $ 309 $ 272
Savings deposits:
Average outstanding $ 7,945 $ 6,300 $ 7,916
Average yield 2.96% 2.95% 2.88%
Interest expense $ 235 $ 186 $ 228
Time deposits:
Average outstanding $42,100 $42,850 $37,854
Average yield 5.19% 5.41% 5.5%
Interest expense $ 2,186 $ 2,318 $ 2,079
Other borrowings:
Average outstanding $ 6,708 $ 6,125 --
Average yield 4.91% 5.06% --
Interest expense $ 329 $ 310 --
Total interest-bearing liabilities:
Average outstanding $79,331 $73,672 $62,155
Average yield 3.95% 4.24% 4.15%
Interest expense $ 3,131 $ 3,123 $ 2,579
Net interest income $ 3,863 $ 3,721 $ 3,053
Average net yield on
interest-earning assets 4.38% 4.56% 4.55%
</TABLE>
121
<PAGE>
LIQUIDITY MANAGEMENT. Sentinel Community has a line of credit with the Federal
Home Loan Bank of $32 million. When Sentinel Community has excess funds over its
reserve requirements or short-term liquidity needs, Sentinel Community
increases/or decreases its securities investments and/or sells federal funds.
Policies have been developed by Sentinel Community's management and approved by
the Board of Directors which establish guidelines for the investments and
liquidity of Sentinel Community. These policies include an Investment Policy, an
Interest Rate Risk Policy and an Asset/Liability Policy. The goals of these
policies are to provide liquidity to meet the financial requirements of Sentinel
Community's customers, maintain adequate reserves as required by regulatory
agencies and maximize earnings of Sentinel Community.
The following table shows Sentinel Community'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 $ 7,730 9.6% $ 6,648 9.0% $ 3,250 4.9%
NOW accounts 16,649 20.7% 14,159 19.1% 11,248 17.2%
Savings deposits 7,945 9.9% 6,300 8.5% 7,916 12.1%
Money market deposits 5,929 7.4% 4,238 5.7% 5,137 7.9%
Time deposits 42,100 52.4% 42,850 57.7% 37,854 57.9%
------- ------- ------- ------- ------- -------
Total deposits $80,353 100.0% $74,195 100.0% $65,405 100.0%
</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, 1999
-----------------------------
TCD's Other
(Dollars in thousands) over Time
(Unaudited) $100,000 Deposits
-------- --------
<S> <C> <C>
Less than three months $ 2,156 $ 5,287
Over three months through twelve months 7,844 21,308
Over twelve months through five years 103 2,003
Over five years 0 2
------- -------
Total $10,103 $28,600
</TABLE>
While the deposits of Sentinel Community may fluctuate up and down somewhat with
local and national economic conditions, management of Sentinel Community does
not believe that such
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deposits, or the business of Sentinel Community in general, are seasonal in
nature. Liability management is monitored by Sentinel Community's Board of
Directors which meets monthly.
REGULATORY MATTERS.
CAPITAL ADEQUACY. Sentinel Community is subject to the FDIC's regulations
governing capital adequacy for nonmember banks. Additional capital requirements
may be imposed on banks based on market risk.
The FDIC has established capital adequacy regulations for nonmember banks, which
set total capital requirements and define capital in terms of "core capital
elements," or Tier 1 capital and "supplemental capital elements," or Tier 2
capital. At least fifty percent (50%) of the qualifying total capital base must
consist of Tier 1 capital. The maximum amount of Tier 2 capital that may be
recognized for risk-based capital purposes is limited to one-hundred percent
(100%) of Tier 1 capital, net of goodwill.
Nonmember banks are required to maintain a minimum ratio of qualifying total
capital to risk-weighted assets of eight percent (8%), at least one-half of
which must be in the form of Tier 1 capital. Risk-based capital ratios are
calculated with reference to risk-weighted assets, including both on and
off-balance sheet exposures, which are multiplied by certain risk weights
assigned by the FDIC to those assets.
The FDIC has established a minimum leverage ratio of three percent (3%) Tier 1
capital to total assets for nonmember banks that have received the highest
composite regulatory rating and are not anticipating or experiencing any
significant growth. All other institutions are required to maintain a leverage
ratio of at least 100 to 200 basis points above the 3% minimum for a minimum of
four percent (4%) or five percent (5%).
Set forth below are Sentinel Community's risk-based and leverage capital ratios
as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
- -------------------------
December 31, 1999
-----------------
Amount Risk-Based Ratio
-------- ----------------
<S> <C> <C>
Tier 1 capital $ 5,488 9.59%
Total capital $ 6,143 10.74%
Total capital minimum requirement $ 4,577 8.0%
Excess $ 1,566
Total risk-weighted assets $57,214
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LEVERAGE RATIO
December 31, 1999
-----------------
Amount Leverage Ratio(1)
------ -----------------
<S> <C> <C>
Tier 1 capital $ 5,488 5.94%
Minimum leverage ratio $ 3,696 4.00%
Excess $ 1,792
Average assets $92,406(2)
</TABLE>
- ----------------------------------------
(1) Tier 1 capital to adjusted total average assets.
(2) As adjusted for intangibles and FAS 115.
The risk-based capital ratios discussed above focus principally on broad
categories of credit risk, and may not take into account many other factors that
can affect a bank's financial condition. These factors include overall interest
rate risk exposure; liquidity, funding and market risks; the quality and level
of earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The FDIC
has addressed many of these areas in related rule-making proposals and under
FDICIA (as defined below), some of which are discussed herein. In addition to
evaluating capital ratios, an overall assessment of capital adequacy must take
account of each of these other factors including, in particular, the level and
severity of problem and adversely classified assets. For this reason, the final
supervisory judgment on a bank's capital adequacy may differ significantly from
the conclusions that might be drawn solely from the absolute level of the bank's
risk-based capital ratio. In light of the foregoing, the FDIC has stated that
banks generally are expected to operate above the minimum risk-based capital
ratio. Banks contemplating significant expansion plans, as well as those
institutions with high or inordinate levels of risk, should hold capital
commensurate with the level and nature of the risks to which they are exposed.
Recently adopted regulations by the federal banking agencies have revised the
risk-based capital standards to take adequate account of concentrations of
credit and the risks of nontraditional activities. Concentrations of credit
refers to situations where a lender has a relatively large proportion of loans
involving one borrower, industry, location, collateral or loan type.
Nontraditional activities are considered those that have not customarily been
part of the banking business but that start to be conducted as a result of
developments in, for example, technology or financial markets. The regulations
require institutions with high or inordinate levels of risk to operate with
higher minimum capital standards. The federal banking agencies also are
authorized to review an institution's management of concentrations of credit
risk for adequacy and consistency with safety and soundness standards regarding
internal controls, credit underwriting or other operational and managerial
areas. In addition, the agencies have
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promulgated guidelines for institutions to develop and implement programs for
interest rate risk management, monitoring and oversight.
Further, the banking agencies recently have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that the banking
agencies will consider in evaluating an institution's capital adequacy. Bank
examiners will consider a bank's historical financial performance and its
earnings exposure to interest rate movements as well as qualitative factors such
as the adequacy of a bank's internal interest rate risk management.
Finally, institutions with significant trading activities must measure and hold
capital for exposure to general market risk arising from fluctuations in
interest rates, equity prices, foreign exchange rates and commodity prices and
exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. The federal banking agencies may apply the
market risk regulations on a case by case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and interest
rate risk, the federal banking agencies will evaluate an institution in its
periodic examination on the degree to which changes in interest rates, foreign
exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies will focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
In certain circumstances, the FDIC may determine that the capital ratios for an
FDIC-insured bank must be maintained at levels which are higher than the minimum
levels required by the guidelines or the regulations. A bank which does not
achieve and maintain the required capital levels may be issued a capital
directive by the FDIC to ensure the maintenance of required capital levels.
DIVIDENDS. Dividends payable by Sentinel Community are governed by federal
prompt corrective action capital regulations.
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
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<PAGE>
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
future payment of cash dividends by Sentinel Community will generally depend, in
addition to regulatory constraints, upon Sentinel Community's earnings during
any fiscal period, the assessment of Sentinel Community'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.
RESERVE BALANCES. Sentinel Community maintains average reserve balances with the
FRB. At December 31, 1999, Sentinel Community's qualifying balance with the FRB
was approximately $643 thousand, consisting of vault cash and balances.
YEAR 2000 COMPLIANCE. The Year 2000 problem arises when computer programs have
been written having two digits rather than four to define the applicable year.
As a result, date-sensitive software and/or hardware may recognize a date having
00 as the year 1900 rather than the year 2000. This could result in a system
failure or other disruption of operations and impede normal business activities.
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to Sentinel Community's financial
position. The estimated total cost of the Year 2000 project is approximately
$84,000 which was expensed as incurred.
Sentinel Community completed all phases of its Year 2000 compliance project and
as of February 29, 2000, Sentinel Community has not encountered any material
Year 2000 problems.
Although Sentinel Community'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
Sentinel Community. Management, however, cannot be certain that Year 2000 issues
affecting customers, suppliers or service providers of Sentinel Community will
not have a material adverse impact on Sentinel Community.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the
risk of loss from adverse changes in market prices and rates. Sentinel
Community'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. Sentinel Community 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. Sentinel Community has a
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<PAGE>
negative gap for time periods up to five years. In addition, Sentinel
Community uses interest rate shock simulations to estimate the effect of
certain hypothetical rate changes. Based upon Sentinel Community's shock
simulations, net interest income is expected to marginally decline with
increasing rates and increase with declining rates.
Sentinel Community's overall cumulative positive gap is the result of the
majority of loans held in the portfolio having longer maturity dates. On the
liability side, the majority of the Sentinel Community's time deposits have
average terms of approximately nine months while savings accounts and other
interest-bearing transaction accounts are recorded for gap analysis in the next
day to six 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. Sentinel Community has reduced interest rates on time deposits and
focused on increasing noninterest-bearing deposits and floating rate loans. In
addition, Sentinel Community holds approximately one-half of its investments in
the available-for-sale category in order to maintain flexibility in matching its
investments with repricing changes which occur in its liabilities.
The following table sets forth the distribution of repricing opportunities of
Sentinel Community'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
Sentinel Community.
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<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Over Three
Months Over
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 $ 600 $ $ $ $ 600
Interest-bearing deposits 99 297 396 792
Investment securities 3,992 5,745 4,509 9,109 23,355
Loans 10,188 21,552 12,774 16,702 61,216
FHLB stock 456 456
-------- --------- -------- -------- --------
Total interest-earning assets 15,335 27,594 17,679 25,811 86,419
Liabilities:
FHLB borrowings 9,000 9,000
Savings deposits(1) 31,334 31,334
Time deposits 23,035 13,560 2,106 2 38,703
-------- --------- -------- -------- --------
Total interest-bearing liabilities 63,369 13,560 2,106 2 79,037
Net (interest-bearing liabilities)
interest-earning assets $(48,034) $ 14,034 $ 15,573 $ 25,809 $ 7,382
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $(48,034) $(34,000) $ (18,427) $ 7,382
Cumulative GAP as a percentage of
total interest-earning assets (55.6) (39.3) (21.3) 8.5
- ----------------
</TABLE>
(1) Savings deposits include interest-bearing transaction accounts.
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<PAGE>
The following table sets forth the distribution of the expected maturities of
Sentinel Community'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 2000 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 $ 600 $ 600 $ 600
Weighted average rate 5.53 5.53
Interest-bearing deposits in banks $ 99 $ 297 $ 396 $ 792 $ 792
Weighted average rate 5.63 6.27 6.63 6.38
Investment securities(1) $ 1,808 $ 508 $ 991 $ 485 $19,563 $23,355 $23,236
Weighted average rate 5.89 5.96 7.0 6.55 5.90 5.95
Fixed rate loans $ 3,883 $ 2,678 $ 2,878 $ 1,966 $ 2,367 $15,546 $29,318 $28,086
Weighted average rate 9.71 9.27 9.35 9.03 9.18 8.26 8.78
Variable rate loans(2) $ 2,952 $ 2,652 $ 2,762 $ 2,962 $ 1,962 $18,608 $31,898 $31,898
Weighted average rate 8.79 8.70 8.34 8.58 8.24 8.45 8.49
FHLB stock $ 456 $ 456 $ 456
Weighted average rate 5.57 5.57
Total interest-bearing assets $ 7,534 $ 7,435 $ 6,544 $ 5,919 $ 4,814 $54,173 $86,419 $85,068
Savings deposits(3) $31,334 $31,334 $31,334
Weighted average rate 2.22 2.22
Time deposits $36,595 $ 1,991 $ 35 $ 30 $ 50 $ 2 $38,703 $38,671
Weighted average rate 4.96 5.39 6.57 5.96 5.95 4.47 4.99
Borrowings $ 9,000 $ 9,000 $ 9,000
Weighted average rate 5.74 5.74
Total interest-bearing liabilities $76,929 $ 1,991 $ 35 $ 30 $ 50 $ 2 $79,037 $79,005
- ------------
</TABLE>
(1) Interest rates on tax exempt obligations have not been tax effected to
include the related tax benefits in calculating the weighted average
yield.
(2) All variable rate loans reprice in one year or less.
(3) Savings deposits include interest-bearing transaction accounts.
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<PAGE>
MANAGEMENT
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 Sentinel Community:
<TABLE>
<CAPTION>
Year First
Appointed
Director or
Name Age Officer Title
- ------------------------------- --------- ----------------- ---------------------------------------------------
<S> <C> <C> <C>
Katherine A. Boyer 36 1993 Vice President and Chief Savings Officer
Grady R. Buck 52 1998 Senior Vice President and Chief Credit Officer
James D. Costello 56 1992 Director
Donald M. Cusey(1) 50 1984 President, Chief Executive Officer and Director
Gary P. Dambacher 49 1997 Director
Kim C. Daters 44 1990 Director
Lary A. Davis 46 1992 Director
Robert K. Johnson 66 1981 Director
Alan J. Kleinert 55 1981 Chairman of the Board
Mark L. Lovewell 39 1996 Senior Vice President and Chief Financial Officer
Joseph W. Martin 70 1995 Director
Paul E. von Savoye 59 1981 Director
Philip S. Wood 56 1997 Executive Vice President and Chief Operations
Officer
- -------------
</TABLE>
(1) Donald M. Cusey was hired as Vice President and Chief Financial Officer
in May 1984. He was appointed as President, Chief Executive Officer and
Director in June 1996.
The business experience of each of the directors and executive officers for the
past five years is described below.
KATHERINE A. BOYER has served as Vice President and Chief Savings Officer of
Sentinel Community since April 1993. From October 1983 to April 1993, she served
in various deposit functions, starting as a teller and working her way up
through supervisory positions.
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<PAGE>
GRADY R. BUCK has served as Senior Vice President and Chief Credit Officer of
Sentinel Community since August 1998. From 1996 to August 1998, he served as
Vice President and Regional Manager for Tri Counties Bank in Bakersfield,
California. Prior to joining Tri Counties, he served in various senior credit
positions with several California banks for over 24 years.
JAMES D. COSTELLO was appointed a director of Sentinel Community in April 1992.
He resigned from the Board in July 1997, after leaving the area for employment
reasons, and was reappointed to the Board in February 1999 after returning to
the area. Mr. Costello is a Consultant, after serving more than 25 years in
various senior management positions in the forest products industry, primarily
Fibreboard Corporation.
DONALD M. CUSEY has served as President, Chief Executive Officer and a director
of Sentinel Community since June 1996. From May 1984 to June 1996, he served as
Chief Financial Officer of Sentinel Community. Mr. Cusey is a CPA and has over
20 years experience in the financial services industry.
GARY P. DAMBACHER has been a director since August 1997. Mr. Dambacher has been
an attorney with a private practice in Sonora, California, since 1981.
KIM C. DATERS has been a director since August 1990. Mr. Daters has been
self-employed as a Certified Financial Planner since 1983. Prior to becoming a
Certified Financial Planner, Mr. Daters worked as an industrial engineer for
Proctor & Gamble in Modesto, California.
LARY A. DAVIS has been a director since June 1992. Mr. Davis is the President of
Sonora Community Hospital, a position he has held since 1989. Mr. Davis has over
20 years experience in the medical services industry.
ROBERT K. JOHNSON has been a director of Sentinel Community since its inception
in 1981. Mr. Johnson, currently retired, has owned and operated various
businesses, including the Wilsonia Lodge in Kings Canyon National Park, Stuft
Pizza in Sonora, and a travel agency in Fresno.
ALAN J. KLEINERT has been Chairman of the Board of Sentinel Community since its
inception in 1981. Mr. Kleinert has owned and operated Cutler Segerstrom
Insurance Agency for over 25 years.
MARK L. LOVEWELL has served as Senior Vice President and Chief Financial Officer
of Sentinel Community since June 1996. From October 1995 to June 1996, he served
in various accounting positions at Sentinel Community, most recently as Vice
President and Controller.
JOSEPH W. MARTIN has been a director of Sentinel Community since September 1995.
Mr. Martin has owned and operated Joe Martin Logging and Trucking, Inc., for
over 40 years, as well as several other related businesses.
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<PAGE>
PAUL E. VON SAVOYE has been a director of Sentinel Community since its inception
in 1981. Mr. von Savoye has owned and operated Cutler Segerstrom Insurance
Agency for over 25 years.
PHILIP S. WOOD has served as Executive Vice President and Chief Operating
Officer of Sentinel Community since July 1997. From 1992 to 1997, he served as
Vice President/Branch Administrator of El Capitan National Bank (subsequently
Valliwide Bank), Sonora, California. Mr. Wood has over 20 years banking
experience.
SENTINEL COMMUNITY'S BOARD OF DIRECTORS AND COMMITTEES. Sentinel Community's
Board of Directors met fourteen (14) times in 1999. All of Sentinel
Community's directors attended at least 75 percent of all of Sentinel
Community's Board of Directors' meetings and committee meetings (of which
they were a member), except James D. Costello (appointed February 25, 1999),
who attended 64% of such meetings.
Sentinel Community's Board of Directors has established the following standing
committees, with membership as noted.
Sentinel Community's Internal Asset Review Committee is composed of Don Cusey,
Paul von Savoye, Lary Davis, Mark Lovewell, Phil Wood and Grady Buck. Sentinel
Community's Internal Asset Review Committee met twelve times during 1999. The
Internal Asset Review Committee reviews asset quality, asset classifications,
loan delinquencies/maturities, allowance for loan and lease losses, portfolio of
REO properties, LTOB and LTV exceptions, and randomly reviews large loans for
quality control.
Sentinel Community's Budget/Audit Committee is composed of Lary Davis, Joe
Martin and Gary Dambacher. Advisory Members are Don Cusey, Phil Wood, Grady Buck
and Mark Lovewell. The Budget/Audit Committee met three times during 1999. The
Budget/Audit Committee reviews external and internal audit reports, regulatory
exam reports, meets with auditors and regulators, as needed, and reviews
procedures for compliance of audit reports.
Sentinel Community's Loan Committee is composed of Pete Kleinert, Chairman, Gary
Dambacher, Don Cusey, Kim Daters, Bob Johnson and Grady Buck. Sentinel
Community's Loan Committee meets weekly, as needed. They review loan
applications, loan policies and procedures and loan pricing.
Sentinel Community's Executive Committee is composed of Pete Kleinert, Chairman,
Don Cusey, Jim Costello, Kim Daters and Lary Davis. Sentinel Community's
Executive Committee meets as needed. They act on items of a Board level nature
which, because of time demands, must be acted on between regularly scheduled
Board meetings. They also review strategic planning, personnel matters including
policies and procedures, investment options including policies and procedures,
and mergers and acquisitions.
Sentinel Community does not maintain a nominating committee. The functions of a
nominating committee are performed by the full Board of Directors of Sentinel
Community.
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<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTOR COMPENSATION. Effective April 1, 1999, each director, with the
exception of Chairman of the Board Kleinert and CEO Cusey, receives fees
totaling $500 per month. Mr. Kleinert receives fees totaling $667 per month. No
additional fees are given for Committee participation. Fees are received
regardless of Board or Committee meeting attendance. During the fiscal year
ended December 31, 1999, the aggregate amount paid to all directors as a group
was $43,800.
EXECUTIVE COMPENSATION. The following table sets forth a summary of the
compensation paid during each of Sentinel Community's last three completed
fiscal years for services rendered in all capacities to Donald M. Cusey, the
Chief Executive Officer of Sentinel Community during the last three fiscal
years. No other employee of Sentinel Community earned over $100,000 during the
year ended December 31, 1999.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
- --------------------------------------------------------------- ---------------------- ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------- --------- -------- ---------- --------- ------------ ---------- ---------- ------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation(2)
Position Year ($) ($) ($) ($) SARs ($) ($)
- --------------------- --------- -------- ---------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald M. Cusey, 1999 115,180 20,453 4,200 0 0 0 3,417
President, CEO and --------- -------- ---------- --------- ------------ ---------- ---------- ------------
Director of Sentinel 1998 114,108 0 4,200 0 0 0 3,315
Community --------- -------- ---------- --------- ------------ ---------- ---------- ------------
1997 111,480 0 4,200 0 0 0 2,437
--------- -------- ---------- --------- ------------ ---------- ---------- ------------
</TABLE>
(1) Consists of an annual automobile allowance.
(2) Represents Sentinel Community's contribution for the cost of premiums
for disability insurance and 401(k) employer matching contribution.
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ----------------------- -------------------- --------------------- -------------------- ----------------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year End (#) Year End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ----------------------- -------------------- --------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Donald M. Cusey 1,073 $11,159 20,973/4,460 $130,624/$20,622
Options Only
- ----------------------- -------------------- --------------------- -------------------- ----------------------
</TABLE>
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<PAGE>
Effective July 1, 1999, Mr. Cusey entered into a two year employment agreement
which terminates on July 1, 2001. Under the terms of Mr. Cusey's employment
agreement, Mr. Cusey shall serve as President and Chief Executive Officer of
Sentinel Community, at a salary of $115,000 per annum. The Board of Sentinel
Community may terminate Mr. Cusey without cause in which he shall receive six
months severance pay. Further, in the event there is a change in control or
merger and Mr. Cusey is not retained as President and Chief Executive Officer,
Mr. Cusey shall receive 12 months severance pay.
CERTAIN TRANSACTIONS
Some of the Sentinel Community's directors and executive officers and their
immediate families, as well as the companies in which they may have interest,
have had loans with Sentinel Community in the ordinary course of the Sentinel
Community's business. In addition, Sentinel Community expects to have loans with
these persons in the future. In management's opinion, all these loans and
commitments to lend were made in the ordinary course of business, were made in
compliance with applicable laws 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. The outstanding balance under extensions of credit
by Sentinel Community to directors and executive officers of Sentinel Community
and to the companies that these directors and executive officers may have an
interest was $439,417, and $71,000 as of December 31, 1999 and 1998,
respectively.
At no time since January 1, 1999 has Sentinel Community had outstanding
aggregate extensions of credit to any of its directors, officers, principal
security holders or their respective associates in excess of 10% of the equity
accounts of Sentinel Community.
Other than disclosed above, there have been no transactions since January 1,
1999, nor are there any presently proposed transactions, to which Sentinel
Community was or is to be a party in which any of Sentinel Community's officers
and directors had or have a direct or indirect material interest other than the
proposed merger.
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<PAGE>
INFORMATION CONCERNING
WESTERN SIERRA AND SENTINEL COMMUNITY
COMPETITION
The banking business in California generally, and in the market areas served by
Western Sierra and Sentinel Community, is highly competitive with respect to
both loans and deposits. Western Sierra and Sentinel Community compete for loans
and deposits with other commercial banks, savings and loan associations, finance
companies, money market funds, credit unions and other financial institutions,
including a number that are much larger than Western Sierra or Sentinel
Community. As of June 30, 1998 there were 120 banking offices, including 34
offices of four major chain banks, operating within Western Sierra's primary
market areas in El Dorado, Sacramento, Placer and Lake Counties, and there were
21 banking offices, including nine offices of six major chain banks operating
within Sentinel Community's primary market area in Tuolumne County. There has
been increased competition for deposit and loan business over the last several
years as a result of deregulation. Additionally, with the enactment of
interstate banking legislation in California, bank holding companies
headquartered outside of California may enter the California market and provide
further competition for Western Sierra and Sentinel Community. See "Effect of
Governmental Policies and Recent Legislation" below. Many of the major
commercial banks operating in Western Sierra's and Sentinel Community's market
areas offer certain services, such as trust and international banking services,
which Western Sierra and Sentinel Community do not offer directly. Additionally,
banks with larger capitalization have larger lending limits and are thereby able
to serve larger customers.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business which depends on rate differentials. In general, the
difference between the interest rate paid by Western Sierra and Sentinel
Community on their deposits and their other borrowings and the interest rate
received by Western Sierra and Sentinel Community on loans extended to its
customers and securities held in Western Sierra's and Sentinel Community's
portfolio comprise the major portion of Western Sierra's and Sentinel
Community's earnings. These rates are highly sensitive to many factors which are
beyond the control of Western Sierra and Sentinel Community. Accordingly, the
earnings and growth of Western Sierra and Sentinel Community are subject to the
influence of domestic and foreign economic conditions, including inflation,
recession and unemployment.
The earnings and growth of Western Sierra and Sentinel Community are also
influenced by the monetary and fiscal policies of the federal government and the
policies of regulatory agencies, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policies (with objectives
such as to curb inflation and combat recession) by its open-market operations in
United States Government securities, by adjusting the required level of reserves
for financial institutions subject to its reserve requirements and by varying
the discount rates applicable to borrowing by depository institutions. The
actions of the Federal Reserve Board in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. The nature and impact of any future change in monetary
policies cannot be predicted.
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CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement is effective
for fiscal years beginning after June 15, 1999 but may be adopted as of the
beginning of any fiscal quarter that begins after the issuance of the Statement.
Management of Western Sierra and Sentinel Community have not yet completed their
analysis to determine the effect implementation of Statement No. 133 will have
on their respective financial statements.
RECENT LEGISLATION AND OTHER CHANGES
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. Certain of the potentially significant changes which have
been enacted recently and others which are currently under consideration by
Congress or various regulatory or professional agencies are discussed below.
The Financial Services Modernization Act ("FSMA") was enacted in late 1999. FSMA
among other things repeals the Glass-Steagall Act. The Glass-Steagall Act
enacted in the Depression era prohibits banks from affiliating with securities
firms. In addition, FSMA will allow for a new type of bank holding company under
the Bank Holding Company Act. The new bank holding company will be allowed to
engage in insurance and securities underwriting, merchant banking and insurance
company portfolio investment activities. Currently, bank holding companies are
strictly limited in the amount of insurance and securities underwriting
activities in which they may engage.
FSMA will also allow bank holding company companies to engage in any activity
considered "financial" in nature or incidental to such financial activities.
Under the existing Bank Holding Company Act, incidental activities are limited
to those that are "banking" in nature or incidental to such banking activities.
Financial activities include as well as lending, providing insurance as an
agent, broker or as principal, issuing annuities, underwriting, and dealing in
or making a market in securities. All insurance activities that are to be
conducted must be conducted in compliance with applicable state laws. In
connection with insurance sales the United States Supreme Court case of BARNETT
BANK OF MARION COUNTY N.A. V. NELSON, 116 S. Ct. 1103 (1996) is followed by
FSMA, and FSMA further provides that "no state may, by statute, regulation,
order, interpretation, or other action, prevent or significantly interfere with
the ability of an insured depository institution, or a subsidiary or affiliate
thereof, to engage, directly or indirectly, either by itself or in conjunction
with a subsidiary, affiliate, or any other party, in any insurance sales,
solicitation, or cross-marketing activity."
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The Community Reinvestment Act provisions in FSMA require that any new bank
holding company that is formed meet the conditions that all of the company's
insured depository institutions are well capitalized and well managed or
received at least a satisfactory rating in the most recent Community
Reinvestment Act examination.
Other key aspects of FSMA include the following:
- streamlining bank holding company supervision by defining the roles of
the Federal Reserve and other federal and state regulators;
- prohibiting FDIC assistance to affiliates and subsidiaries of banks and
thrifts;
- allowing a national bank that is well capitalized and well managed to
establish new operating subsidiaries that may engage in financial
activities other than insurance underwriting, merchant banking,
insurance company portfolio investments, real estate development and
real estate investment, so long as the aggregate assets of all
financial subsidiaries do not exceed 45% of the parent's assets or $50
billion, whichever is less;
- permitting national banks to underwrite municipal bonds;
- providing that securities activities conducted by a bank subsidiary
will be subject to regulation by the Securities and Exchange
Commission;
- providing that insurance activities conducted by a bank subsidiary will
be subject to regulation by the applicable state insurance authority;
- replacing broker-dealer exemptions allowed to banks with limited
exemptions;
- providing that de novo unitary thrift holding company applications
received by the Office of Thrift Supervision after May 4, 1999 shall
not be approved;
- providing that existing unitary thrift holding companies may only be
sold to financial companies;
- adopting new privacy provisions which allow customers to "opt out" of
sharing nonpublic personal information with nonaffiliated third parties
subject to certain exceptions;
- requiring that ATM's which impose a fee on noncustomers to disclose on
the ATM screen the amount of the fee prior to a transaction becoming
irrevocable on the ATM;
- providing regulatory relief to smaller banks with less than $250
million in total assets with respect to the frequency of CRA
examinations. The time between examinations may be as long as five
years for small banks and savings and loans; and
- requiring plain language for federal banking agency regulations.
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On October 1, 1998, the FDIC adopted two new rules governing minimum capital
levels that FDIC-supervised banks must maintain against the risks to which they
are exposed. The first rule makes risk-based capital standards consistent for
two types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on equity securities to be recognized for risk-based
capital purposes. These rules may be applied by Western Sierra and Sentinel
Community.
In August 1997, Governor Wilson of California signed Assembly Bill 1432
("AB1432") which provides for certain changes in the banking laws of California.
Effective January 1, 1998 AB1432 eliminates the provisions regarding impairment
of contributed capital and the assessment of shares when there is an impairment
of capital. AB1432 now allows the DFI to close a bank, if the DFI finds that the
bank's tangible shareholders' equity is less than the greater of 3% of the
bank's total assets or $1 million. AB1432 also moved administration of the Local
Agency Program from the California Department of Financial Institutions to the
California State Treasurer's office.
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act") as
part of the Omnibus Appropriations Bill was enacted on September 30, 1996 and
includes many banking related provisions. The most important banking provision
is the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
1996 Act provides for a one time assessment, payable on November 30, 1996, of
approximately 65 basis points per $100 of deposits of SAIF insured deposits
including SAIF insured deposits which were assumed by banks in acquisitions of
savings associations. For the years 1997 through 1999 the banking industry will
assist in the payment of interest on Financing Corporation ("FICO") bonds that
were issued to help pay for the clean up of the savings and loan industry. Banks
will pay approximately 1.3 cents per $100 of deposits for this special
assessment, and after the Year 2000, banks will pay approximately 2.4 cents per
$100 of deposits until the FICO bonds mature in 2017. There is a three year
moratorium on conversions of SAIF deposits to Bank Insurance Fund ("BIF")
deposits. The 1996 Act also has certain regulatory relief provisions for the
banking industry. Lender liability under the Superfund is eliminated for lenders
who foreclose on property that is contaminated provided that the lenders were
not involved with the management of the entity that contributed to the
contamination. There is a five year sunset provision for the elimination of
civil liability under the Truth in Savings Act. The FRB and Department of
Housing and Urban Development are to develop a single format for Real Estate
Settlement Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified. Significant
revisions are made to the Fair Credit Reporting Act ("FCRA") including requiring
that entities which provide information to credit bureaus conduct an
investigation if a consumer claims the information to be in error. Regulatory
agencies may not examine for FCRA compliance unless there is a consumer
complaint investigation that reveals a violation or where the agency otherwise
finds a violation. In the area of the Equal Credit Opportunity Act, banks that
self-test for compliance with fair lending laws will be protected from the
results of the test provided that appropriate corrective action is taken when
violations are found.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground
storage tank provisions of
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the Resource Conversation and Recovery Act to provide lenders and fiduciaries
with greater protections from environmental liability. In June 1997, the U.S.
Environmental Protection Agency ("EPA") issued its official policy with
regard to the liability of lenders under CERCLA as a result of the enactment
of the Asset Conservation, Lender Liability and Deposit Insurance Protection
Act of 1996. California law provides that, subject to numerous exceptions, a
lender acting in the capacity of a lender shall not be liable under any state
or local statute, regulation or ordinance, other than the California
Hazardous Waste Control Law, to undertake a cleanup, pay damages, penalties
or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
In 1997, California adopted the Environmental Responsibility Acceptance Act (the
"Act") (Cal. Civil Code Section 850-855) to facilitate the notification of
government agencies and potentially responsible parties (for example, for
cleanup) of the existence of contamination and the cleanup or other remediation
of contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
It is impossible to predict what effect the enactment of certain of the
above-mentioned legislation will have on Western Sierra and Sentinel Community
and on the financial institutions industry in general. Moreover, it is likely
that other bills affecting the business of banks may be introduced in the future
by the United States Congress or California legislature.
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DESCRIPTION OF WESTERN SIERRA FOLLOWING THE MERGER
BUSINESS
Western Sierra has filed an application to merge Roseville 1st National Bank
into Western Sierra National Bank. The completion of the Roseville 1st National
Bank merger may occur prior to the merger with Sentinel Community. It is
anticipated that following the merger, Western Sierra will continue to operate
the businesses of Western Sierra National Bank and Lake Community in
substantially the same form as such businesses were conducted prior to the
merger. Western Sierra will continue to operate Western Sierra National Bank
through Western Sierra National Bank's head office and branch offices, including
the head office and branch offices of Sentinel Community, Lake Community Bank
through Lake Community Bank's head office and branch offices and Roseville 1st
National Bank through Roseville 1st National Bank's head office and branch
office as independently operated subsidiary banks. However, if the merger of
Roseville 1st National Bank with Western Sierra National Bank is completed
before the merger with Sentinel Community, then Western Sierra National Bank
will operate through Western Sierra National Bank's head office and branch
offices, including the head office and branch offices of Sentinel Community and
Roseville 1st National Bank.
MANAGEMENT
Upon completion of the merger, the Board of Directors of Western Sierra will
consist of 17 directors. All of the then 15 directors of Western Sierra then in
office immediately prior to the completion of the merger shall continue to serve
as directors of Western Sierra, and in addition, Alan J. "Pete" Kleinert and
Lary Davis, currently directors of Sentinel Community, will be added to the
Board of Directors of Western Sierra. In addition, upon completion of the
merger, Alan J. "Pete" Kleinert and Kim C. Daters will be appointed to the Board
of Directors of Western Sierra National Bank. For information concerning these
persons, see "Description of Western Sierra--Management--Information on
Directors and Executive Officers" and "Description of Sentinel
Community--Management--Information on Directors and Executive Officers."
It is anticipated that the directors of Western Sierra will receive fees in
amounts which are substantially similar to those presently paid to directors of
Western Sierra. These fees are described in "Description of Western
Sierra--Management--Compensation of Directors and Executive Officers."
Gary D. Gall, who is currently the President and Chief Executive Officer of
Western Sierra and Western Sierra National Bank, Richard C. Seeba, who is
currently the Executive Vice President of Western Sierra and the President and
Chief Executive Officer Roseville 1st National Bank, Kirk Dowdell, who is
currently the Executive Vice President and Chief Credit Officer of Western
Sierra and Western Sierra National Bank, Lesa Fynes, who is currently the Senior
Vice President and Chief Financial Officer of Western Sierra, Western Sierra
National Bank and Roseville 1st National Bank, Thomas C. Warren, who is
currently the Senior Vice President and Manager of Information Systems of
Western Sierra and Douglas A. Nordell, who is currently the President and Chief
Executive Officer of Lake Community Bank, are expected to serve in those same
positions with the companies following the merger. In addition, Donald M. Cusey,
who is
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currently the President and Chief Executive Officer of Sentinel Community, is
expected to serve as the Regional President of Western Sierra National Bank
following the merger. In addition, the Board of Directors of Western Sierra
will appoint from time to time such other officers of Western Sierra and the
subsidiary banks as may be necessary. For further information concerning Gary
D. Gall, Richard Seeba, Thomas C. Warren, Kirk Dowdell, Lesa Fynes, Douglas
A. Nordell and other principal officers of Western Sierra, Lake Community
Bank and Roseville 1st National Bank, see "Description of Western
Sierra--Management--Information on Directors and Executive Officers." For
further information concerning Donald M. Cusey, see "Description of Sentinel
Community--Management--Information on Directors and Executive Officers."
It is anticipated that Gary D. Gall, Douglas A. Nordell and Richard C. Seeba and
the other principal officers of Western Sierra, Western Sierra National Bank,
Lake Community and Roseville 1st National Bank will receive compensation
substantially similar to that currently being received by them. For information
concerning compensation currently being paid to principal officers of Western
Sierra, Western Sierra National Bank Lake Community Bank and Roseville 1st
National Bank, see "Description of Western Sierra--Management--Compensation of
Directors and Executive Officers" above.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles of Incorporation and Bylaws of Western Sierra provide for
indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreements. Western Sierra Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the State of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of such person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there shall be no indemnification for:
- amounts paid in settling or otherwise disposing of a pending action
without court approval;
- expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval;
- matters in which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which
the proceeding is or was pending shall determine that such person is
entitled to be indemnified; or
- other matters specified in the California General Corporation Law.
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Western Sierra's Bylaws provide that Western Sierra shall to the maximum extent
permitted by law have the power to indemnify its directors, officers and
employees. Western Sierra's Bylaws also provide that Western Sierra shall have
the power to purchase and maintain insurance covering its directors, officers
and employees against any liability asserted against any of them and incurred by
any of them, whether or not Western Sierra would have the power to indemnify
them against such liability under the provisions of applicable law or the
provisions of Western Sierra's Bylaws. Each of the directors and executive
officers of Western Sierra's subsidiary bank, Western Sierra National Bank has
an indemnification agreement with Western Sierra National Bank that provides
that Western Sierra National Bank shall indemnify such person to the full extent
authorized by the applicable provisions of California law, subject to national
banking laws, and further provide advances to pay for any expenses which would
be subject to reimbursement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling Western Sierra pursuant to the foregoing, Western Sierra
has been informed that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
INDEPENDENT PUBLIC ACCOUNTANTS
It is anticipated that Perry-Smith & Co., LLP will continue to provide
accounting services to Western Sierra, Western Sierra National Bank, Lake
Community Bank and Roseville 1st National Bank, such services to include audits
of year end financial statements and other services as required.
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WESTERN SIERRA PROPOSAL 2:
AMENDMENT OF BYLAWS TO ELIMINATE CUMULATIVE VOTING
Section 301.5 of the California Corporations Code provides that a listed
corporation may by amendment of its bylaws or articles of incorporation
eliminate cumulative voting. Western Sierra is a listed corporation as defined
in Section 301.5 of the California Corporations Code in that it is a corporation
with its common stock designated as qualified for trading as a national market
system security on the National Association of Securities Dealers Automated
Quotation System.
Western Sierra's Board of Directors adopted the following resolution, subject to
shareholder approval, to amend the Bylaws of Western Sierra to eliminate
cumulative voting.
Resolved, that Western Sierra's Bylaws, Article II, Section 2.8, paragraph
4 is amended in the entirety to read as follows:
Pursuant to Section 301.5 of the Code, this corporation shall not
have cumulative voting as provided under Section 708 of the Code,
provided that this corporation is a listed corporation as defined in
Section 301.5 of the Code.
Without the proposed bylaw amendment, Section 708 of the California Corporations
Code requires that upon notice given by a shareholder at a shareholders'
meeting, cumulative voting would be available for the election of directors.
Under cumulative voting, each share entitled to vote in the election of
directors has a number of votes as is equal to the number of directors to be
elected. A shareholder may then cast all of his or her votes for a single
candidate or may allocate them among as many candidates as he or she may choose.
As a result, shareholders holding a significant minority percentage of the
outstanding shares entitled to vote in the election of directors may be able to
assure the election of one or more directors.
The effect of eliminating cumulative voting would be that the holder or holders
of a majority of the shares entitled to vote in an election of directors would
be able to elect all directors being elected. Consequently, the elimination of
cumulative voting could have the effect of preventing minority representation on
the Board of Directors of Western Sierra.
In considering the elimination of cumulative voting, shareholders should also be
aware that another effect of the elimination of cumulative voting is to make
more difficult a change of the composition of the Board of Directors.
The Board of Directors of Western Sierra believes that, in general, in publicly
held companies such as Western Sierra, each director should represent the
interests of all of the shareholders, rather than the interests of a special
constituency, and the presence on the board of one or more directors
representing such a constituency could disrupt and impair the efficient
management of Western Sierra.
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THE BOARD OF DIRECTORS OF WESTERN SIERRA RECOMMENDS A VOTE "FOR" THE AMENDMENT
OF THE BYLAWS TO ELIMINATE CUMULATIVE VOTING.
SHAREHOLDERS SHOULD NOTE THAT IF THIS ITEM OF BUSINESS TO AMEND THE BYLAWS TO
ELIMINATE CUMULATIVE VOTING IS ADOPTED BY THE SHAREHOLDERS OF WESTERN SIERRA,
CUMULATIVE VOTING WILL NOT BE AVAILABLE BEGINNING WITH THE ELECTION OF DIRECTORS
OF WESTERN SIERRA FOR 2000, WHICH IS THE NEXT ITEM OF BUSINESS AT THE WESTERN
SIERRA MEETING.
Approval of the amendment to eliminate cumulative voting by the shareholders of
Western Sierra requires the affirmative vote of a majority of the outstanding
shares entitled to vote at the meeting.
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WESTERN SIERRA PROPOSAL 3:
ELECTION OF DIRECTORS
NOMINEES
Western Sierra's Bylaws provide that the number of directors of Western Sierra
shall not be less than eleven (11) nor more than twenty-one (21) until changed
by an amendment to the Bylaws adopted by Western Sierra's shareholders. The
Bylaws further provide that the exact number of directors shall be established,
within the limits specified, by a Bylaw amending Article III, Section 3.2 of the
Bylaws, duly adopted by the Board of Directors or by the shareholders.
The persons named below, all of whom are currently members of the Board of
Directors, have been nominated for election as directors to serve until the
2001 annual meeting of shareholders and until their successors are elected
and have qualified. If Proposal 2 regarding the amendment of Western Sierra's
Bylaws is not approved, then in connection with the election of directors,
shares may be voted cumulatively if a shareholder present at the meeting
gives notice at the meeting, prior to the voting for election of directors,
of his or her intention to vote cumulatively. If Proposal 2 is not approved,
and if any shareholder of Western Sierra gives such notice, then all
shareholders eligible to vote will be entitled to cumulate their shares in
voting for election of directors. Cumulative voting allows a shareholder to
cast a number of votes equal to the number of shares held in his or her name
as of the record date, multiplied by the number of directors to be elected.
These votes may be cast for any one nominee, or may be distributed among as
many nominees as the shareholder sees fit. If cumulative voting is permitted
and declared at the meeting, votes represented by proxies may be cumulated in
the discretion of the proxyholders, in accordance with management's
recommendation. Votes of the proxyholders will be cast in such a manner as to
effect the election of all fifteen (15) nominees, as appropriate, (or as many
thereof as possible if the rules of cumulative voting still apply). The
fifteen nominees for directors receiving the most votes will be elected
directors. In the event that any of the nominees should be unable to serve as
a director, it is intended that the proxy will be voted for the election of
such substitute nominee, if any, as shall be designated by the Board of
Directors. The Board of Directors has no reason to believe that any of the
nominees named below will be unable to serve if elected.
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NAME AND TITLE WITH WESTERN SIERRA
Charles W. Bacchi, Director
Barbara L. Cook, Director
Kirk Doyle, Director
William J. Fisher, Director
Gary D. Gall, President/CEO and Director
Richard L. Golemon, Vice Chairman of the Board
John Helms, Director
Howard Jahn, Director
Thomas Manz, Director
Harold S. Prescott, Jr., Director
Darol B. Rasmussen, Director
Osvaldo I. Scariot, Secretary and Director
Richard C. Seeba, Executive Vice President and Director
Joseph A. Surra, Chairman of the Board
Howard Van Lente, Director
For additional information on the nominees, see "Description of Western
Sierra--Management--Information on Directors and Executive Officers."
All of the nominees named above have served as members of Western Sierra's Board
of Directors for the past year. All nominees will continue to serve if elected
at the meeting until the 2001 annual meeting of shareholders and until their
successors are elected and have been qualified. None of the directors were
selected pursuant to any arrangement or understanding other than with the
directors and executive officers of Western Sierra acting within their
capacities as such. There are no family relationships between any of the
directors of Western Sierra. No director of Western Sierra serves as a director
of any company which has a class of securities registered under, or which is
subject to the periodic reporting requirements of, the Exchange Act, or of any
company registered as an investment company under the Investment Company Act of
1940.
THE BOARD OF DIRECTORS OF WESTERN SIERRA RECOMMENDS A VOTE "FOR" EACH OF THE
NOMINEES FOR ELECTION AS DIRECTORS.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Western
Sierra directors and certain executive officers and persons who own more than
ten percent of a registered class of Western Sierra's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. They are required by Securities and Exchange Commission
regulation to furnish Western Sierra with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such forms received by Western
Sierra, or written representations from the such persons that no Forms 5 were
required for those persons, Western Sierra believes that, during 1999 such
persons complied with all filing requirements applicable to them, except for
Mr. Bacchi who was late in filing a Form 4 for one transaction, Ms. Cook who
was late in filing a Form 4 for one transaction, Mr. Jahn who was late in
filing a Form 3, Mr. Prescott who was late in filing one Form 4 for two
transactions, Mr. Rasmussen who was late in filing a Form 4 for one
transaction, Mr. Scariot who was late in filing a Form 4 for one transaction,
and Mr. Van Lente who was late in filing a Form 4 for one transaction.
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CHANGE IN ACCOUNTANTS
In December, 1999, Sentinel Community retained Moss Adams LLP as its independent
accountants. Grant Thornton LLP was Sentinel Community's previous independent
accountants. The decision to change independent accountants was ratified and
approved by Sentinel Community's Board of Directors in March, 2000. During the
relationship between Sentinel Community and Grant Thornton LLP, there were no
disagreements regarding any matters with respect to accounting principles or
practices, financial statement disclosure, or audit scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would have caused Grant Thornton LLP to make reference to the subject matter of
the disagreement in connection with its report. The former accountants' report
is a part of the financial statements of Sentinel Community included in this
joint proxy statement/prospectus. Such report does not contain an adverse
opinion or disclaimer of opinion or qualification of modifications as to
uncertainty, audit scope or accounting principles. Prior to retaining Moss Adams
LLP, Sentinel Community had not consulted with Moss Adams LLP regarding
accounting principles.
EXPERTS
The financial statements of Western Sierra as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 included in
this joint proxy statement/prospectus have been audited by Perry-Smith & Co.,
LLP, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated balance sheet of Sentinel Community and subsidiary as of
December 31, 1999, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the year then ended included in this
joint proxy statement/prospectus have been audited by Moss Adams LLP,
independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of Sentinel Community and subsidiary as of
December 31, 1998, and for each of the two years in the period ended December
31, 1998, included in this proxy statement/prospectus have been so included in
reliance on the report of Grant Thornton LLP, independent accountants, given on
the authority of said firm as experts in accounting and auditing.
Representatives of Perry-Smith & Co., LLP will be present at the Western Sierra
meeting, and they will be given an opportunity to make a statement if they
desire to do so. They will also be available to respond to appropriate
questions.
Representatives of Moss Adams LLP will be present at the Sentinel Community
meeting, and they will be given an opportunity to make a statement if they
desire to do so. They will also be available to respond to appropriate
questions.
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LEGAL MATTERS
The validity of the securities to be issued by Western Sierra in the merger is
being passed upon by Gary Steven Findley & Associates, Anaheim, California.
Legal matters in connection with the merger will be passed upon for Sentinel
Community by Bartel Eng Linn & Schroder, Sacramento, California.
OTHER BUSINESS
The Board of Directors of Western Sierra does not know of any other matters to
be presented at the Western Sierra meeting except the proposals to approve the
merger, to amend the Bylaws to eliminate cumulative voting and to elect
directors, as set forth above. The Board of Directors of Sentinel Community does
not know of any other matters to be presented at the Sentinel Community meeting
except the proposal to approve the merger set forth above. If other matters
properly come before the Western Sierra meeting or the Sentinel Community
meeting, however, it is the intention of the persons named in the accompanying
proxy cards to vote the proxy cards in accordance with their best judgment and
in their sole discretion.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report....................................................................................F-1
Consolidated Balance Sheet, December 31, 1999 and 1998..........................................................F-2
Consolidated Statement of Income for the Years Ended
December 31, 1999, 1998 and 1997...............................................................................F-3
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997............................................................F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997...............................................................................F-8
Notes to Consolidated Financial Statements.....................................................................F-12
SENTINEL COMMUNITY BANK
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report...................................................................................F-48
Independent Auditors' Report...................................................................................F-49
Consolidated Balance Sheets, December 31, 1999 and 1998........................................................F-50
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.....................F-51
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997...............................................................................F-52
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.....................F-54
Notes to Consolidated Financial Statements.....................................................................F-56
</TABLE>
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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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
ASSETS
<S> <C> <C>
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>
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>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
----------------------- OTHER
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS (LOSS) INCOME
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997, as previously reported 796,948 $ 4,989,000 $ 2,762,000 $ (31,000)
Lake Community Bank pooling of interests 856,597 3,178,000 5,012,000 (41,000)
Roseville 1st Community Bancorp and subsidiary
pooling of interests 387,486 2,021,000 1,750,000 4,000
----------- ----------- ----------- -----------
Balance, January 1, 1997, restated 2,041,031 10,188,000 9,524,000 (68,000)
Comprehensive income:
Net income 1,951,000
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities (Note 16) 208,000
Total comprehensive income
Stock options exercised and related tax
benefit (Note 11) 11,943 119,000
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)
Fractional shares (4,000)
Earned ESOP shares (Note 15) 4,000 40,000
----------- ----------- ----------- -----------
Balance, December 31, 1997 2,190,104 12,200,000 9,283,000 140,000
----------- ----------- ----------- -----------
<CAPTION>
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME
----------------- ---------------
<S> <C> <C>
Balance, January 1, 1997, as previously reported $ 7,720,000
Lake Community Bank pooling of interests 8,149,000
Roseville 1st Community Bancorp and subsidiary
pooling of interests 3,775,000
----------------
Balance, January 1, 1997, restated 19,644,000
Comprehensive income:
Net income 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
--------------
Total comprehensive income $ 2,159,000
==============
Stock options exercised and related tax benefit (Note 11) 119,000
6% stock dividend
10% stock dividend
Cash dividend - $.27 per share (335,000)
Fractional shares (4,000)
Earned ESOP shares (Note 15) 40,000
----------------
Balance, December 31, 1997 21,623,000
----------------
</TABLE>
(Continued)
F-5
<PAGE>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------- OTHER
RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS (LOSS) INCOME
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 2,190,104 $12,200,000 $ 9,283,000 $ 140,000
Comprehensive income:
Net income 1,101,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (Note 16) (25,000)
Total comprehensive income
Stock options exercised and related
tax benefit (Note 11) 136,862 1,231,000
----------- ----------- ------------ -----------
Balance, December 31, 1998 2,326,966 13,431,000 10,384,000 115,000
Comprehensive income:
Net income 2,805,000
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (Notes 3 and 16) (1,755,000)
Total comprehensive income
Stock options exercised and related tax
benefit (Note 11) 91,679 899,000
5% stock dividend 120,691 1,634,000 (1,634,000)
Repurchase and retirement of common stock (Note 11) (4,199) (53,000)
Fractional shares (Note 2) (1,358) (21,000)
Unearned ESOP shares (Note 15) (18,587) (300,000)
----------- ----------- ------------ -----------
Balance, December 31, 1999 2,515,192 $15,611,000 $ 11,534,000 $(1,640,000)
=========== =========== ============ ===========
<CAPTION>
SHAREHOLDERS' COMPREHENSIVE
EQUITY INCOME
----------------- ---------------
<S> <C> <C>
Balance, December 31, 1997 $ 21,623,000
Comprehensive income:
Net income 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)
------------
Total comprehensive income $ 1,076,000
============
Stock options exercised and related
tax benefit (Note 11) 1,231,000
------------
Balance, December 31, 1998 23,930,000
Comprehensive income:
Net income 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)
------------
Total comprehensive income $ 1,050,000
============
Stock options exercised and related tax
benefit (Note 11) 899,000
5% stock dividend
Repurchase and retirement of common stock (Note 11) (53,000)
Fractional shares (Note 2) (21,000)
Unearned ESOP shares (Note 15) (300,000)
------------
Balance, December 31, 1999 $ 25,505,000
============
</TABLE>
(Continued)
F-6
<PAGE>
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>
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>
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>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Supplemental schedule related to acquisition:
<S> <C>
On February 21, 1997, the Company acquired certain assets and liabilities of
the Lincoln branch of Wells Fargo Bank (Note 18):
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>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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> <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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
LEVERAGE RATIO
<S> <C> <C> <C> <C> <C> <C>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
TOTAL RISK-BASED CAPITAL RATIO
<S> <C> <C> <C> <C> <C> <C>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
BORROWINGS FROM THE BANK
<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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
---------------- ---------------- ---------------
FOR THE YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C>
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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>
WESTERN SIERRA BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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
F-48
<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
F-49
<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.
F-50
<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.
F-51
<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>
F-52
<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.
F-53
<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>
F-54
<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.
F-55
<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.
F-56
<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.
F-57
<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.
F-58
<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.
F-59
<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.
F-60
<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>
F-61
<PAGE>
SENTINEL COMMUNITY BANK
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998 and 1997
F-62
<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>
F-63
<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.
F-64
<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.
F-65
<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.
F-66
<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>
F-67
<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>
F-68
<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.
F-69
<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.
F-70
<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.
F-71
<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.
F-72
<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>
F-73
<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.
F-74
<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>
F-75
<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>
F-76
<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.
F-77
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
DATED: DECEMBER 27, 1999
BY AND BETWEEN
WESTERN SIERRA BANCORP
WESTERN SIERRA NATIONAL BANK
AND
SENTINEL COMMUNITY BANK
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement")
is entered into as of December 27, 1999 by and among SENTINEL COMMUNITY BANK, a
federal savings and loan association ("SCB"), WESTERN SIERRA BANCORP, a
California corporation ("Bancorp"), and WESTERN SIERRA NATIONAL BANK, a national
banking association ("WSNB"), which is a wholly-owned subsidiary of Bancorp.
RECITALS:
WHEREAS, the respective Boards of Directors of SCB, Bancorp and WSNB
have determined that it is in the best interests of SCB, Bancorp and WSNB and
their respective shareholders for SCB to be merged with and into WSNB
("Merger"), upon the terms and subject to the conditions set forth in this
Agreement and in accordance with the California Corporations Code, national
banking laws and other applicable laws;
WHEREAS, each of the Boards of Directors of SCB, Bancorp and WSNB have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, SCB's, Bancorp's and WSNB's Boards of Directors have resolved
to recommend approval of the merger of SCB and WSNB to their respective
shareholders; and
WHEREAS, upon the consummation of the Merger of SCB with WSNB, WSNB
shall be the surviving entity of the Merger and remain a wholly owned subsidiary
of Bancorp.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, SCB, Bancorp and
WSNB hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, either SCB or
Bancorp shall have authorized, recommended, publicly proposed
or publicly announced an intention to authorize, recommend or
propose, or shall have entered or announced an intention to
enter into a letter of intent, an agreement-in-principle or a
definitive agreement with any Person (other than SCB, Bancorp
or any of their respective Subsidiaries) to effect, an
Acquisition Transaction or failed to publicly oppose a Tender
Offer or an Exchange Offer (as defined below). As used herein,
the term "Acquisition Transaction" shall mean (i) a merger,
consolidation or similar transaction involving SCB, Bancorp or
any of their respective Subsidiaries (other than internal
mergers, reorganizations, consolidations or dissolutions
involving only existing Subsidiaries),
1
<PAGE>
(ii) the disposition, by sale, lease, exchange, dissolution
or liquidation, or otherwise, of all or substantially all of
the assets of SCB or Bancorp or any asset or assets of SCB
or Bancorp the disposition or lease of which would result in
a material change in the business or business operations of
SCB or Bancorp, a transfer of any shares of stock or other
securities of SCB or Bancorp by SCB or Bancorp, or a material
change in the assets, liabilities or results of operations or
the future prospects of SCB or Bancorp, including, but not
limited to a grant of an option entitling any Person to
acquire any shares of stock of SCB or Bancorp or any assets
material to the business of SCB or Bancorp; or (iii) the
issuance, other than pursuant to outstanding stock options,
sale or other disposition by SCB or Bancorp (including,
without limitation, by way of merger, consolidation, share
exchange or any similar transaction) of shares of SCB Common
Stock or Bancorp Common Stock or other Equity Securities, or
the grant of any option, warrant or other right to acquire
shares of SCB Common Stock or Bancorp Common Stock or other
Equity Securities, representing directly, or on an
as-exercised, as-exchanged or as-converted basis (in the
case of options, warrants, rights or exchangeable or
convertible Equity Securities), 15% or more of the voting
securities of SCB or Bancorp;
(b) Prior to termination of this Agreement (i) any Person (other
than a person who is a party to a Shareholder Agreement) shall
have increased the number of shares of SCB Common Stock or
Bancorp Common Stock over which such person has beneficial
ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) by a number that is greater than 1% of
the then outstanding shares of SCB Common Stock or Bancorp
Common Stock if, after giving effect to such increase, such
Person owns, beneficially, more than 5% of the outstanding
shares of SCB Common Stock or Bancorp Common Stock, or (ii)
any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns, or has the
right to acquire beneficial ownership of, more than 5% of the
then outstanding shares of SCB Common Stock or Bancorp Common
Stock; or
(c) The approval by SCB's or Bancorp's shareholders, or the
consummation by SCB or Bancorp, of any Acquisition Transaction
as described in Subsection (a) of this Paragraph within a
period of one hundred eighty (180) days following: (i) the
termination of this Agreement by Bancorp pursuant to Sections
8.1.1, 8.1.3, 8.1.5, 8.1.7, 8.1.8, or 8.1.11; or (ii) the
termination of this Agreement by SCB pursuant to Section
8.1.1, 8.1.3, 8.1.4, 8.1.6, 8.1.9, 8.1.10, or 8.1.12.
(d) An Acquisition Transaction shall not mean any transaction
identified above with an entity identified in writing by
Bancorp or SCB prior to the date of the Agreement.
"Acquisition Proposal" shall have the meaning given such term in
Section 6.2.5.
"Affected Party" shall have the meaning given to it in Section 5.7.
2
<PAGE>
"Affiliate" or "affiliate" shall mean, with respect to any other
Person, any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person.
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3.
"Aggregate Merger Price" shall mean the sum of $10,750,000 less any
amount paid by SCB to holders of SCB Stock Options for the redemption
and cancellation of such options and less the amount, if any, of the
SCB Shareholder' Equity Adjustment. The calculation of Aggregate Merger
Price shall be performed by Perry-Smith & Co. and agreed to by Grant
Thornton or such other party agreed to by Bancorp and SCB.
"Bancorp" shall mean Western Sierra Bancorp.
"Bancorp Average Trading Price" shall mean the average closing bid and
ask price for Bancorp Common Stock as reported on the NASDAQ National
Market System during the twenty consecutive trading days ending with
the end of the fifth trading day immediately preceding the Effective
Time.
"Bancorp Common Stock" shall mean the common stock, no par value per
share, of Bancorp.
"Bancorp Filings" shall have the meanings given such term in Section
4.6.1.
"Bancorp Financial Statements" shall mean the financial statements of
Bancorp for the year ended December 31, 1998
"Bancorp Market Value Per Share" shall mean the closing price of
Bancorp Common Stock as reported on the NASDAQ National Market as of
the last trading day prior to the Effective Time.
"Bancorp Material Adverse Event" shall have the meaning given to such
term in Section 8.1.9.
"Bancorp Stock Plans" shall have the meaning set forth in Section 4.5.
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law
of the State of California.
3
<PAGE>
"Classified Assets" shall have the meaning given to such term in
Section 6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section
2.1.
"Closing Schedules" shall have the meaning given to such term in
Section 5.7.
"Conversion Rate" shall mean the result of a fraction, the numerator of
which is equal to the Aggregate Merger Price divided by the Bancorp
Average Trading Price but such numerator shall not be less than 600,000
nor more than 775,000 (except if the Bancorp Average Trading Price is
less than $12 and Bancorp determines in its sole discretion to issue
more Bancorp Common Stock than 775,000 shares of Bancorp Common Stock)
and the denominator of which is the number of outstanding shares of SCB
immediately outstanding prior to the Effective Time. However, in the
event that Bancorp announces the acquisition of a majority interest in
Bancorp Common Stock by means of a merger prior to the Closing Date,
the numerator shall be not less than 687,500.
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements
or covenants of such party contained in Articles 5 or 6.
"Determination Date" shall mean the last business day of the calendar
month immediately preceding the calendar month in which the Effective
Time occurs.
"Dissenting Shares" shall mean shares of SCB Common Stock or Bancorp
Common Stock which come within all of the criteria for the exercise of
dissenters rights set forth in Section 552.14 of Title 12 of the Code
of Federal Regulations or Chapter 13 of the California Corporations
Code, as applicable.
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Section 552.14
of Title 12 of the Code of Federal Regulations or Paragraph (a) of
Section 1301 of the California Corporations Code as appropriate.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any
Governmental Entity pertaining to health or to the environment,
including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Federal Water Pollution Control Act Amendments,
the Occupational Safety and Health Act of 1970, as amended, the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA"),
the Hazardous Materials Transportation Act of 1975, as amended,
4
<PAGE>
the Safe Drinking Water Act, as amended, and the Toxic Substances
Control Act, as amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean American Securities Transfer and Trust, or
such other Person as Bancorp shall have appointed to perform the duties
set forth in Section 2.8.
"Exchange Offer" shall mean the commencement (as such term is defined
in Rule 14d-2 under the Exchange Act) of an exchange offer or the
filing by any Person of a registration statement under the Securities
Act with respect to an exchange offer to purchase any shares of SCB
Common Stock such that, upon consummation of such offer, such Person
would own or control 15% or more of the then outstanding shares of SCB
Common Stock.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Entity" shall mean any court, federal, state, local or
foreign government or any administrative agency or commission or other
governmental authority or instrumentality whatsoever.
"Hazardous Substances" shall have the meaning given such term in
Section 3.23.4.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning given to such
term in Section 3.7.2.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement; the actual knowledge, after reasonable
inquiry, of any director or executive officer of SCB, Bancorp or WSNB.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable
federal laws of the United States and laws of any state having
jurisdiction over the Merger, to permit the parties to consummate the
Merger.
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or
prospects of a Person and its subsidiaries, if any,
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taken as a whole (unless specifically indicated otherwise); or
(ii) on the ability of a Person that is a party to this Agreement to
perform its obligations under this Agreement or to consummate the
transactions contemplated by this Agreement.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Agreement" shall have the meaning given to such term in Section
2.1.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OCC" shall mean Office of the Comptroller of the Currency.
"OREO" shall have the meaning given to such term in Section 3.13.
"OTS" shall mean the Office of Thrift Supervision.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on SCB or Bancorp in accordance with
Section 552.14 of Title 12 of the Code of Federal Regulations and
Paragraph (b) of Section 1301 of the California Corporations Code and
has not withdrawn such demand prior to the Effective Time,
respectively.
"Persons" or "persons" shall mean an individual, corporation,
partnership, limited liability company, joint venture, trust or
unincorporated organization, Governmental Entity or any other legal
entity whatsoever.
"Registration Statement" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements,
and other documents required to be filed with respect to federal,
state, local and foreign Taxes, and the term "Return" means any one of
the foregoing Returns.
"SCB" shall mean Sentinel Community Bank.
"SCB Certificates" shall have the meaning given such term in Section
2.8.1.
"SCB Collateralizing Real Estate" shall have the meaning given to such
term in Section 3.23.1.
"SCB Common Stock" shall mean the common stock, $10.00 par value, of
SCB.
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"SCB's Costs Associated With the Transaction" shall mean all legal,
accounting and professional costs incurred or to be incurred by SCB for
the transaction up to the Closing Date (including investment banking
fees) which have not been expensed by SCB by the Determination Date.
"SCB Fairness Opinion" shall have the meaning given to such term in
Section 7.3.7.
"SCB Filings" shall have the meaning given such term in Section 3.6.1.
"SCB Financial Statements" shall have the meaning given to such term in
Section 3.7.3.
"SCB Material Adverse Event" shall have the meaning given to such term
in Section 8.1.8.
"SCB Properties" shall have the meaning given to such term in Section
3.23.1.
"SCB Federal Documents" shall have the meaning given to such term in
Section 3.6.2.
"SCB Shareholders' Equity Adjustment" shall mean the amount by which
SCB's shareholder equity as of the Determination Date, exclusive of (x)
SCB's Costs Associated With the Transaction as of the Determination
Date up to a maximum of $100,000 for legal and accounting fees,
$368,000 for termination of the FISERV agreement, and $75,000 for
investment banking fees, and (y) adjustments made to the loan loss
reserves or other reserves requested by WSNB pursuant to Sections 5.8.1
and 5.8.2 of this Agreement, is less than $5,600,000.
"SCB Stock Options" shall mean any options to purchase any shares of
SCB Common Stock or any other Equity Securities of SCB granted on or
prior to the Effective Time, whether pursuant to the SCB Stock Option
Plan or otherwise.
"SCB Stock Option Plan" shall mean SCB's written Stock Option Plan as
described in Schedule 3.5 and 3.24 hereto.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shareholder Agreement" shall have the meaning given such term in
Section 7.2.9.
"Subsidiary" shall mean, with respect to any corporation (the
"parent"), any other corporation, association or other business entity
of which more than 50% of the shares of the Voting Stock are owned or
controlled, directly or indirectly, by the parent or by one or more
Subsidiaries of the parent, or by the parent and one or more of its
Subsidiaries.
"Superior Proposal" shall have the meaning given to such term in
Section 6.2.5.
"Surviving Corporation" shall mean WSNB after the consummation of the
Merger.
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"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, or other taxes, together
with any interest and any penalties, additions to tax, or additional
amounts with respect thereto, and the term "Tax" means any one of the
foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal
Governmental Entity before the Merger may become effective, including,
but not limited to, any filing required to be made with the California
Franchise Tax Board to obtain a Tax Clearance Certificate for the
Merger.
"Tender Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of a tender offer or the filing by
any person of a registration statement under the Securities Act with
respect to, a tender offer to purchase any shares of SCB Common Stock
or Bancorp Common Stock such that, upon consummation of such offer,
such person would own or control 15% or more of the then outstanding
voting securities of SCB or Bancorp.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote
in the election of the directors, trustees or Persons performing
similar functions of the Person in question, including, without
limitation, nonvoting securities that are convertible or exchangeable
into voting securities, but shall not include any stock or other
interest so entitling the holders thereof to vote only upon the
happening of a contingency (other than a conversion or exchange thereof
into voting securities), whether or not such contingency has occurred.
"WSNB" shall mean Western Sierra National Bank, a wholly owned
subsidiary of Bancorp.
ARTICLE 2. THE MERGER
Section 2.1 THE MERGER. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, SCB
shall be merged with WSNB, with WSNB being the Surviving Corporation of the
merger, all pursuant to the Agreement of Merger attached to this Agreement as
Exhibit 2.1 (the "Merger Agreement") and in accordance with the applicable
provisions of national banking laws (the "Merger"). The closing of the Merger
(the "Closing") shall take place at a location and time and Business Day to be
designated by Bancorp and reasonably concurred to by SCB (the "Closing Date")
which shall not, however, be later than thirty (30) days after receipt of the
Last Regulatory Approval and expiration of all applicable waiting periods. WSNB
shall submit a request to the OCC as to effective time of the Merger. The Merger
shall be effective at the time specified in a certificate to be issued by the
OCC approving the Merger ("Effective Time").
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Section 2.2 EFFECT OF MERGER. By virtue of the Merger and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of SCB and WSNB shall be
vested in and be held and enjoyed by the Surviving Corporation, without further
act or deed, and all the estates and interests of every kind of SCB and WSNB,
including all debts due to either of them, shall be as effectively the property
of the Surviving Corporation as they were of SCB and WSNB immediately prior to
the Effective Time, and the title to any real estate vested by deed or otherwise
in either SCB or WSNB shall not revert or be in any way impaired by reason of
the Merger; and all rights of creditors and liens upon any property of SCB and
WSNB shall be preserved unimpaired and all debts, liabilities and duties of SCB
and WSNB shall be debts, liabilities and duties of the Surviving Corporation and
may be enforced against it to the same extent as if such debts, liabilities and
duties had been incurred or contracted by it, and none of such debts,
liabilities or duties shall be expanded, increased, broadened or enlarged by
reason of the Merger.
Section 2.3 ARTICLES OF ASSOCIATION. The Articles of Association of
WSNB in effect immediately prior to the Effective Time shall be the Articles of
Association of the Surviving Corporation until amended and the name of the
Surviving Corporation shall be "Western Sierra National Bank."
Section 2.4 WSNB STOCK. The authorized and issued capital stock of
WSNB, all of which shall be owned by Bancorp, immediately prior to the Effective
Time, on and after the Effective Time, pursuant to the Merger Agreement and
shall remain issued and outstanding.
Section 2.5 CANCELLATION AND TERMINATION OF SCB STOCK OPTIONS. At the
Effective Time, all outstanding rights with respect to SCB Common Stock pursuant
to stock options under the SCB Stock Option Plan which shall not have been
exercised or redeemed shall be canceled and terminated.
Section 2.6 CONVERSION OF SCB COMMON STOCK.
2.6.1 Except as provided in Sections 2.6.2 and 2.7, each share
of SCB Common Stock shall be converted at the Effective Time into and become the
right to receive that number of shares of duly authorized, validly issued, fully
paid and nonassessable shares of Bancorp Common Stock equal to the Conversion
Rate; provided, however, that the shares held by any shareholder who properly
exercises dissenters' rights provided under OTS regulations, shall not be so
converted and in lieu of such conversion shall be treated in accordance with the
provisions of Section 552.14(b) of the Title 12 of the Code of Federal
Regulations.
2.6.2 The Conversion Rate shall be further appropriately
adjusted to reflect any recapitalization, reorganization, reclassification,
split-up, merger, consolidation, exchange, stock or other dividend or
distribution, made, declared or effective with respect to the Bancorp Common
Stock between the date of this Agreement and the Effective Time.
Section 2.7 FRACTIONAL SHARES. No fractional shares of Bancorp Common
Stock shall be issued in the Merger. In lieu thereof, each holder of SCB Common
Stock who would otherwise be entitled to receive a fractional share shall
receive an amount in cash equal to the product (rounded to the nearest
hundredth) obtained by multiplying (a) Bancorp Market Value Per Share by (b) the
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fraction of a share of Bancorp Common Stock to which such holder would otherwise
be entitled. No such holder shall be entitled to dividends or other rights in
respect of any such fraction.
Section 2.8 EXCHANGE PROCEDURES. On or as soon as practicable after the
Effective Time, (i) Bancorp will deliver to the Exchange Agent: (i) certificates
representing the number of shares of Bancorp Common Stock issuable in the
Merger; and (ii) cash for the payout of fractional shares.
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of SCB Common Stock ("SCB Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall, as promptly as practicable thereafter, deliver to each
holder of such surrendered SCB Certificates, certificates representing the
appropriate number of shares of Bancorp Common Stock ("New Certificates") and/or
checks for payment of cash in lieu of fractional shares, in respect of the SCB
Certificates. In no event shall the holders of SCB Certificates be entitled to
receive interest on cash amounts due them hereunder.
2.8.2 Until an SCB Certificate has been surrendered and
exchanged as herein provided, each share of SCB Common Stock represented by such
SCB Certificate shall represent, on and after the Effective Time, the right to
receive the Conversion Rate into which each such share of SCB Common Stock shown
thereon has been converted as provided by Section 2.6 including the right to
vote such shares of Bancorp Common Stock. No dividends or other distributions
that are declared on any shares of Bancorp Common Stock into which any shares of
SCB Common Stock have been converted at the Effective Time shall be paid to the
holder of such SCB shares until the SCB Certificates evidencing such SCB shares
have been surrendered in exchange for New Certificates in the manner herein
provided, but upon such surrender, such dividends or other distributions, from
and after the Effective Time, will be paid to such holders. In no event shall
the holders entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions.
2.8.3 No transfer taxes shall be payable by any shareholder in
respect of the issuance of New Certificates, except that if any New Certificate
is to be issued in a name other than that in which the SCB Certificates
surrendered shall have been registered, it shall be a condition of such issuance
that the holder requesting such issuance shall properly endorse the certificate
or certificates and shall pay to Bancorp or the Exchange Agent any transfer
taxes payable by reason thereof, or of any prior transfer of such surrendered
certificate, or establish to the satisfaction of Bancorp or the Exchange Agent
that such taxes have been paid or are not payable.
2.8.4 Any Bancorp Common Stock or cash delivered to the
Exchange Agent and not distributed pursuant to this Section 2.8 at the end of
nine months from the Effective Time, shall be returned to Bancorp, in which
event the Persons entitled thereto shall receive such Bancorp Common Stock or
cash directly from Bancorp.
2.8.5 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 and 2.8.3 hereof, if any holder of SCB Common Stock shall be
unable to surrender such holder's SCB Certificates because such SCB Certificates
have been lost or destroyed, such holder may deliver in lieu thereof an
affidavit and indemnity bond in form and substance and with surety satisfactory
to the Exchange Agent and Bancorp.
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2.8.6 The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to the shares of Bancorp Common
Stock held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with respect to
such shares of Bancorp Common Stock for the account of the Persons entitled
thereto.
2.8.7 After the Effective Time, there shall be no further
registration of transfers of the shares of SCB Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, SCB Certificates representing such shares of SCB Common Stock are
presented to Bancorp, they shall be canceled and exchanged for Bancorp Common
Stock as provided in this Article 2.
Section 2.9 BOARD OF DIRECTORS OF BANCORP AND WSNB FOLLOWING THE
EFFECTIVE TIME. At the Effective Time, (i) one director of SCB shall be
appointed as a director of both Bancorp and WSNB, (ii) one director of SCB shall
be appointed as a director of Bancorp, and (iii) one director of SCB shall be
appointed as a director of WSNB, each to serve until the next annual meetings of
shareholders of Bancorp and WSNB and until such successors are elected and
qualified. The directors of SCB to be appointed to Bancorp's and WSNB's boards
shall be determined by Bancorp and SCB. In addition, one of the directors of SCB
who is appointed to the Board of Directors of Bancorp shall also be appointed to
Bancorp's executive committee. At the Effective Time, the Board of Directors of
WSNB shall be 14 in number, two of which will be selected by the parties from
SCB's Board of Directors, and 12 of which will be current directors of WSNB. At
the Effective Time, the Board of Directors of Bancorp shall be 18 in number, two
of which will be selected by the parties from SCB's Board of Directors, and 16
of which will be current directors of Bancorp. Bancorp shall use its best
efforts to appoint such directors to WSNB on an annual basis and nominate such
directors as nominees to Bancorp's Board of Directors in conjunction with the
election of directors at the annual meeting of shareholders.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SCB
SCB represents and warrants to Bancorp as follows:
Section 3.1 ORGANIZATION; CORPORATE POWER; ETC. SCB is a federal
savings and loan association duly organized, validly existing and in good
standing under the laws of the United States and has all requisite corporate
power and authority to own, lease and operate its properties and assets and to
carry on its business substantially as it is being conducted on the date of this
Agreement. SCB has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining all Requisite Regulatory Approvals, SCB
will have the requisite corporate power and authority to perform its obligations
hereunder with respect to the consummation of the transactions contemplated
hereby. SCB is authorized by the OTS to conduct a general banking business. SCB
is not a member of the Federal Reserve System. SCB's deposits are insured by the
FDIC in the manner and to the full extent provided by law. SCB maintains and
operates branch offices only in the State of California. Neither the scope of
the business of SCB, or any Subsidiary of SCB, nor the location of any of their
respective properties, requires that SCB or any of its respective Subsidiaries
be licensed or qualified to conduct business in any jurisdiction other than the
State of California,
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where the failure to be so licensed and qualified would have a Material
Adverse Effect on SCB taken as a whole.
Section 3.2 LICENSES AND PERMITS. Except as disclosed on Schedule 3.2,
SCB and its Subsidiaries have all material licenses, certificates, franchises,
rights and permits that are necessary for the conduct of their respective
businesses, and such licenses are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a Material Adverse Effect on SCB or on the ability of SCB to
consummate the transactions contemplated by this Agreement. The properties,
assets, operations and businesses of SCB and those of its Subsidiaries, are and
have been maintained and conducted in compliance with all applicable licenses,
certificates, franchises, rights and permits to the extent that the failure to
do so would not have a Material Adverse Effect on SCB, taken as a whole.
Section 3.3 SUBSIDIARIES. Other than as set forth on Schedule 3.3,
there is no corporation, partnership, joint venture or other entity in which SCB
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 3.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
3.4.1 The execution and delivery of this Agreement and the
Merger Agreement by SCB, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate action
on the part of SCB, subject only to the approval of this Agreement, the Merger
Agreement and the Merger by SCB's shareholders. This Agreement has been duly
executed and delivered by SCB and constitutes a legal, valid and binding
obligation of SCB, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and by general
equitable principles. The Merger Agreement, upon the receipt of all Requisite
Regulatory Approvals and the due execution shall be filed with the OCC, and at
the Effective Time the Merger Agreement will constitute a legal, valid and
binding obligation of SCB, enforceable in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting the rights of creditors generally and by general
equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and will not conflict with,
or result in any violation of or default or loss of a material benefit under,
any provision of the Articles of Incorporation or Bylaws of SCB, or except for
the necessity of obtaining Requisite Regulatory Approvals and approval of the
shareholders of SCB, any material mortgage, indenture, lease, agreement or other
material instrument or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to SCB or any of its assets or properties, other than any such conflict,
violation, default or loss which (i) will not have a Material Adverse Effect on
SCB, or on Bancorp following consummation of the Merger; or (ii) will be cured
or waived prior to the Effective Time. No material consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required in connection with the execution and delivery of this
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Agreement or the Merger Agreement by SCB or the performance by SCB of its
obligations hereunder and thereunder, except for (a) filings required in order
to obtain the Requisite Regulatory Approvals; and (b) the filing and acceptance
of the Merger Agreement with the OCC.
Section 3.5 CAPITAL STRUCTURE. The authorized capital stock of SCB
consists of 1,000,000 shares of SCB Common Stock, $10.00 par value per share. On
the date of this Agreement, 482,456 shares of SCB Common Stock were outstanding
and 75,475 shares of SCB Common Stock were reserved for issuance pursuant to
outstanding SCB Stock Options under the SCB Stock Option Plan. All outstanding
shares of SCB Common Stock are validly issued, fully paid and nonassessable and
do not possess any preemptive rights and were not issued in violation of any
preemptive rights or any similar rights of any Person. Except for the SCB Stock
Options described on Schedule 3.5 to this Agreement, SCB does not have
outstanding any options, warrants, calls, rights, commitments, securities or
agreements of any character to which SCB is a party or by which it is bound
obligating SCB to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of SCB or obligating SCB to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement.
Section 3.6 SCB FILINGS.
3.6.1 Since January 1, 1997, SCB and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the OTS; (b) the FDIC; and (c) any other applicable federal, state or local
governmental or regulatory authority. All such reports, registrations and
filings, and all reports sent to SCB's shareholders during the three-year period
ended December 31, 1998 (whether or not filed with any Regulatory Authority),
are collectively referred to as the "SCB Filings. Except to the extent
prohibited by law, copies of the SCB Filings have been made available to
Bancorp. As of their respective filing or mailing dates, each of the past SCB
Filings (a) was true and complete in all material respects (or was amended so as
to be so promptly following discovery of any discrepancy); and (b) complied in
all material respects with all of the statutes, rules and regulations enforced
or promulgated by the governmental or regulatory authority with which it was
filed (or was amended so as to be so promptly following discovery of any such
noncompliance) and none contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The SCB Financial Statements, together with the financial
statements contained in the SCB Filings have been prepared in accordance with
GAAP, or applicable regulatory accounting principles, applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount) the financial position of
SCB as of the dates thereof and the results of its operations, cash flows and
changes in shareholders' equity for the periods then ended.
3.6.2 SCB has filed each report, schedule and amendments to
each of the foregoing since January 1, 1997 that SCB was required to file with
the OTS and the FDIC (the "SCB Federal Documents"), all of which have been made
available to Bancorp. As of their respective dates, the SCB Federal Documents
complied in all material respects with the applicable requirements of the
California Financial Code and the Federal Deposit Insurance Act, as the case may
be, and the rules
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and regulations of the OTS and the FDIC thereunder applicable to such SCB
Federal Documents, and none of the SCB Federal Documents contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of SCB included in the SCB Filings comply in all material respects
with applicable regulatory accounting requirements and with the published
rules and regulations of the OTS (as applicable) with respect thereto, and
have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
the unaudited statements, as permitted by regulations of the OTS) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the financial position of SCB as of
the dates thereof and the results of its operations and cash flows or changes
in financial position for the periods then ended.
Section 3.7 ACCURACY OF INFORMATION SUPPLIED.
3.7.1 No representation or warranty of SCB contained herein or
any statement, schedule, exhibit or certificate given or to be given by or on
behalf of SCB or any of its Subsidiaries, to Bancorp in connection herewith and
none of the information supplied or to be supplied by SCB or its Subsidiaries to
Bancorp hereunder contains or will contain any untrue statement of material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
3.7.2 None of the information supplied or to be supplied by
SCB or relating to SCB which is included or incorporated by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by Bancorp in
connection with the issuance of shares of Bancorp Common Stock in the Merger
(including the Joint Proxy Statement of Bancorp and SCB and the Prospectus of
Bancorp ("Joint Proxy Statement/Prospectus") constituting a part thereof, the
"Registration Statement") will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) the Joint Proxy Statement/ Prospectus and any
amendment or supplement thereto will, at all times from the date of mailing to
shareholders of SCB through the date of the meeting of shareholders of SCB to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
Bancorp Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The Joint
Proxy Statement/Prospectus (except for such portions thereof that relate only to
Bancorp and its Subsidiaries) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
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3.7.3 SCB has or will deliver to Bancorp copies of: (a) the
audited balance sheets of SCB and its Subsidiaries as of December 31, 1998, 1997
and 1996 and the related statements of income, changes in shareholders' equity
and cash flows for the years then ended and the related notes to such financial
statements, all as audited by Grant Thornton, independent public accountants
(the "SCB Financial Statements"), and SCB will hereafter until the Closing Date
deliver to Bancorp copies of additional financial statements of SCB as provided
in Sections 5.1.1(iii) and 6.1.11(iii). The SCB Financial Statements have been
prepared (and all of said additional financial statements will be prepared) in
accordance with GAAP, or applicable regulatory accounting principles, applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto) consistently followed throughout the periods covered by such
statements, and present (and, when prepared, will present) fairly the financial
position of SCB and its Subsidiaries as of the respective dates indicated and
the results of operations, cash flows and changes in shareholders' equity at the
respective dates and for the respective periods covered by such financial
statements (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount). In addition, SCB has delivered to
Bancorp copies of all management or other letters delivered to SCB by its
independent accountants in connection with any of the SCB Financial Statements
or by such accountants or any consultant regarding the internal controls or
internal compliance procedures and systems of SCB issued at any time since
January 1, 1996, and will make available for inspection by Bancorp or its
representatives, at such times and places as Bancorp may reasonably request,
reports and working papers produced or developed by such accountants or
consultants.
Section 3.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 3.8, to the best of SCB's Knowledge, the respective businesses of SCB
and its Subsidiaries are not being conducted in violation of any law, ordinance
or regulation, except for violations which individually or in the aggregate
would not have a Material Adverse Effect on SCB, or Bancorp at or following the
Effective Time. Except as set forth in Schedule 3.8, no investigation or review
by any Governmental Entity with respect to SCB is pending or, to the Knowledge
of SCB threatened, nor has any Governmental Entity indicated to SCB an intention
to conduct the same.
Section 3.9 LITIGATION. Except as set forth in Schedule 3.9, there is
no suit, action or proceeding or investigation pending, or to the Knowledge of
SCB threatened against or affecting SCB or any of its Subsidiaries, taken as a
whole, which, if adversely determined, would have a Material Adverse Effect on
SCB or its Subsidiaries; nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against SCB or any of
its Subsidiaries that has, or which, insofar as reasonably can be foreseen, in
the future would have, any such Material Adverse Effect. Schedule 3.9 contains a
true, correct and complete list, including identification of the applicable
insurance policy covering such litigation, if any, subject to reservation of
rights, if any, the applicable deductible and the amount of any reserve
therefor, of all pending litigation in which SCB or any of its Subsidiaries is a
named party, and except as disclosed on Schedule 3.9, all of the litigation
shown on such Schedule is adequately covered by insurance in force, except for
applicable deductibles, or has been adequately reserved for in accordance with
SCB's prior business practices.
Section 3.10 AGREEMENTS WITH BANKING AUTHORITIES. Except as set forth
in Schedule 3.10, neither SCB nor any Subsidiary of SCB is a party to any
written agreement or memorandum of understanding with, or order or directive
from, any Governmental Entity.
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Section 3.11 INSURANCE. SCB and its Subsidiaries have in full force and
effect policies of insurance with respect to their assets and businesses against
such casualties and contingencies and in such amounts, types and forms as
indicated on Schedule 3.11. None of SCB or any of its Subsidiaries is in default
under any such policy of insurance or bond such that it can be canceled and all
material claims thereunder have been filed in timely fashion. SCB and its
Subsidiaries have filed claims with, or given notice of claim to, their insurers
or bonding companies in timely fashion with respect to all material matters and
occurrences for which they believe they have coverage.
Section 3.12 TITLE TO ASSETS OTHER THAN REAL PROPERTY. SCB and its
Subsidiaries have good and marketable title to all their properties and assets
(other than real property which is the subject to Section 3.13), owned or leased
by SCB or any of its Subsidiaries, free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature except as disclosed on
Schedule 3.12 and except for: (a) encumbrances as set forth in the SCB Financial
Statements; (b) liens for current Taxes not yet due which have been fully
reserved for; and (c) encumbrances, if any, that are not substantial in
character, amount or extent and do not detract materially from the value, or
interfere with present use or the sale or other disposition of the property
subject thereto or affected thereby. All such properties and assets are, and
require only routine maintenance to keep them, in good working condition, normal
wear and tear excepted.
Section 3.13 REAL PROPERTY. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by SCB or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Each of SCB and its
respective Subsidiaries has good and marketable title to the real properties
that it owns, as described in such Schedule, free and clear of all mortgages,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (a) rights of lessors,
lessees or sublessees in such matters as are reflected in a written lease; (b)
current Taxes (including assessments collected with Taxes) not yet due and
payable; (c) encumbrances, if any, that are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with
present use, or the ability of SCB to dispose, of the property subject thereto
or affected thereby; and (d) other matters as described in Schedule 3.13. SCB
and its Subsidiaries have valid leasehold interests in the leaseholds they
respectively hold, free and clear of all mortgages, liens, security interest,
charges, claims, assessments and encumbrances, except for (a) claims of lessors,
co-lessees or sublessees in such matters as are reflected in a written lease;
(b) title exceptions affecting the fee estate of the lessor under such leases;
and (c) other matters as described in Schedule 3.13. To the best of SCB's
Knowledge, the activities of SCB and its Subsidiaries with respect to all real
property owned or leased by them for use in connection with their operations are
in all material respects permitted and authorized by applicable zoning laws,
ordinances and regulations and all laws and regulations of any Governmental
Entity. Except as set forth in Schedule 3.13, SCB and its Subsidiaries enjoy
quiet possession under all material leases to which they are the lessees and all
of such leases are valid and in full force and effect, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and by general
equitable principles. The buildings and improvements on real properties owned or
leased by SCB or any of its Subsidiaries are in good condition and repair, and
do not require more than normal and routine maintenance, to keep them in such
condition, normal wear and tear excepted.
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Section 3.14 TAXES.
3.14.1 FILING OF RETURNS. Except as set forth on Schedule
3.14.1, SCB and its Subsidiaries have duly prepared and filed federal, state,
and local Returns (for Tax or informational purposes) which were required to be
filed by or in respect of SCB and its Subsidiaries, or any of their properties,
income and/or operations on or prior to the Closing Date. As of the time they
were filed, the foregoing Returns accurately reflected the material facts
regarding the income, business, asset, operations, activities, status, and any
other information required to be shown thereon. No extension of time within
which SCB or any of its Subsidiaries may file any Return is currently in force.
3.14.2 PAYMENT OF TAXES. Except as disclosed on Schedule
3.14.2 with respect to all amounts in respect of Taxes imposed on SCB or any
Subsidiary or for which SCB or any Subsidiary is or could be liable, whether to
taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of SCB or any
Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
3.14.3 AUDIT HISTORY. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of SCB
or any Subsidiary currently in progress. Except as disclosed on Schedule 3.14.3,
SCB and its Subsidiaries have not received any written notices within the three
years preceding the Closing Date of any pending or threatened audit, by the
Internal Revenue Service or any state, local or foreign agency, for any Returns
or Tax liability of SCB or any Subsidiary for any period. SCB and its
Subsidiaries currently have no unpaid deficiencies assessed by the Internal
Revenue Service or any state, local or foreign taxing authority arising out of
any examination of any of the Returns of SCB or any Subsidiaries filed for
fiscal years ended on or after December 31, 1995 through the Closing Date, nor
to the Knowledge of SCB is there reason to believe that any material deficiency
will be assessed.
3.14.4 STATUTE OF LIMITATIONS. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of SCB or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of SCB or any
Subsidiaries are currently pending.
3.14.5 WITHHOLDING OBLIGATIONS. SCB and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions, unemployment contributions,
backup withholding and other deductions required to be withheld therefrom by any
Tax law and have paid the same to the proper taxing authorities within the time
required under any applicable Tax law.
3.14.6 TAX LIENS. There are no Tax liens, whether imposed by
any federal, state, local or foreign taxing authority, outstanding against any
assets owned by SCB or its Subsidiaries, except for liens for Taxes that are not
yet due and payable.
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3.14.7 TAX RESERVES. SCB and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The SCB Financial Statements contain fair and sufficient
accruals for the payment of all Taxes for the periods covered by the SCB
Financial Statements and all periods prior thereto.
3.14.8 TAX ELECTIONS. No new elections with respect to Taxes
or any changes in current elections with respect to Taxes affecting the assets
owned by SCB or its Subsidiaries shall be made after the date of this Agreement
without the prior written consent of Bancorp, which shall not be unreasonably
withheld. Bancorp shall be deemed to have consented in writing to any election
SCB or its Subsidiaries shall desire to make if: (i) the electing Person shall
have notified the Chief Executive Officer of Bancorp in writing of its desire to
make such election, including in such notice a reasonably complete summary of
the election it desires to make and the reasons it desires to make such election
at least 20 Business Days prior to the due date (including extensions thereof)
for filing such election; and (ii) Bancorp shall not have responded in writing
to such notice by the fifth Business Day prior to the due date (including
extensions thereof) for filing such election.
3.14.9 IRC SECTION 382 APPLICABILITY. None of SCB or any of
its Subsidiaries, including any party joining in any consolidated return to
which SCB is a member, underwent an "ownership change" as defined in IRC Section
382(g) within the "testing period" (as defined in IRC Section 382) ending
immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
3.14.10 DISCLOSURE INFORMATION. Within 45 days of the date of
this Agreement, SCB will deliver to Bancorp a schedule setting forth the
following information with respect to SCB and as of the most recent practicable
date (as well as on an estimated pro forma basis as of the Closing giving effect
to the consummation of the transactions contemplated hereby): (a) SCB's basis in
its assets; (b) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to SCB; and (c) the amount of any deferred gain or loss
allocable to SCB and arising out of any deferred intercompany transactions.
Section 3.15 PERFORMANCE OF OBLIGATIONS. To SCB's Knowledge, SCB and
its Subsidiaries have performed all material obligations required to be
performed by them to date and none of SCB or any of its Subsidiaries is in
default under or in breach of any term or provision of any covenant, contract,
lease, indenture or any other agreement, written or oral, to which any is a
party, is subject or is otherwise bound, and no event has occurred that, with
the giving of notice or the passage of time or both, would constitute such a
default or breach, where such default or breach or failure to perform would have
a Material Adverse Effect on SCB or its Subsidiaries. To SCB's Knowledge, and
except as disclosed on Schedule 3.15 or in the portion of Schedule 3.16 that
identifies 90-day past due or classified or nonaccrual loans, no party with whom
SCB or any of its Subsidiaries has an agreement that is of material importance
to the businesses of SCB or its Subsidiaries is in default thereunder.
Section 3.16 LOANS AND INVESTMENTS. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of SCB or their Subsidiaries are, and constitute,
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in all material respects, the legal, valid and binding obligations of the
parties thereto and are enforceable against such parties in accordance with
their terms, except as the enforceability thereof may be limited by
applicable law and otherwise by bankruptcy, insolvency, moratorium or other
similar laws affecting the rights of creditors generally and by general
equitable principles. Except as described on Schedule 3.16, as of November
30, 1999, no loans or investments held by SCB or any Subsidiary are: (i) more
than ninety days past due with respect to any scheduled payment of principal
or interest, other than loans on a nonaccrual status; (ii) classified as
"loss," "doubtful," "substandard" or "specially mentioned" by SCB or any
banking regulators; or (iii) on a nonaccrual status in accordance with SCB's
loan review procedures. Except as set forth on Schedule 3.16, none of such
assets (other than loans) are subject to any restrictions, contractual,
statutory or other, that would materially impair the ability of the entity
holding such investment to dispose freely of any such assets at any time,
except restrictions on the public distribution or transfer of any such
investments under the Securities Act and the regulations thereunder or state
securities laws and pledges or security interests given in connection with
government deposits. All loans, leases or other extensions of credit
outstanding, or commitments to make any loans, leases or other extensions of
credit to any Affiliates of SCB are disclosed on Schedule 3.16. For
outstanding loans or extensions of credit or commitments to make loans or
extensions of credit where the original principal amounts are in excess of
$25,000 and which by their terms are either secured by collateral or
supported by a guaranty or similar obligation, the security interests have
been duly perfected in all material respects and have the priority they
purport to have in all material respects, other than by operation of law,
and, in the case of each guaranty or similar obligation, each has been duly
executed and delivered to SCB or any Subsidiary, and to SCB's Knowledge, is
still in full force and effect.
Section 3.17 BROKERS AND FINDERS. Except as set forth on Schedule 3.17,
none of SCB or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. SCB agrees to indemnify and hold
harmless Bancorp and its affiliates, and to defend with counsel selected by
Bancorp and reasonably satisfactory to SCB, from and against any liability, cost
or expense, including attorneys' fees, incurred in connection with a breach of
this Section 3.17.
Section 3.18 MATERIAL CONTRACTS. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which SCB or any Subsidiary
is a party as of the date of this Agreement, except for loans and other
extensions of credit made by SCB in the ordinary course of its business and
those items specifically disclosed in the SCB Financial Statements.
Section 3.19 ABSENCE OF MATERIAL ADVERSE EFFECT. Since January 1, 1999,
the respective businesses of SCB and its Subsidiaries have been conducted only
in the ordinary course, except as disclosed in the SCB Filings, in the same
manner as theretofore conducted, and no event or circumstance has occurred or is
expected to occur which has had or which, with the passage of time or otherwise,
could reasonably be expected to have a Material Adverse Effect on SCB.
Section 3.20 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
3.20, none of SCB or any of its Subsidiaries has any liabilities or obligations,
either accrued, contingent or otherwise,
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that are material to SCB and its Subsidiaries and that have not been: (a)
reflected or disclosed in the SCB Financial Statements; or (b) incurred
subsequent to December 31, 1998 in the ordinary course of business. SCB has
no Knowledge of any basis for the assertion against SCB or any of its
Subsidiaries, of any liability, obligation or claim (including without
limitation that of any Governmental Entity) that will have or cause, or could
reasonably be expected to have or cause, a Material Adverse Effect on SCB
that is not fully and fairly reflected and disclosed in the SCB Financial
Statements or on Schedule 3.20.
Section 3.21 EMPLOYEES; EMPLOYEE BENEFIT PLANS; ERISA.
3.21.1 To SCB's Knowledge, all material obligations of SCB or
its Subsidiaries for payment to trusts or other funds or to any Governmental
Entity or to any individual, director, officer, employee or agent (or his or her
heirs, legatees or legal representatives) with respect to unemployment
compensation benefits, profit-sharing, pension or retirement benefits or social
security benefits, whether arising by operation of law, by contract or by past
custom, have been properly accrued for the periods covered thereby on the SCB
Financial Statements and paid when due. All material obligations of SCB or its
Subsidiaries, whether arising by operation of law, by contract or by past custom
for vacation or holiday pay, bonuses and other forms of compensation which are
payable to their respective directors, officers, employees or agents have been
properly accrued on the SCB Financial Statements for the periods covered thereby
and paid when due. Except as set forth on Schedule 3.21.1, there are no unfair
labor practice complaints, strikes, slowdowns, stoppages or other controversies
pending or, to the Knowledge of SCB, attempts to unionize or controversies
threatened between SCB or any Subsidiary or Affiliate and or relating to, any of
their employees that are likely to have a Material Adverse Effect on SCB and its
Subsidiaries, taken as a whole. None of SCB or any Subsidiary is a party to any
collective bargaining agreement with respect to any of their employees and,
except as set forth on Schedule 3.21.1, none of SCB or any Subsidiary is a party
to a written employment contract with any of their respective employees and
there are no understandings with respect to the employment of any officer or
employee of SCB or any Subsidiary which are not terminable by SCB or such
Subsidiary without liability on not more than thirty (30) days' notice. Except
as disclosed in the SCB Financial Statements for the periods covered thereby,
all material sums due for employee compensation have been paid and all employer
contributions for employee benefits, including deferred compensation
obligations, and all material benefit obligations under any Employee Plan (as
defined in Section 3.21.3 hereof) or any Benefit Arrangement (as defined in
Section 3.21.4 hereof) have been duly and adequately paid or provided for in
accordance with plan documents. Except as set forth on Schedule 3.21.1, no
director, officer or employee of SCB or any Subsidiary is entitled to receive
any payment of any amount under any existing agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated by
this Agreement or the Merger Agreement. To SCB's Knowledge, it has materially
complied with all applicable federal and state statutes and regulations which
govern workers' compensation, equal employment opportunity and equal pay,
including, but not limited to, all civil rights laws, Presidential Executive
Order 1124, the Fair Labor Standards Act of 1938, as amended, and the Americans
with Disabilities Act.
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3.21.2 SCB has delivered as Schedule 3.21.2 a complete list
of:
(a) All current employees of SCB or any of its
Subsidiaries together with each employee's tenure with SCB or such Subsidiary,
title or job classification, and the current annual rate of compensation
anticipated to be paid to each such employee; and
(b) All Employee Plans and Benefit Arrangements,
including all plans or practices providing for current compensation or accruals
for active Employees, including, but not limited to, all employee benefit plans,
all pension, profit-sharing, retirement, bonus, stock option, incentive,
deferred compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
3.21.3 Except as disclosed on Schedule 3.21.3, none of SCB or
any of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of SCB or any of its Subsidiaries (any such plan being herein referred to as an
"Employee Plan"). True and complete copies of each such Employee Plan, including
amendments thereto, have been previously delivered to Bancorp, together with (i)
all agreements regarding plan assets with respect to such Employee Plans, (ii) a
true and complete copy of the annual reports for the most recent three years
(Form 5500 Series including, if applicable, Schedules A and B thereto) prepared
in connection with any such Employee Plan, (iii) a true and complete copy of the
actuarial valuation reports for the most recent three years, if any, prepared in
connection with any such Employee Plan covering any active employee of SCB or
its Subsidiaries, (iv) a copy of the most recent summary plan description of
each such Employee Plan, together with any modifications thereto, and (v) a copy
of the most recent favorable determination letter (if applicable) from the
Internal Revenue Service for each Employee Plan. None of the Employee Plans is a
"multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple
employer plan" as covered in Section 412(c) of the IRC, and none of SCB or any
of its Subsidiaries has been obligated to make a contribution to any such
multiemployer or multiple employer plan within the past five years. None of the
Employee Plans of SCB or any of its Subsidiaries is, or for the last five years
has been, subject to Title IV of ERISA. Each Employee Plan which is intended to
be qualified under Section 401(a) of the IRC is so qualified and each trust
maintained pursuant thereto is exempt from income tax under Section 501(a) of
the IRC, and none of SCB or any of its Subsidiaries is aware of any fact which
has occurred which would cause the loss of such qualification or exemption.
3.21.4 Except as disclosed in Schedule 3.21.2, none of SCB or
any of its Subsidiaries maintains (other than base salary and base wages) any
form of current or deferred compensation, bonus, stock option, stock
appreciation right, severance pay, salary continuation, retirement or incentive
plan or arrangement for the benefit of any director, officer or employee,
whether active or retired, of SCB or any of its Subsidiaries or for any class or
classes of such directors, officers or employees. Except as disclosed in
Schedule 3.21.2, none of SCB or any of its Subsidiaries maintains any group or
individual health insurance, welfare or similar plan or arrangement for the
benefit of any director, officer or employee of SCB or any of its Subsidiaries,
whether active or retired, or for any class or classes of such directors,
officers or employees. Any such plan or arrangement described in this Section
3.21.4, copies of which have been delivered to Bancorp, shall be herein referred
to as a "Benefit Arrangement."
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3.21.5 To SCB's Knowledge, all Employee Plans and Benefit
Arrangements are operated in material compliance with the requirements
prescribed by any and all statutes, governmental or court orders, or
governmental rules or regulations currently in effect, including but not limited
to ERISA and the IRC, applicable to such plans or arrangements, and plan
documents relating to any such plans or arrangements, comply with or will be
amended to comply with applicable legal requirements. To SCB's Knowledge, none
of SCB or any of its Subsidiaries, nor any Employee Plan, nor any trusts created
thereunder, nor any trustee, administrator nor any other fiduciary thereof, has
engaged in a "prohibited transaction," as defined in Section 406 of ERISA and
Section 4975 of the IRC, that could subject SCB or any of its Subsidiaries or
Bancorp to liability under Section 409 or 502(i) of ERISA or Section 4975 of the
IRC or that would adversely affect the qualified status of such plans; each
"plan official" within the meaning of Section 412 of ERISA of each Employee Plan
is bonded to the extent required by such Section 412; with respect to each
Employee Plan, to SCB's Knowledge, no employee of SCB or any Subsidiary, nor any
fiduciary of any Employee Plan, has engaged in any breach of fiduciary duty as
defined in Part 4 of Subtitle B of Title I of ERISA which could subject SCB or
any of its Subsidiaries to liability if SCB or any such Subsidiary is obligated
to indemnify such Person against liability. Except as disclosed in Schedule
3.21.5, SCB and its Subsidiaries have not failed to make any material
contribution or pay any amount due and owing as required by law or the terms of
any Employee Plan or Benefit Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee
Plan or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, there is no pending, or to SCB's Knowledge threatened, legal
action, proceeding or investigation against any Employee Plan which could result
in material liability to such Employee Plan, other than routine claims for
benefits, and there is no basis for any such legal action, proceeding or
investigation.
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(g)(2)) materially
complies and has materially complied with the requirements of Section 601
through 608 of ERISA or Section 4980B of the IRC governing continuation coverage
requirements for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of SCB or
any of its Subsidiaries maintains any Employee Plan or Benefit Arrangement
pursuant to which any benefit or other payment will be required to be made by
SCB or any of its Subsidiaries or Affiliates or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of SCB or any
Subsidiary or Affiliate thereof, in either case as a result of the consummation
of the transactions contemplated by this Agreement or the Merger Agreement.
Section 3.22 POWERS OF ATTORNEY. No power of attorney or similar
authorization given by SCB or any Subsidiary thereof is presently in effect or
outstanding other than powers of attorney given in the ordinary course of
business.
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Section 3.23 HAZARDOUS MATERIALS. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of
cleaning, pest control and office supplies, and other small quantities of
Hazardous Substances that are used in the ordinary course of the respective
businesses of SCB and its Subsidiaries and in compliance with applicable
Environmental Laws, or ordinary rubbish, debris and nonhazardous solid waste
stored in garbage cans or bins for regular disposal off-site, or petroleum
contained in and de minimus quantities discharged from motor vehicles in their
ordinary operation on any of the SCB Properties (as defined below), SCB and its
Subsidiaries have not engaged in the generation, use, manufacture, treatment,
transportation, storage (in tanks or otherwise), or the disposal, of Hazardous
Substances other than as permitted by and only in compliance with applicable
law. To SCB's Knowledge, no Hazardous Substances have been released, emitted or
disposed of, or otherwise deposited, on, in or from any real property which is
now or has been previously owned since January 1, 1995, or which is currently or
during the past three years was leased, by SCB or any of its Subsidiaries,
including OREO (collectively, the "SCB Properties"), or to SCB's Knowledge, on
or in any real property in which SCB or any of its Subsidiaries now holds any
security interest, mortgage or other lien or interest with an underlying
obligation in excess of $25,000 ("SCB Collateralizing Real Estate"), except for
(i) matters disclosed on Schedule 3.23; (ii) ordinary and necessary quantities
of cleaning, pest control and office supplies used and stored in compliance with
applicable Environmental Laws, or ordinary rubbish, debris and nonhazardous
solid waste stored in garbage cans or bins for regular disposal off-site, or
petroleum contained in, and de minimus quantities discharged from, motor
vehicles in their ordinary operation on such SCB Properties; and (iii) such
releases, emissions, disposals or deposits which constituted a violation of an
Environmental Law but did not have a Material Adverse Effect on the SCB Property
involved and would not result in the incurrence or imposition of any liability,
expense, penalty or fine against SCB or any of its Subsidiaries in excess of
$25,000 individually or in the aggregate. To SCB's Knowledge, no activity has
been undertaken on any of the SCB Properties since January l, 1995, and to the
Knowledge of SCB no activities have been or are being undertaken on any of the
SCB Collateralizing Real Estate, that would cause or contribute to:
(a) any of the SCB Properties or SCB
Collateralizing Real Estate becoming a treatment, storage or disposal facility
within the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any
Hazardous Substances under circumstances which would violate any Environmental
Laws; or
(c) the discharge of Hazardous Substances into
any soil, subsurface water or ground water or into the air, or the dredging
or filling of any waters, that would require a permit or any other approval
under the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et
seq., the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq., or any
similar federal or state law or local ordinance; the cumulative effect of
which would have a material adverse effect on the SCB Property or SCB
Collateralizing Real Estate involved.
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3.23.2 Except as set forth on Schedule 3.23, to the Knowledge
of SCB, there are not, and never have been, any underground storage tanks
located in or under any of the SCB Properties or the SCB Collateralizing Real
Estate.
3.23.3 None of SCB or any of its Subsidiaries has received any
written notice of, and to the Knowledge of SCB none has received any verbal
notice of, any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for remedial
or responsive actions or for compensation, with respect to any of the SCB
Properties or SCB Collateralizing Real Estate, alleging noncompliance with or
violation of any Environmental Law or seeking relief under any Environmental Law
and none of the SCB Properties or SCB Collateralizing Real Estate is listed on
the United States Environmental Protection Agency's National Priorities List of
Hazardous Waste Sites, or, to the Knowledge of SCB, any other list, schedule,
log, inventory or record of hazardous waste sites maintained by any federal,
state or local agency.
3.23.4 "Hazardous Substances" shall mean any hazardous, toxic
or infectious substance, material, gas or waste which is regulated by any local,
state or federal Governmental Entity, or any of their agencies.
Section 3.24 STOCK OPTIONS. Schedule 3.24 to this Agreement contains a
description of the SCB Stock Option Plan and list of all SCB Stock Options
outstanding, indicating for each: (a) the grant date; (b) whether vested or
unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS. Each representation, warranty, covenant and agreement of SCB set
forth in this Agreement shall be deemed to be made on and as of the date hereof
and as of the Effective Time.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BANCORP
Bancorp and WSNB represent and warrant to SCB that:
Section 4.1 ORGANIZATION; CORPORATE POWER; ETC. Bancorp is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to own, lease and operate its respective properties and assets and to carry on
its respective business substantially as it is being conducted on the date of
this Agreement. Bancorp is a bank holding company registered under the BHCA.
WSNB is a national banking association duly organized, validly existing and in
good standing under national banking laws. WSNB is authorized by the OCC to
conduct a general banking business in California and is a member of the Federal
Reserve System. WSNB's deposits are insured by the FDIC in the manner and to the
full extent provided by law. Each of Bancorp's Subsidiaries has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business substantially as it is being conducted on the date of this
Agreement, except where the failure to have such power or authority would not
have a Material Adverse Effect on Bancorp taken as a whole or the ability of
Bancorp or WSNB to consummate the transactions contemplated by this Agreement.
Bancorp and WSNB have all requisite corporate power and authority to enter into
this Agreement and, subject
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to obtaining all Requisite Regulatory Approvals, Bancorp and WSNB will have
the requisite corporate power and authority to perform its respective
obligations hereunder with respect to the consummation of the transactions
contemplated hereby. Bancorp is the sole shareholder of WSNB. Neither the
scope of business of Bancorp or any Subsidiary, nor the location of any of
their respective properties, requires that Bancorp or any of its respective
Subsidiaries be licensed to conduct business in any jurisdiction other than
those jurisdictions in which they are licensed or qualified to do business as
a foreign corporation, where the failure to be so licensed or qualified
would, individually or in the aggregate, have a Material Adverse Effect on
Bancorp taken as a whole.
Section 4.2 LICENSES AND PERMITS. Except as disclosed on Schedule 4.2,
Bancorp and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on Bancorp taken as a whole, or
on the ability of Bancorp and/or WSNB to consummate the transactions
contemplated by this Agreement. The properties, assets, operations and
businesses of Bancorp and those of its Subsidiaries, including WSNB, are and
have been maintained and conducted in compliance with all applicable licenses,
certificates, franchises, rights and permits to the extent that the failure to
do so would have a Material Adverse Effect on Bancorp or WSNB.
Section 4.3 SUBSIDIARIES. Other than as set forth on Schedule 4.3,
there is no corporation, partnership, joint venture or other entity in which
Bancorp owns, directly or indirectly (except as pledgee pursuant to loans or
stock or other interest held as the result of or in lieu of foreclosure pursuant
to pledge or other security arrangement) any equity or other voting interest or
position. Bancorp is the sole shareholder of each Subsidiary set forth on
Schedule 4.3.
Section 4.4 AUTHORIZATION OF AGREEMENT; NO CONFLICTS.
4.4.1 The execution and delivery of this Agreement and the
Merger Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
parts of Bancorp and WSNB, subject only to the approval of this Agreement and
the Merger Agreement by Bancorp's shareholders. This Agreement has been duly
executed and delivered by Bancorp and WSNB and constitutes a legal, valid and
binding obligation of Bancorp and WSNB, enforceable in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles. The Merger Agreement, upon the
receipt of all Requisite Regulatory Approvals, the due execution and filing of
such Merger Agreement with the OCC at the Effective Time will constitute a
legal, valid and binding obligation of WSNB and Bancorp, enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting the rights
of creditors generally or by general equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and will not conflict with, or result in any violation of or
default or loss of a material benefit under, any provision of the Articles of
Incorporation (or Association) or Bylaws of Bancorp and WSNB, or except for the
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necessity of obtaining the Requisite Regulatory Approvals and the approval of
the shareholders of Bancorp, any material mortgage, indenture, lease, agreement
or other material instrument, or any permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Bancorp or WSNB or any of their assets or properties or any of
their respective Subsidiaries, other than any such conflict, violation, default
or loss which (i) will not have a Material Adverse Effect on Bancorp and WSNB
taken as a whole; or (ii) will be cured or waived prior to the Effective Time.
No material consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required in connection
with the execution and delivery of this Agreement by Bancorp and WSNB or the
performance by Bancorp and WSNB of their obligations hereunder, except for (a)
filings required in order to obtain Requisite Regulatory Approvals; (b) the
filing of the Registration Statement (including the Joint Proxy Statement/
Prospectus constituting a part thereof) with the SEC relating to the Merger and
the declaration of effectiveness of the Registration Statement by the SEC and
any applicable state securities law regulatory authorities; (c) the filing and
approval of the Merger Agreement with the OCC; (d) any approvals required to be
obtained pursuant to the BHCA or the Federal Deposit Insurance Act or any other
required governmental approval for the execution and delivery of this Agreement
by Bancorp and WSNB or the consummation of the Merger; and (e) any consents,
authorizations, approvals, filings or exemptions required to be made or obtained
under the securities or "blue sky" laws of various jurisdictions in connection
with the issuance of shares of Bancorp Common Stock contemplated by this
Agreement.
Section 4.5 CAPITAL STRUCTURE OF BANCORP. The authorized capital stock
of Bancorp consists of 10,000,000 shares of Bancorp Common Stock, no par value
per share and 10,000,000 shares of Bancorp preferred stock. On the date of this
Agreement 2,533,779 shares of Bancorp Common Stock were outstanding, 192,923
shares of Bancorp Common Stock were reserved for issuance pursuant to employee
stock option and other employee stock plans (the "Bancorp Stock Plans"), and no
shares of Bancorp preferred stock were outstanding or were reserved for issuance
by Bancorp. All outstanding shares of Bancorp Common Stock are validly issued,
fully paid and nonassessable and do not possess any preemptive rights and were
not issued in violation of any preemptive rights or any similar rights of any
Person. The issuance of the shares of Bancorp Common Stock proposed to be issued
pursuant to this Agreement at the Effective Time will have been duly authorized
by all requisite corporate action of Bancorp, and such shares, when issued as
contemplated by this Agreement, will constitute duly authorized, validly issued,
fully paid and nonassessable shares of Bancorp Common Stock, and will not have
been issued in violation of any preemptive or similar rights of any Person. As
of the date of this Agreement, and except for this Agreement and the Bancorp
Stock Plans, Bancorp does not have outstanding any options, warrants, calls,
rights, commitments, securities or agreements of any character to which Bancorp
is a party or by which it is bound obligating Bancorp to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
Bancorp or obligating Bancorp to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 4.6 BANCORP FILINGS.
4.6.1 Since January 1, 1997, Bancorp and its Subsidiaries have
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
(a) the Federal Reserve Board or any Federal Reserve Bank; (b)
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the OCC; (c) the SEC; and (d) any other applicable federal, state or local
governmental or regulatory authority. All such reports, registrations and
filings including the Bancorp Financial Statements are collectively referred
to as the "Bancorp Filings". Except to the extent prohibited by law, copies
of the Bancorp Filings have been made available to SCB. As of their
respective filing or mailing dates, each of the past Bancorp Filings (a) was
true and complete in all material respects (or was amended so as to be so
promptly following discovery of any discrepancy); and (b) complied in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the governmental or regulatory authority with which it was
filed (or was amended so as to be so promptly following discovery of any such
noncompliance) and none contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Bancorp Financial Statements, together
with the financial statements contained in the Bancorp Filings, have been
prepared in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the period involved (except
as may be indicated in the notes thereto) and fairly present (subject, in the
case of the unaudited statements, to recurring adjustments normal in nature
and amount) the consolidated financial position of Bancorp as of the dates
thereof and the consolidated results of its operations, cash flows and
changes in shareholders' equity for the period then ended.
4.6.2 Bancorp, or WSNB, as the case may be, has filed each
report, schedule, and amendments to each of the foregoing since January 1, 1997
that Bancorp, or WSNB, was required to file with the Federal Reserve Bank or the
OCC, all of which have been made available to SCB. As of their respective dates,
these filings complied in all material respects with the applicable requirements
of the Bank Holding Company Act and the National Banking Laws, as the case may
be, and the rules and regulations of the Federal Reserve Board and the OCC
thereunder applicable to such filings, and none of these filings contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of Bancorp included in the Bancorp Filings comply in all material
respects with applicable accounting requirements and have been prepared in
accordance with GAAP, or applicable regulatory accounting principles, applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto, and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the
consolidated financial position of Bancorp as of the dates thereof and the
consolidated results of its operations and cash flows or changes in financial
position for the periods then ended.
Section 4.7 ACCURACY OF INFORMATION SUPPLIED.
4.7.1 No representation or warranty of Bancorp contained
herein or any statement, schedule, exhibit or certificate given or to be given
by or on behalf of Bancorp or any of its Subsidiaries, including WSNB, to SCB in
connection herewith and none of the information supplied or to be supplied by
Bancorp or any of its Subsidiaries, including WSNB, to SCB hereunder contains or
will contain any untrue statement of material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
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4.7.2 None of the information supplied or to be supplied by
Bancorp or relating to Bancorp and WSNB which is included or incorporated by
reference in (i) the Registration Statement on Form S-4 to be filed with the SEC
by Bancorp in connection the issuance of shares of Bancorp Common Stock in the
Merger will, at the time the Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) the Joint Proxy Statement/ Prospectus and any amendment or
supplement thereto will, at all times from the date of mailing to shareholders
of Bancorp through the date of the meeting of shareholders of Bancorp to be held
in connection with the Merger, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (iii) the applications and forms to be filed with
securities or "blue sky" authorities, self regulatory authorities, or any
Governmental Entity in connection with the Merger, the issuance of any shares of
Bancorp Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals will, at the time filed or at the time they become effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Registration Statement (except for such portions thereof that relate only to SCB
and its Subsidiaries) will comply in all material respects with the applicable
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
4.7.3 Bancorp has or will deliver to SCB copies of: (a) the
audited balance sheets of Bancorp and its Subsidiaries as of December 31, 1998,
1997 and 1996 and the related statements of income, changes in shareholders'
equity and cash flows for the years then ended and the related notes to such
financial statements, all as audited by Perry-Smith & Company, independent
public accountants (the "Bancorp Financial Statements"), and Bancorp will
hereafter until the Closing Date deliver to SCB copies of additional financial
statements of Bancorp as provided in Section 5.1.1(iii). The Bancorp Financial
Statements have been prepared (and all of said additional financial statements
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of Bancorp and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
Bancorp has delivered to SCB copies of all management or other letters delivered
to Bancorp by its independent accountants in connection with any of the Bancorp
Financial Statements or by such accountants or any consultant regarding the
internal controls or internal compliance procedures and systems of Bancorp
issued at any time since January 1, 1996, and will make available for inspection
by SCB or its representatives, at such times and places as SCB may reasonably
request, reports and working papers produced or developed by such accountants or
consultants.
Section 4.8 COMPLIANCE WITH APPLICABLE LAWS. Except as disclosed on
Schedule 4.8, to the best of Bancorp's Knowledge, the respective businesses of
Bancorp and its Subsidiaries are not being
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conducted in violation of any law, ordinance or regulation, except for
violations which individually or in the aggregate would not have a Material
Adverse Effect on Bancorp and its Subsidiaries, taken as a whole. No
investigation or review by any Governmental Entity with respect to Bancorp is
pending or, to the Knowledge of Bancorp threatened, nor has any Governmental
Entity indicated to Bancorp an intention to conduct the same, other than
those the outcome of which, as far as can be reasonably foreseen, will not
have a Material Adverse Effect on Bancorp and its Subsidiaries, taken as a
whole.
Section 4.9 LITIGATION. Except as disclosed on Schedule 4.9, there is
no suit, action or proceeding or investigation pending or, to the Knowledge of
Bancorp, threatened against or affecting Bancorp or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on Bancorp
and its Subsidiaries, taken as a whole; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Bancorp or any of its Subsidiaries that has or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect.
Section 4.10 AGREEMENTS WITH BANKING AUTHORITIES. Neither Bancorp nor
any Subsidiary of Bancorp is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 4.11 UNDISCLOSED LIABILITIES. Except as disclosed on Schedule
4.11, none of Bancorp or any of its Subsidiaries has any liabilities or
obligations, either accrued, contingent or otherwise, that are material to
Bancorp and its Subsidiaries, taken as a whole, and that have not been: (a)
reflected or disclosed in the Bancorp Financial Statements; or (b) incurred
subsequent to December 31, 1998 in the ordinary course of business. Bancorp has
no Knowledge of any basis for the assertion against Bancorp or any of its
Subsidiaries, of any liability, obligation or claim (including without
limitation that of any Governmental Entity) that will have or cause, or could
reasonably be expected to have or cause, a Material Adverse Effect on Bancorp
and its Subsidiaries, taken as a whole, that is not fairly reflected in the
Bancorp Financial Statements or on Schedule 4.11.
Section 4.12 TAXES.
4.12.1 FILING OF RETURNS. Except as set forth on Schedule
4.12.1, Bancorp and its Subsidiaries have duly prepared and filed federal,
state, and local Returns (for Tax or informational purposes) which were required
to be filed by or in respect of Bancorp and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. No extension of time within
which Bancorp or any of its Subsidiaries may file any Return is currently in
force.
4.12.2 PAYMENT OF TAXES. Except as disclosed on Schedule
4.12.2 with respect to all amounts in respect of Taxes imposed on Bancorp or any
Subsidiary or for which Bancorp or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements
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have been or will be fully complied with in all material respects, and all
such amounts required to be paid by or on behalf of Bancorp or any Subsidiary
to taxing authorities or others on or before the date hereof have been paid.
Section 4.13 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS. Each representation, warranty, covenant and
agreement of Bancorp set forth in this Agreement shall be deemed to be made
on and as of the date hereof and as of the Effective Time.
ARTICLE 5. ADDITIONAL AGREEMENTS
Section 5.1 ACCESS TO INFORMATION, DUE DILIGENCE, ETC.
5.1.1 Upon reasonable notice, each party shall permit the
other party and their accountants, counsel and other representatives
reasonable access to their officers, employees, properties, books, contracts,
commitments and records and from the date hereof through the Effective Time,
and shall furnish or provide access to each other as soon as practicable, (i)
a copy of each of SCB's Filings or Bancorp's Filings filed subsequent to the
date of this Agreement promptly after such document has been filed with the
appropriate Governmental Entity, provided, however, that copies of any
Returns relating to Taxes of any of SCB or any of its Subsidiaries shall be
furnished to Bancorp at least 15 Business Days prior to the proposed date of
filing thereof and shall not be filed without the prior approval of Bancorp,
which approval shall not be unreasonably withheld or delayed; (ii) unless
otherwise prohibited by law, a copy of each report, schedule and other
documents filed or received by it during such period with any Regulatory
Authority or the Internal Revenue Service, as to documents other than related
to employees or customers and other than those distributed to banks
generally; (iii) as promptly as practicable following the end of each
calendar month after the date hereof, a balance sheet of SCB or Bancorp as of
the end of such month; and (iv) all other information concerning its
business, properties, assets, financial condition, results of operations,
liabilities, personnel and otherwise as SCB or Bancorp may reasonably request.
5.1.2 Until the Effective Time, a representative of Bancorp
shall be entitled and shall be invited to attend meetings of the Board of
Directors of SCB and of the Loan Committee of SCB, and prior written notice
of the dates, times and places of such meetings shall be given to Bancorp
with the same number of days' prior notice as SCB's directors receive for
such meetings; provided, however, that such representative shall excuse
himself or herself from any portion of any such meetings that (i) relate to
approval of, or the exercise of any rights under, this Agreement by SCB, and
(ii) involve discussions between such Board of Directors or such Loan
Committee and legal counsel for SCB that are entitled to be protected from
disclosure under an attorney-client privilege which, in the opinion of
counsel for SCB, would be lost due to the presence of such representative of
Bancorp.
5.1.3 Bancorp, WSNB and SCB each agrees to keep
confidential and not divulge to any other party or Person (other than to the
employees, attorneys, accountants and consultants of each who have a need to
receive such information and other than as may be required by law) any
information received from the other, unless and until such documents and
other information otherwise becomes publicly available or unless the
disclosure of such information is authorized by
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each party. In the event of termination of this Agreement for any reason, the
parties shall promptly return, or at the election of the other party destroy,
all documents obtained from the other and any copies or notes of such
documents (except as otherwise required by law) and, upon the request of the
other party, confirm such destruction to the other in writing.
Section 5.2 SHAREHOLDER APPROVAL.
5.2.1 SCB and Bancorp each shall promptly call a meeting of
its respective shareholders to be held at the earliest practicable date after
the date on which the initial Registration Statement is filed with the SEC,
but in no event later than May 31, 2000, for the purpose of approving this
Agreement and authorizing the Merger Agreement and the Merger. Each of the
respective Boards of Directors will recommend to the respective shareholders,
approval of this Agreement, the Merger Agreement and the Merger; provided,
however, that the SCB Board of Directors or Bancorp's Board of Directors may
withdraw its recommendation if such Board of Directors believes in good faith
(based on a written opinion of a financial advisor that is experienced in
evaluating the fairness of Acquisition Proposals) that a Superior Proposal
(defined below) has been made and shall have determined in good faith, after
consultation with and based on written advice of its outside legal counsel,
that the withdrawal of such recommendation is necessary for such Board of
Directors to comply with its fiduciary duties under applicable law.
5.2.2 If the Merger is approved by vote of the shareholders
of Bancorp and SCB, then, within ten (10) days thereafter Bancorp and SCB
shall send a Dissenting Shareholder Notice to each recordholder of any
Dissenting Shares.
5.2.3 Prior to the Effective Time of the Merger, Bancorp,
as the sole shareholder of WSNB, shall take all action necessary for the
consummation of the Merger by WSNB.
Section 5.3 TAKING OF NECESSARY ACTION.
5.3.1 Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees, subject to applicable laws and
the fiduciary duties of SCB's, Bancorp's or WSNB's Boards of Directors, as
advised in writing by their respective counsel, to use all reasonable efforts
promptly to take or cause to be taken all action and promptly to do or cause
to be done all things necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions
contemplated by this Agreement and the Merger Agreement, including, without
limitation, the delivery of any certificate or other document reasonably
requested by counsel to a party to this Agreement. Without limiting the
foregoing, Bancorp, WSNB and SCB will use their reasonable efforts to obtain
all consents of third parties and Government Entities necessary or, in the
reasonable opinion of Bancorp or SCB advisable for the consummation of the
transactions contemplated by this Agreement. Without limiting the foregoing,
Bancorp shall cause WSNB to take all actions necessary to execute and file
the Merger Agreement and to effect all transactions contemplated of WSNB by
this Agreement and SCB shall take all actions necessary to effect all
transactions contemplated by this Agreement and the Merger Agreement. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the Merger Agreement,
or to vest the Surviving Corporation with full title to all properties,
assets, rights, approvals, immunities and franchises of SCB, the proper
officers or
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directors of Bancorp, WSNB or SCB, as the case may be, shall take all such
necessary action. Notwithstanding the foregoing, nothing in this Agreement
shall be construed to require SCB to take any action (or omit to take any
action) which may affect the Conversion Rate, except as may be specifically
provided for or required by this Agreement.
5.3.2 The obligations of SCB or Bancorp contained in
Section 6.2.5 of this Agreement shall continue to be in full force and effect
despite any Default thereof by reason of receipt of a Superior Proposal
(defined below) and any Default thereof by the defaulting party shall entitle
either SCB or Bancorp to such legal or equitable remedies as may be provided
in this Agreement or by law notwithstanding that any action or inaction of
the Board of Directors or officers of the defaulting party which is required
to enable such party to fulfill such obligations may be excused based on the
continuing fiduciary obligations of such party's Board of Directors and
officers to its shareholders. Notwithstanding the foregoing, however, in the
event of a termination of this Agreement by Bancorp or SCB and the actual
payment of the liquidated damages to the other party as provided for in
Section 8.5 of this Agreement, neither Bancorp, SCB or their respective
directors or officers shall have any obligations or liabilities of any kind
under this Agreement by reason of any such Default, and Bancorp or SCB shall
have no further obligations of any kind under this Agreement.
5.3.3 SCB shall use its best efforts to cause each
director, executive officer and other Person who is an "Affiliate" of SCB
(for purposes of Rule 145 under the Securities Act) to deliver to Bancorp, on
the date of this Agreement, a written agreement in the form attached hereto
as Exhibit 5.3 (the "Affiliate Agreements").
Section 5.4 REGISTRATION STATEMENT AND APPLICATIONS.
5.4.1 Bancorp and SCB will cooperate and jointly prepare
and file as promptly as practicable the Registration Statement, the
statements, applications, correspondence or forms to be filed with
appropriate State securities law regulatory authorities, and the statements,
correspondence or applications to be filed to obtain the Requisite Regulatory
Approvals to consummate the transactions contemplated by this Agreement. Each
of Bancorp and SCB shall use all reasonable efforts to have the S-4
Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing, and thereafter mail the Joint
Proxy Statement/Prospectus to the shareholders of SCB and Bancorp. Each party
will furnish all financial or other information, including accountant comfort
letters relating thereto, certificates, consents and opinions of counsel
concerning it and its Subsidiaries received by such party.
5.4.2 Each party shall provide to the other at the request
of the other party: (i) immediately prior to the filing thereof, copies of
all material statements, applications, correspondence or forms to be filed
with state securities law regulatory authorities, the SEC and other
appropriate regulatory authorities to obtain the Requisite Regulatory
Approvals to consummate the transactions contemplated by this Agreement; and
(ii) promptly after delivery to, or receipt from, such regulatory authorities
all written communications, letters, reports or other documents relating to
the transactions contemplated by this Agreement.
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Section 5.5 EXPENSES.
5.5.1 Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same, including,
without limitation, all costs associated with any resales of Bancorp Common
Stock by Affiliates of SCB; provided, however, that Bancorp will file on a
timely basis at its own expense the reports required by Rule 144(c) of the
Securities Act.
5.5.2 SCB shall use its best efforts to ensure that its
attorneys, accountants, financial advisors, investment bankers and other
consultants engaged by it in connection with the transaction contemplated by
this Agreement submit full and final bills on or before the Determination
Date and that all such expenses are paid or properly accrued prior to the
Determination Date.
Section 5.6 NOTIFICATION OF CERTAIN EVENTS.
5.6.1 SCB shall provide to Bancorp, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or
conditions that are the subject of Sections 6.1 and 6.2, which notice shall
provide reasonable detail as to the subject matter thereof.
5.6.2 Bancorp shall provide to SCB, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or
conditions that are the subject of Section 6.3 and 6.4, which notice shall
provide reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in
writing of any change or event which could reasonably be expected to have a
Material Adverse Effect on the business, properties, assets, financial
condition, results of operations, liabilities or personnel of such party or
on its ability to consummate the transactions contemplated by this Agreement
or the Merger Agreement.
5.6.4 SCB and Bancorp shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statement or Joint Proxy Statement/Prospectus at any time contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statement therein, in light
of the circumstances under which they were made, not misleading or that the
Registration Statement or the Joint Proxy Statement/Prospectus otherwise is
required to be amended and supplemented, which notice shall specify, in
reasonable detail, the circumstances thereof. Bancorp shall promptly amend
and supplement such materials and disseminate the new or modified information
so as to fully comply with the Securities Act. If the amendment or supplement
so required relates to information concerning SCB, the out-of-pocket costs
and expenses of preparing, filing and disseminating such amendment or
supplement shall be borne by SCB.
Section 5.7 CLOSING SCHEDULES. SCB has delivered to Bancorp on or
before the date of this Agreement all of the Schedules to this Agreement
which SCB is required to deliver to Bancorp hereunder (the "SCB Schedules").
Bancorp has delivered to SCB on or before the date of this Agreement all of
the Schedules to this Agreement which Bancorp is required to deliver to SCB
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hereunder ( the "Bancorp Schedules"). Immediately prior to the Closing Date,
SCB shall have prepared updates of the SCB Schedules provided for in this
Agreement and shall deliver to Bancorp revised schedules containing the
updated information (or a certificate signed by SCB's Chief Executive Officer
stating that there have been no changes on the applicable schedules); and
Bancorp shall have prepared updates of the Bancorp Schedules provided for in
this Agreement and shall deliver to SCB revised Schedules containing updated
information (or a certificate signed by Bancorp's Chief Executive Officer
stating that there has been no change on the applicable schedules.) Such
updated schedules shall sometimes be referred to collectively, as the
"Closing Schedules." The Closing Schedules shall be dated as of the day prior
to the Closing Date and shall contain information as of the day prior to the
Closing Date or as of such earlier date as is practicable under the
circumstances. In the event the Closing Schedules disclose an event,
occurrence or circumstance that has had or could reasonably be expected to
have a Material Adverse Effect on SCB, on the one hand, or on Bancorp, on the
other hand, or on consummation of the transactions contemplated by this
Agreement, that was not disclosed in the previously delivered Schedules
hereto, the party delivering such Closing Schedules (the "Affected Party")
shall so notify the other party in the letter of transmittal for such Closing
Schedules, the Closing Date shall be delayed for seven (7) Business Days or
such longer period as is agreed to by the other party in writing, and such
other party shall be entitled to terminate this Agreement within five (5)
Business Days after receiving such Closing Schedules that disclose such
event, occurrence or circumstance. In the event of any such termination, the
terminating party shall have no liability for such termination. The Affected
Party shall have no liability to the terminating party in such an event
unless (i) as a result of the existence of such event, occurrence or
circumstance so disclosed in the Closing Schedules any of the representations
or warranties of the Affected Party contained in this Agreement are found to
have been untrue in any material respect as of the date of this Agreement, or
(ii) the event, occurrence or circumstance could have been prevented in the
exercise of reasonable diligence by any officers or directors of the Affected
Party, in either of which cases the Affected Party shall be liable to the
terminating party for Liquidated Damages as provided in Section 8.5 hereof.
Section 5.8 ADDITIONAL ACCRUALS/APPRAISALS.
5.8.1 Prior to December 31, 1999, SCB shall have increased its loan
loss reserve or other reserves to an amount determined by the parties and
agreed to by SCB's accountants.
5.8.2 Prior to the Closing Date, but after the Determination Date,
at Bancorp's request, SCB shall, consistent with GAAP and applicable banking
regulations, establish such additional accruals and reserves immediately
prior to the Determination Date as may be necessary to conform SCB's
accounting and credit and OREO loss reserve practices and methods to those of
Bancorp, provided, however, that no accrual or reserve made by SCB pursuant
to this Section 5.8.2, or any litigation or regulatory proceeding arising out
of any such accrual or reserve, or any other effect on SCB resulting from
SCB's compliance with this Section 5.8.2, shall constitute or be deemed to be
a breach, violation of or failure to satisfy any representation, warranty,
covenant, condition or other provision of this Agreement or otherwise be
considered in determining whether any such breach, violation or failure to
satisfy shall have occurred. If the requested accruals and reserves affect
the audit of SCB's year end financial statements for 1999, both Grant
Thornton and SCB must agree to the adjustments.
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ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 AFFIRMATIVE CONDUCT OF SCB. During the period from the
date of execution of this Agreement through the Effective Time, SCB shall
carry on its business, and shall cause each of its respective Subsidiaries to
carry on its business, in the ordinary course in substantially the manner in
which heretofore conducted, subject to changes in law applicable to all
federal savings and loan associations and directives from regulators, and use
all commercially reasonable efforts to preserve intact its business
organization, keep available the services of its officers and employees,
(other than terminations in the ordinary course of business) and preserve its
relationships with customers, depositors, suppliers and others having
business dealings with it; and, to these ends, shall fulfill each of the
following:
6.1.1 Use its commercially reasonable efforts, or cooperate
with others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.1.2 Advise Bancorp promptly in writing of any change that
would have a Material Adverse Effect on its capital structure, financial
condition, assets, results of operations, business or prospects or of any
matter which would make the representations and warranties set forth in
Article 3 hereof not true and correct in any material respect as of the
effective date of the Registration Statement and at the Effective Time;
6.1.3 Keep in full force and effect all of its existing
material permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this
Agreement; and notify Bancorp in writing promptly of any facts or
circumstances which could affect its ability, or that of any of its
Subsidiaries, to maintain such insurance or bonding coverage;
6.1.5 Perform its contractual obligations and not breach or
come into default on any of such obligations, and not amend, modify, or,
except as they may be terminated in accordance with their terms, terminate
any material contract, agreement, understanding, commitment, or offer,
whether written or oral, (collectively referred to as an "Understanding") or
materially default in the performance of any of its obligations under any
Understanding where such default would have a Material Adverse Effect on SCB;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will
not, have a Material Adverse Effect on SCB;
6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
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6.1.8 Maintain its assets and properties in good condition
and repair, normal wear and tear excepted;
6.1.9 Promptly advise Bancorp in writing of any event or
any other transaction within the Knowledge of SCB, whereby any Person or
related group of Persons acquires, after the date of this Agreement, directly
or indirectly, record or beneficial ownership (as defined in Rule 13d-3
promulgated by the SEC pursuant to the Exchange Act) or control of 5% or more
of the outstanding shares of SCB Common Stock either prior to or after the
record date fixed for the SCB shareholders' meeting or any adjourned meeting
thereof to approve the transactions contemplated herein;
6.1.10 (a) Maintain a reserve for loan and lease losses
("Loan Loss Reserve") at a level which is adequate to provide for all known
and reasonably expected losses on loans, leases and other extensions of
credit outstanding and other inherent risks in SCB's portfolio of loans and
leases, in accordance with GAAP and applicable regulatory accounting
principles and banking laws and regulations;
(b) Charge off all loans, receivables and other
assets, or portions thereof, deemed uncollectible in accordance with GAAP,
regulatory accounting principles, and applicable law or regulation, or which
have been classified as "loss" or as directed by any regulatory authority,
unless such classification or direction has been disregarded in good faith by
SCB, SCB has submitted in writing to such regulatory authority the basis upon
which it has so disregarded such classification or direction, and such
regulatory authority retracts its direction requiring such charge-off;
6.1.11 Furnish to Bancorp, as soon as practicable, and in
any event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of SCB and access to the working papers
related thereto, provided, however, that SCB need not furnish Bancorp any
materials relating to deliberations of SCB's Board of Directors with respect
to its approval of this Agreement, communications of SCB's legal counsel with
the Board of Directors or officers of SCB regarding SCB's rights against or
obligations to Bancorp or its Subsidiaries under this Agreement, or books,
records and documents covered by the attorney-client privilege or which are
attorneys' work product; (ii) copies of all material reports, renewals,
filings, certificates, statements, correspondence and other documents
specific to SCB or filed with or received from any Federal Reserve Bank, the
FDIC, the OTS or any Governmental Entity; (iii) monthly unaudited balance
sheets, statements of income and changes in shareholders' equity for SCB and
its Subsidiaries and quarterly unaudited balance sheets, statements of income
and changes in shareholders' equity for SCB, in each case prepared on a basis
consistent with past practice; and (iv) such other reports as Bancorp may
reasonably request (which are otherwise deliverable under this Section
6.1.11) relating to SCB. Each of the financial statements of SCB delivered
pursuant to this Section 6.1.11 shall be accompanied by a certificate of the
Chief Financial Officer of SCB to the effect that such financial statements
fairly present the financial information presented therein of SCB, for the
periods covered, subject to recurring adjustments normal in nature and
amount, necessary for a fair presentation and are prepared on a basis
consistent with past practice;
6.1.12 SCB agrees that through the Effective Time, as of
their respect dates, (i) each SCB Filing will be true and complete in all
material respects; and (ii) each SCB Filing with comply
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in all material respects with all of the statutes, rules and regulations
enforced or promulgated by the Governmental Entity with which it will be
filed and none will contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they will
be made, not misleading. Any financial statement contained in any of such SCB
Filings that is intended to present the financial position of SCB during the
periods involved to which it relates will fairly present in all material
respects the financial position of SCB and will be prepared in accordance
with GAAP or consistent with applicable regulatory accounting principles and
banking law and banking regulations, except as stated therein;
6.1.13 Maintain reserves for contingent liabilities in
accordance with GAAP or applicable regulatory accounting principles, and
consistent with past practices;
6.1.14 Promptly notify Bancorp of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any
government or regulatory action, including an investigation or notice of
investigation, or similar proceeding or notice of any material claims against
SCB or any of its assets;
6.1.15 Inform Bancorp of the amounts and categories of any
loans, leases or other extensions of credit, or other assets, that have been
classified by any bank regulatory authority or by any unit of SCB as
"Specially Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or
any comparable classification ("Classified Assets"). SCB will furnish to
Bancorp, as soon as practicable, and in any event within fifteen days after
the end of each calendar month, schedules including the following: (i)
Classified Assets by type (including each credit or other asset in an amount
equal to or greater than $10,000), and its classification category; (ii)
nonaccrual credits by type (including each credit in an amount equal to or
greater than $10,000); (iii) renegotiated loans by type (loans on which
interest has been renegotiated to lower than market rates because of the
financial condition of the borrowers); (iv) delinquent credits by type
(including each delinquent credit in an amount equal to or greater than
$10,000), including an aging into 30-89 and 90+ day categories; (v) loans or
leases or other assets charged off, in whole or in part, during the previous
month by type (including each such loan or lease or other asset in an amount
equal to or greater than $10,000); and (vi) OREO or assets owned stating with
respect to each its type;
6.1.16 Furnish to Bancorp, upon Bancorp's request,
schedules with respect to the following: (i) participating loans and leases,
stating, with respect to each, whether it is purchased or sold and the loan
or lease type; (ii) loans or leases (including any commitments) by SCB to any
director or officer (at or above the Vice President level) of SCB or any of
its Subsidiaries, or to any Person holding 5% or more of the capital stock of
SCB, including, with respect to each such loan or lease, the identity and, to
the best Knowledge of SCB, the relation of the borrower to SCB, the loan or
lease type and the outstanding and undrawn amounts; and (iii) standby letters
of credit, by type, (including each letter of credit in a face amount equal
to or greater than $10,000); and
6.1.17 Make available to Bancorp copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit
of $25,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $10,000 in the case of unsecured loans or unsecured
extensions of
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credit, which are approved by SCB after the date of this Agreement, within
ten Business Days of preparation of such packages.
Section 6.2 NEGATIVE COVENANTS OF SCB. During the period from the
date of execution of this Agreement through the Effective Time, SCB agrees
that without Bancorp's prior written consent, it shall not:
6.2.1 (a) Declare or pay any dividend on, other than
regular cash dividends consistent with past practices and disclosed to
Bancorp, or make any other distribution in respect of, any of its capital
stock; (b) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock; or (c) repurchase or
otherwise acquire any shares of its capital stock;
6.2.2 Take any action that would or might result in any of
the representations and warranties of SCB set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set
forth in Article 7 not being satisfied, except to the extent such actions are
required to be undertaken by applicable law, regulation or at the direction
of any Regulatory Authority;
6.2.3 Issue, deliver, sell, or grant, or authorize the
issuance, delivery, sale or grant of, or purchase, any shares of the capital
stock of SCB or any securities convertible or exercisable into or
exchangeable for such capital stock, or any rights, warrants or options,
including options under any stock option plans or enter into any agreements
to do any of the foregoing, except in connection with the issuance of SCB
Common Stock pursuant to the exercise of SCB Stock Options;
6.2.4 Amend its Articles of Incorporation or Bylaws, except
as required by applicable law or by the terms of this Agreement;
6.2.5 Authorize or knowingly permit any of its
representatives, directly or indirectly, to solicit or encourage any Acquisition
Proposal (as hereinafter defined) or participate in any discussions or
negotiations with, or provide any nonpublic information to, any Person or group
of persons (other than Bancorp, and its representatives) concerning any such
solicited Acquisition Proposal. SCB shall notify Bancorp as soon as practicable
if any inquiry regarding an Acquisition Proposal is received by SCB, including
the terms thereof. For purposes of this Section 6.2.5, "Acquisition Proposal"
shall mean any (a) proposal pursuant to which any Person other than Bancorp
would acquire or participate in a merger or other business combination or
reorganization involving SCB; (b) proposal by which any Person or group, other
than Bancorp, would acquire the right to vote ten percent (10%) or more of the
capital stock of SCB entitled to vote for the election of directors; (c)
acquisition of the assets of SCB other than in the ordinary course of business;
or (d) acquisition in excess of ten percent (10%) of the outstanding capital
stock of SCB, other than as contemplated by this Agreement. Notwithstanding the
foregoing, nothing contained in this Agreement shall prevent SCB or SCB's Board
of Directors from (i) furnishing nonpublic information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity, or
recommending an unsolicited bona fide written Acquisition Proposal to the
shareholders of SCB, if and only to the extent that (A) the Board of Directors
of SCB has determined and believes in good faith (after consultation with and
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the concurrence of its financial advisor) that such Acquisition Proposal
would, if consummated, result in a transaction materially more favorable,
from a financial point of view, to SCB's shareholders than the transaction
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal") and SCB's Board
of Directors has determined in good faith, after consultation with and based
on written advice from its outside legal counsel, that such action is
necessary for SCB to comply with its fiduciary duties to shareholders under
applicable law, and (B) prior to furnishing such nonpublic information to, or
entering into discussions or negotiations with, such person or entity, SCB's
Board of Directors has received from such person or entity an executed
confidentiality agreement, with terms no more favorable to such party than
those contained in the Confidentiality Agreement between SCB and Bancorp, or
(ii) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to an Acquisition Proposal, if such Rule is applicable thereto;
6.2.6 Acquire or agree to acquire by merging, consolidating
with, or by purchasing all or a substantial portion of the assets of, or in
any other manner, any business or any Person or otherwise acquire or agree to
acquire any assets which are material to SCB, other than in the ordinary
course of business consistent with prior practice;
6.2.7 Sell, lease or otherwise dispose of any of its assets
which are material, individually or in the aggregate, to SCB, except in the
ordinary course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities of SCB
or any of its Subsidiaries or guarantee any debt securities of others other
than in the ordinary course of business consistent with prior practice;
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one
year) issued, in its ordinary course of business consistent with prior
practice, and liabilities arising out of, incurred in connection with, or
related to the consummation of this Agreement; (b) commitments to make loans
or other extensions of credit in the ordinary course of business consistent
with prior practice; and (c) loan sales in the ordinary course of business,
without any recourse, provided that no commitment to sell loans shall extend
beyond the Effective Time;
6.2.10 Make or enter into a commitment to make any loan or
other extension of credit to any director, officer or employee of SCB or any
of its Subsidiaries, except in accordance with practice or policy in
existence on the date of this Agreement and in compliance with all applicable
laws and all applicable regulations and directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent
with prior practice, as required by an existing contract, or as set forth on
Schedule 6.2.11, grant any general or uniform increase in the rates of pay of
employees or employee benefits or any increase in salary or employee benefits
of any officer, employee or agent or pay any bonus to any Person;
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6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose
of any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1998 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.2.14 Make any capital expenditures, or commitments with
respect thereto, except those in the ordinary course of business which do not
exceed $10,000 individually or $30,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract
or agreement, enter into any new employment contract or agreement or make any
bonus or any special or extraordinary payments to any Person;
6.2.16 Except in the ordinary course of business consistent
with prior practice, and in compliance with applicable laws and regulations,
make any material investments, by purchase of stock or securities, contributions
of capital, property transfers, purchases of any property or assets or
otherwise, in any other individual, corporation or other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
Bancorp, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
report or proposed Tax election or change in any method or period of accounting,
to Bancorp for its approval, which it shall not unreasonably withhold or delay;
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
6.2.19 Change its fiscal year or methods of accounting in
effect at December 31, 1998, except as required by changes in GAAP or regulatory
accounting principles as concurred to by SCB's independent public accountants;
6.2.20 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization; or
6.2.21 Take or cause to be taken into OREO any property
without (a) an environmental report reporting no adverse environmental condition
on such property, with a copy
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of such report delivered to Bancorp prior to taking such property into OREO;
and (b) the written consent of Bancorp, which shall not be unreasonably
withheld.
Section 6.3 CONDUCT OF BANCORP. During the period from the date of
execution of this Agreement through the Effective Time, Bancorp agrees (except
to the extent SCB shall otherwise consent in writing) to do the following:
6.3.1 Use its commercially reasonable efforts, or cooperate
with others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise SCB promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 Bancorp agrees that through the Effective Time, as of
their respect dates, (i) each Bancorp Filing will be true and complete in all
material respects; and (ii) each Bancorp Filing will comply in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Governmental Entity with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such Bancorp Filings that is intended to present
the financial position of Bancorp, on a consolidated basis, during the periods
involved to which it relates will fairly present in all material respects the
financial position of Bancorp, on a consolidated basis, and will be prepared in
accordance with GAAP or consistent with applicable regulatory accounting
principles and banking law and regulations, except as stated therein; and
6.3.4 Promptly notify SCB of the filing, or threatened filing,
of any litigation, or the filing or threatened filing of any government or
regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against Bancorp or any of
its assets, which is expected to have a Material Adverse Effect on Bancorp and
its Subsidiaries taken as a whole.
Section 6.4 NEGATIVE COVENANTS OF BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, Bancorp agrees
that without SCB's prior written consent, it shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular
cash dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock or (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock.
6.4.2 Take any action that would or might result in any of the
representations and warranties of Bancorp set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such
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actions are required to be undertaken by applicable law, regulation or at the
direction of any Regulatory Authority or are contemplated by this Agreement;
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 CONDITIONS TO THE PARTIES' OBLIGATIONS. The obligations of
all the parties to this Agreement to effect the Merger shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreement and the Merger
shall have been validly approved by the holders of a majority of the outstanding
shares of SCB Common Stock and Bancorp Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Merger under applicable federal laws of the United States or applicable
laws of any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger Agreement shall have been obtained or expired, as the
case may be (all such permits, approvals and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals"),
without the imposition of any condition which in the reasonable judgment of any
party to be affected by such condition is materially burdensome upon such party
or its respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any Government Entity which: (i) makes the consummation of the Merger
illegal; (ii) requires the divestiture by Bancorp of any material asset or of a
material portion of the business of Bancorp; or (iii) imposes any condition upon
Bancorp or its Subsidiaries (other than general provisions of law applicable to
all banks and bank holding companies) which in the judgment of Bancorp would be
materially burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 Bancorp and SCB shall have received an opinion from
Perry-Smith & Co., dated the Effective Time, subject to assumptions and
exceptions normally included, and in form and substance reasonably satisfactory
to Bancorp and SCB, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the IRC and that Bancorp and SCB will each be a party to that reorganization
within the meaning of Section 368(b) of the IRC;
7.1.6 Bancorp and SCB shall have received from Perry-Smith &
Co., who are the independent public accountants of Bancorp and SCB, letters,
dated at the effective date of the
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Registration Statement and at the Effective Time, in form and substance
satisfactory to Bancorp and SCB that the Merger may be accounted for as a
pooling of interests;
7.1.7 Bancorp and SCB shall have received opinions of counsel
for the other party in substantially the forms previously agreed to by the
parties as set forth in Exhibits 7.1.7A and 7.1.7B, respectively, dated as of
the Closing Date;
7.1.8 No action, suit or proceeding shall have been instituted
or threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger Agreement
which presents a substantial risk that such transactions will be restrained or
that either party hereto may suffer material damages or other relief as a result
of consummating such transactions;
7.1.9 The holders of no more than 10% of the outstanding
shares of SCB Common Stock have exercised dissenters' rights. The options of SCB
that are redeemed and dissenters of Bancorp shall be included in such
calculation. Dissenters' rights shall be deemed to be exercised to the extent at
the Effective Time the holder of such shares have complied with the provisions
of Section 552.14(b) of the Title 12 of the Code of Federal Regulations relating
to dissenters' rights for SCB or the provisions of Sections 1300 et seq. of
California Corporations Code for Bancorp; and
7.1.10 The Bancorp Common Stock issuable in the Merger shall
have been included for listing on the NASDAQ National Market.
Section 7.2 CONDITIONS TO BANCORP'S OBLIGATIONS. The obligations of
Bancorp to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by Bancorp) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a)
the representations and warranties of SCB contained in Article 3 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on SCB
or the Surviving Corporation, or upon the consummation of the transactions
contemplated hereby; (b) SCB shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on SCB or the Surviving Corporation, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
Bancorp to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) SCB shall have delivered to Bancorp certificates dated the
date of the Effective Time and signed by the President and Chief Executive
Officer to the effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition
of any material burden or restriction on any of the parties hereto not in
existence on the date hereof, each consent to the consummation of the Merger
required to be obtained from any Person under any agreement, contract
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or license to which SCB is a party or by or under which it is bound or
licensed, the withholding of which might have a Material Adverse Effect on
SCB, the Surviving Corporation or Bancorp at or following the Effective Time,
or on the transactions contemplated by this Agreement;
7.2.3 SCB shall have delivered its Closing Schedules to
Bancorp on the day immediately preceding the Closing Date and none of such
Closing Schedules shall reflect any item that was not on the SCB Schedules (or
in the SCB Financial Statements) delivered on the date of execution of this
Agreement that has had, would have, or could be reasonably likely to have, a
Material Adverse Effect on SCB, the Surviving Corporation or Bancorp at or after
the Effective Time, or on the consummation of the transactions contemplated
hereby;
7.2.4 Between the date of this Agreement and the Effective
Time, no event or circumstance shall have occurred which has had or could
reasonably be expected to have a Material Adverse Effect on SCB, or its
Subsidiaries, and Bancorp shall have received a certificate signed on behalf of
SCB by the President and Chief Executive Officer of SCB to such effect;
7.2.5 Counsel for Bancorp shall have approved, in the exercise
of counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to Bancorp hereunder
or that are reasonably requested by such counsel;
7.2.6 The sale of the Bancorp Common Stock resulting from the
Merger shall have been qualified or registered with the appropriate State
securities law or "blue sky" regulatory authorities of all States in which
qualification or registration is required under the State securities laws, and
such qualifications or registration shall not have been suspended or revoked;
7.2.7 SCB shall have delivered to Bancorp not later than the
date of this Agreement all of the executed Affiliate Agreements in the form
attached hereto as Exhibit 5.3;
7.2.8 None of SCB or any of its Subsidiaries shall be subject
to any memorandum of understanding, cease and desist order, or other agreement
with any Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect;
7.2.9 All of SCB's director-shareholders shall have delivered
to Bancorp on the date of this Agreement the Shareholder Agreements in the form
attached hereto as Exhibit 7.2.9;
7.2.10 All of the SCB stock options outstanding and the SCB
stock option plan shall have been canceled and terminated as of the Effective
Time.
7.2.11 Grant Thornton shall have issued a letter to Bancorp
with the calculation of the amount of the shareholders' equity of SCB exclusive
of SCB's Costs Associated With the Transaction as of the Determination Date and
any adjustments made to the loan loss reserves or other reserves requested by
WSNB pursuant to Sections 5.8.1 and 5.8.2 of this Agreement.
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Section 7.3 CONDITIONS TO SCB'S OBLIGATIONS. The obligations of SCB to
effect the Merger shall be subject to the fulfillment (or waiver, in writing, by
SCB) of the following conditions:
7.3.1 Except as otherwise provided in this Section 7.3, (a)
the representations and warranties of Bancorp contained in Article 4 shall be
true in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
Bancorp and WSNB, taken as a whole, or upon consummation of the transactions
contemplated hereby; (b) Bancorp shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on Bancorp and WSNB, taken as a whole, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
SCB to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) Bancorp shall have delivered to SCB certificates dated the
date of the Effective Time and signed by a duly authorized officer to the effect
set forth in Subsections 7.3.1(a), (b) and (c);
7.3.2 There shall have been obtained, without the imposition
of any material burden or restriction on any of the parties hereto not in
existence on the date hereof, each consent to the consummation of the Merger
required to be obtained from any Person under any agreement, contract or license
to which either Bancorp or WSNB is a party or by or under which either is bound
or licensed, the withholding of which might have a Material Adverse Effect on
Bancorp, WSNB or the Surviving Corporation at or following the Effective Time,
or on the transactions contemplated by this Agreement;
7.3.3 Between the date of this Agreement and the Effective
Time, no event or circumstance shall have occurred which has had or could
reasonably be expected to have a Material Adverse Effect on Bancorp or its
Subsidiaries, taken as a whole, and SCB shall have received a certificate signed
on behalf of Bancorp by the President and Chief Executive Officer of Bancorp to
such effect;
7.3.4 Counsel for SCB shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to SCB hereunder or
that are reasonably requested by such counsel;
7.3.5 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of Bancorp and its Subsidiaries,
taken as a whole, from December 31, 1998 to the Effective Time that results in a
Material Adverse Effect as to Bancorp and its Subsidiaries, taken as a whole;
7.3.6 Prior to the Closing Date, Bancorp and WSNB shall have
taken all corporate action required to effectuate the appointment of the two
board members of SCB to its respective Board of Directors effective immediately
after the Effective Time;
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7.3.7 Bancorp shall have delivered its Closing Schedules to
SCB on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the Bancorp Schedules (or in
the Bancorp Financial Statements) delivered on the date of execution of this
Agreement that has had, or would have a Material Adverse Effect on Bancorp and
its Subsidiaries, taken as a whole, at or after the Effective Time, or on the
consummation of the transactions contemplated hereby;
7.3.8 Hoefer and Arnett shall not have revoked, at any time
prior to the meeting of SCB's shareholders at which the Merger is to be voted
on, its opinion, rendered to the Board of Directors of SCB on December 27, 1999
(the "SCB Fairness Opinion"), to the effect that the terms of the Merger, from a
financial standpoint, are fair to the shareholders of SCB; and
7.3.9 Bancorp shall have obtained a three year director and
officer liability insurance tail coverage policy for the benefit of the current
directors and executive officers of SCB and will provide proof of director and
officer liability insurance for those directors of SCB whom shall serve as
directors of Bancorp and/or WSNB following the Merger.
ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time;
8.1.1 By mutual consent of the Boards of Directors of Bancorp
and SCB;
8.1.2 By Bancorp or SCB upon the failure to satisfy any
conditions specified in Section 7.1 if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
8.1.3 By Bancorp or SCB if an Acquisition Event involving SCB
shall have occurred;
8.1.4 By SCB if there shall have been a material breach of any
of the representations or warranties of Bancorp set forth in this Agreement,
which breach, in the reasonable opinion of SCB, by its nature cannot be cured or
is not cured prior to the Closing and which breach would, in the reasonable
opinion of SCB, individually or in the aggregate, have, or be reasonably likely
to have, a Material Adverse Effect on Bancorp and its Subsidiaries, taken as a
whole, or upon the consummation of the transactions contemplated hereby;
8.1.5 By Bancorp if there shall have been a material breach of
any of the representations or warranties of SCB set forth in this Agreement,
which breach, in the reasonable opinion of Bancorp, by its nature cannot be
cured or is not cured prior to the Closing and which breach would, in the
reasonable opinion of Bancorp, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on SCB or upon the
consummation of the transactions contemplated hereby;
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8.1.6 By SCB after the occurrence of a Default by Bancorp and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of SCB,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.7 By Bancorp after the occurrence of a Default by SCB and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of Bancorp,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.8 By Bancorp if the Closing Schedules delivered by SCB
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the SCB Financial Statements
delivered to Bancorp on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on SCB, or after the
Effective Time, on Bancorp, or on the consummation of the transactions
contemplated hereby (an "SCB Material Adverse Event");
8.1.9 By SCB if the Closing Schedules delivered by Bancorp
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the Bancorp Financial
Statements delivered to SCB on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on Bancorp and its
Subsidiaries, taken as a whole, or on the consummation of the transactions
contemplated hereby (a "Bancorp Material Adverse Event");
8.1.10 By SCB upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to June 30, 2000;
8.1.11 By Bancorp upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to June 30, 2000; or
8.1.12 By SCB if the Bancorp Average Trading Price is below
$12, provided that SCB notifies Bancorp in writing within 48 hours of the
determination of the Bancorp Average Trading Price of SCB's decision to
terminate, and provided that Bancorp does not agree to issue additional shares
in excess of 775,000 shares of Bancorp Common Stock to SCB shareholders within
48 hours of the time SCB notifies Bancorp of its termination.
Section 8.2 EFFECT OF TERMINATION; SURVIVAL. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.3, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
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Section 8.3 AMENDMENT. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of SCB
and Bancorp; provided, however, that after any such approval by such
shareholders, no amendments shall be made which by law require further approval
by such shareholders without such further approval.
Section 8.4 WAIVER. Any term or provision of this Agreement other than
regulatory approval or any other provision required by law, may be waived in
writing at any time by the party which is, or whose shareholders are, entitled
to the benefits thereof.
Section 8.5 LIQUIDATED DAMAGES; CANCELLATION FEE.
8.5.1 In the event of the occurrence of (i) an Acquisition
Event involving SCB, then SCB shall pay to Bancorp the sum of Five Hundred
Thousand Dollars ($500,000) in cash.
8.5.2 In the event of termination of this Agreement by SCB
pursuant to Section 8.1.10 as a result of the revocation of the SCB Fairness
Opinion; or a termination of this Agreement by Bancorp pursuant to (i) Section
8.1.2 (no approval by SCB shareholders), or (ii) pursuant to Section 8.1.5
(breach of representations or warranties of SCB) or Section 8.1.7 (Default) or
Section 8.1.8 (disclosure in the Closing Schedules of an SCB Material Adverse
Event), where such breach of representation or warranty, Default or SCB Material
Adverse Event shall have been caused in whole or in material part by any action
or inaction within the control of SCB or any of its Subsidiaries, or any of
their directors or executive officers (it being understood that any breach or
Default or SCB Material Adverse Event that occurred after the date of this
Agreement and was outside of the control of SCB and its Subsidiaries, and the
directors and executive officers thereof, such as, by way of example only, the
filing of a lawsuit against SCB, shall not come within this Section 8.5.2),
then, SCB shall pay to Bancorp the sum of Two Hundred Thousand Dollars
($200,000), in cash; provided, however, that if an Acquisition Agreement occurs
involving SCB within one hundred eighty (180) days following any termination by
Bancorp to which this Section 8.5.2 applies, SCB shall pay to Bancorp an
additional Three Hundred Thousand Dollars ($300,000) in cash.
8.5.3 In the event of the termination of this Agreement by
Bancorp pursuant to (i) Section 8.1.2 (no approval by Bancorp Shareholders), or
(ii) 8.1.4 (breach of representations and warranties of Bancorp) or Section
8.1.6 (Default), or Section 8.1.9 (disclosure in Closing Schedules of a Bancorp
Material Adverse Event), where such breach of representation or warranty, or
such Default or Bancorp Material Adverse Event shall have been caused in whole
or in material part by any action or inaction within the control of Bancorp or
any of its Subsidiaries, or any of their directors or executive officers (it
being understood that any action or inaction outside of the control of Bancorp,
its Subsidiaries and their directors and executive officers, such as, by way of
example only, the filing of a lawsuit against Bancorp, shall not come within
this Section 8.5.3), then, Bancorp shall pay to SCB the sum of Two Hundred
Thousand Dollars ($200,000), in cash.
8.5.4 The parties have determined that the occurrence of any
of the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3
would cause a substantial damage and loss and lost business opportunities to the
party terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair
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compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.3, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
Bancorp or SCB and for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties hereto, nor any Affiliates of any such
parties, shall have any further obligation or liability of any kind to the other
party, except pursuant to Sections 5.1.4, 5.5 and 9.5.
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time or to a
termination of this Agreement.
Section 9.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so delivered, mailed or sent, as the case may be, to the parties
at the following addresses (or any such other address for a party as shall be
specified by like notice):
If to SCB at:
Sentinel Community Bank
229 South Washington Street
Sonora, California 95370
Fax No. (209) 533-2449
Attention: Donald M. Cusey, President/CEO
with a copy to:
Bartel Eng Linn Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Fax No. (916) 442-3442
Attention: Daniel B. Eng, Esq.
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If to Bancorp or WSNB at:
Western Sierra Bancorp
3550 Country Club Drive, Suite 202
Cameron Park, California 95682
Fax No. (530) 676-2817
Attention: Gary D. Gall, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
Section 9.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.4 ENTIRE AGREEMENT/NO THIRD PARTY RIGHTS/ASSIGNMENT. This
Agreement (including the documents and instruments referred to herein): (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) except as expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 NONDISCLOSURE OF AGREEMENT. Bancorp and SCB agree, except
as required by law or the rules of the NASDAQ, so long as this Agreement is in
effect, not to issue any public notice, disclosure or press release with respect
to the transactions contemplated by this Agreement without seeking the consent
of the other party, which consent shall not be unreasonably withheld.
Section 9.6 GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law, except where national banking law applies.
Section 9.7 HEADINGS/TABLE OF CONTENTS. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.8 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Merger Agreement is not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed
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that the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the State of California or any state having
jurisdiction, this being in addition to any remedy to which they are entitled
at law or in equity.
Section 9.9 SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, Bancorp, WSNB and SCB have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first above written.
WESTERN SIERRA BANCORP SENTINEL COMMUNITY BANK
By: /s/ Gary D. Gall By: /s/ Alan J. Kleinert
- --------------------------------- -----------------------------
Name: GARY D. GALL, PRESIDENT/CEO Name: Alan J. Kleinert
- --------------------------------- -----------------------------
By: /s/ Joseph A. Surra By: /s/ Donald M. Cusey, Pres/CEO
- -------------------------------- -------------------------------
Name: Joseph A. Surra, Chairman Name: Donald M. Cusey
- -------------------------------- -------------------------------
WESTERN SIERRA NATIONAL BANK
By: /s/ Gary D. Gall
- --------------------------------
Name: Gary D. Gall, President/CEO
- --------------------------------
By: /s/ Joseph A. Surra
- --------------------------------
Name: Joseph A. Surra, Chairman
- --------------------------------
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FIRST AMENDMENT TO AGREEMENT
AND PLAN OF REORGANIZATION AND MERGER
This First Amendment to the Agreement and Plan of Reorganization and Merger
dated as of March 17, 2000 (the "Amendment") is entered into by and among
Western Sierra Bancorp ("Bancorp"), a California corporation, Western Sierra
National Bank ("WSNB"), a national banking association, and Sentinel Community
Bank, ("SCB") a federal savings and loan association.
RECITALS
WHEREAS, Bancorp, WSNB and SCB have entered into that the Agreement and
Plan of Reorganization and Merger dated as of December 27, 1999 (the
"Agreement"); and
WHEREAS, Bancorp, WSNB and SCB each agree that it is in the best
interests of the corporations to amend certain provisions of the Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bancorp, WSNB and SCB hereby agree
as follows:
1. AMENDMENT OF ARTICLE 1. DEFINITIONS. Article 1 shall be amended to
delete the definition of the term "Aggregate Merger Price".
2. AMENDMENT OF ARTICLE 1. DEFINITIONS. "PER SHARE MERGER PRICE". The
definition of "Per Share Merger Price" shall be added to Article 1 and
shall read in the entirety as follows:
"Per Share Merger Price" shall mean the total of $20.6819 less the
amount, if any, of the quotient of the SCB Shareholders' Equity
Adjustment divided by 514,943. The calculation of the Per Share Merger
Price shall be performed by Perry-Smith LLP and agreed to by Moss Adams
LLP or such other party agreed to by Bancorp and SCB.
3. AMENDMENT OF ARTICLE 1. DEFINITIONS. "CONVERSION RATE". The definition
of "Conversion Rate" shall be amended in Article 1 to read in the
entirety as follows:
"Conversion Rate" shall mean the fraction equal to the Per Share Merger
Price divided by the Bancorp Average Trading Price, provided however
that for purposes of the calculation the Bancorp Average Trading Price
shall not be less than $13.8710 or more than $17.9167 (except if the
Bancorp Average Trading Price is less than $12 and Bancorp determines
in its sole discretion to continue with the Merger, then such lower
Bancorp Average Trading Price will be used). However, in the event that
Bancorp announces the third party acquisition of a majority interest in
Bancorp Common Stock by means of a merger prior to the Closing Date,
the Bancorp Average Trading Price for purposes of the calculation shall
not be less than $15.6364.
4. AMENDMENT OF ARTICLE 1. DEFINITIONS. "SCB SHAREHOLDERS' EQUITY
ADJUSTMENT". The definition of "SCB SHAREHOLDERS' EQUITY ADJUSTMENT"
shall be amended in Article 1 to read in the entirety as follows:
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"SCB Shareholders' Equity Adjustment" shall mean the amount by which
SCB's shareholder equity as of the Determination Date, exclusive of (x)
SCB's Costs Associated With the Transaction as of the Determination
Date up to a maximum of $100,000 for legal and accounting fees,
$368,000 for termination of the FISERV agreement, $75,000 for
investment banking fees, and $235,000 for unrealized losses on
securities available for sale, and (y) adjustments made to the loan
loss reserves or other reserves requested by WSNB pursuant to Sections
5.8.1 and 5.8.2 of this Agreement, is less than $5,600,000, excluding
any payment received by SCB upon the exercise of any SCB Stock Options
between the date of the Amendment of the Agreement and the Effective
Time.
5. AMENDMENT OF SECTION 2.5. Section 2.5 of the Agreement shall be amended
to read in the entirety as follows:
Section 2.5 CONVERSION OF SCB STOCK OPTIONS. At the Effective Time, all
outstanding rights with respect to SCB Common Stock pursuant to stock
options under the SCB Stock Option Plan shall be converted into and
become equivalent rights with respect to Bancorp Common Stock at the
applicable Conversion Rate with a corresponding adjustment in the
option price, and Bancorp shall assume each SCB Stock Option in
accordance with the terms of SCB Stock Option Plan and the stock option
agreement by which it is evidenced.
6. AMENDMENT OF SECTION 6.2.20 AND SECTION 6.2.21 OF THE AGREEMENT.
Section 6.2.20 and 6.2.21 of the Agreement shall be amended to read in
the entirety as follows:
6.2.20 Take or cause to be taken any action which
would disqualify the Merger as a "reorganization" within the meaning of
Section 368(a) of the IRC as a tax-free reorganization;
6.2.21 Take or cause to be taken into OREO any
property without (a) an environmental report reporting no adverse
environmental condition on such property, with a copy of such report
delivered to Bancorp prior to taking such property into OREO; and (b)
the written consent of Bancorp, which shall not be unreasonably
withheld; or
7. AMENDMENT TO ADD A NEW SECTION 6.2.22 OF THE AGREEMENT. A new Section
6.2.22 shall be added to the Agreement and shall read in the entirety
as follows:
6.2.22 Make any payments or distributions for the
cancellation or termination of any SCB Stock Option or make any
amendments to the SCB Stock Option Plan.
8. REFERENCES. Upon execution and delivery of this Amendment, all
references in the Agreement to the "Agreement," and the provisions
thereof, shall be deemed to refer to the Agreement, as amended by this
Amendment.
9. NO OTHER AMENDMENTS OR CHANGES. Except as expressly amended or modified
by this Agreement, all of the terms and conditions of the Agreement
shall remain unchanged and in full force and effect.
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10. DEFINITIONS. All capitalized terms used herein and not otherwise
defined or amended shall have the meanings given to them in the
Agreement.
IN WITNESS WHEREOF, Bancorp, WSNB, SCB have caused this Agreement to be signed
by their respective officers thereunto duly authorized, all as of the date first
above written.
WESTERN SIERRA BANCORP WESTERN SIERRA NATIONAL BANK
By: /s/ Gary D. Gall By: /s/ Gary D. Gall
- --------------------- ---------------------
Name: Gary D. Gall Name: Gary D. Gall
- --------------------- -------------------
By: /s/ Lesa Fynes By: /s/ Lesa Fynes
- --------------------- ----------------------
Name: Lesa Fynes Name: Lesa Fynes
- --------------------- --------------------
SENTINEL COMMUNITY BANK
By: /s/ Alan J. Kleinert
- ------------------------
Name: Alan J. Kleinet
- ------------------------
By: /s/ Donald M. Cusey
- ------------------------
Name: Donald M. Cusey
- ------------------------
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EXHIBIT II
Hoefer & Arnett
(Letterhead)
March 17, 2000
Members of the Board of Directors
Sentinel Community Bank
229 North Washington Street
Sonoma, CA 95370
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the holders of the outstanding shares of Common
Stock, $10.00 par value, of Sentinel Community Bank ("SENC") of the Conversion
Ratio, as defined in Section 2.6 of the Agreement and Plan of Reorganization and
Merger dated as of December 27, 1999, as amended on March 17, 2000 (the
"Agreement"), in the proposed merger (the "Merger") of SENC and Western Sierra
Bancorp ("WSBA").
Hoefer & Arnett Incorporated, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Hoefer &
Arnett Incorporated provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, of SENC or WSBA for its own
account and for the accounts of customers. We are familiar with SENC having
acted as its financial advisor in connection with the Agreement.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Annual Report to Shareholders of SENC and WSBA for the years
ended December 31, 1997 and 1998; certain interim reports to shareholders and
Quarterly Reports on Form 10-Q of WSBA; certain other communications from SENC
and WSBA to the their respective shareholders; and certain internal financial
analyses and forecasts for SENC and WSBA prepared by their respective
managements including forecasts for certain costs savings and revenue
opportunities (the "Synergies") expected to be achieved as a result of the
Merger. We also have held discussions with members of the senior management of
SENC and WSBA regarding the strategic rationale for, and the potential benefits
of, the Merger and the past and current business operations, regulatory
relationships, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading activity
for the shares of SENC and WSBA, compared certain financial and stock market
information for SENC and WSBA with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the commercial banking industry
and performed such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this
<PAGE>
opinion. In that regard, we have assumed, with your consent, that the
financial forecasts, including, without limitation, the Synergies and
projections regarding under-performing and non-performing assets and net
charge-offs have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of SENC and WSBA and that such
forecasts will be realized in the amounts and at the times contemplated
thereby. We are not experts in the evaluation of loan and lease portfolios
for purposes of assessing the adequacy of the allowances for losses with
respect thereto and have assumed, with your consent, that such allowances for
each of SENC and WSBA are in the aggregate adequate to cover all such losses.
In addition, we have not reviewed individual credit files nor have we made an
independent evaluation or appraisal of the assets and liabilities of SENC,
WSBA or any of their subsidiaries and we have not been furnished with any
such evaluation or appraisal. We also have assumed, with your consent, that
the Merger will be accounted for as a pooling of interests under generally
accepted accounting principles and that obtaining any necessary regulatory
approvals and third party consents for the Merger or otherwise will not have
a material adverse effect on SENC, WSBA or the combined company pursuant to
the Merger. In addition, our opinion does not address the relative merits of
the Merger as compared to any alternative business transaction that might be
available to SENC.
Our advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of SENC in connection with
its consideration of the Merger and such opinion does not constitute a
recommendation as to how any holder of shares of SENC should vote with respect
to such transaction.
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Conversion
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of the outstanding shares of Common Stock of Sentinel Community Bank.
Very truly yours,
/s/ Hoefer & Arnett
HOEFER & ARNETT INCORPORATED
<PAGE>
EXHIBIT III
CHAPTER 13 OF
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which
come within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the National Market System of the NASDAQ Stock Market,
and the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304; provided,
however, that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for payment
are filed with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE
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(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE - TIME FOR PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
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fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues.
If the status of the shares as dissenting shares is in issue, the court shall
first determine that issue. If the fair market value of the dissenting shares is
in issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT - PAYMENT - COSTS
(a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on
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judgments from the date of compliance with Sections 1300, 1301 and 1302 if
the value awarded by the court for the shares is more than 125 percent of the
price offered by the corporation under subdivision (a) of Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
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SECTION 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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EXHIBIT IV
SECTION 552.14 DISSENTER AND APPRAISAL RIGHTS
(a) RIGHT TO DEMAND PAYMENT OF FAIR OR APPRAISED VALUE. Except as provided
in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with 552.13 of this part shall have
the right to demand payment of the fair or appraised value of his
stock: Provided, That such stockholder has not voted in favor of the
combination and complies with the provisions of paragraph (c) of this
section.
(b) EXCEPTIONS. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this
section to demand payment of the stock's fair or appraised value, if
such stock was listed on a national securities exchange or quoted on
the National Association of Securities Dealers' Automated Quotation
System (""NASDAQ"") on the date of the meeting at which the combination
was acted upon or stockholder action is not required for a combination
made pursuant to 552.13(h)(2) of this part. "Qualified consideration"
means cash, shares of stock of any association or corporation which at
the effective date of the combination will be listed on a national
securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) PROCEDURE
(1) NOTICE. Each constituent Federal stock association shall
notify all stockholders entitled to rights under this section,
not less than twenty days prior to the meeting at which the
combination agreement is to be submitted for stockholder
approval, of the right to demand payment of appraised value of
shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders
of record and may be part of management's proxy solicitation
for such meeting.
(2) DEMAND FOR APPRAISAL AND PAYMENT. Each stockholder electing to
make a demand under this section shall deliver to the Federal
stock association, before voting on the combination, a writing
identifying himself or herself and stating his or her
intention thereby to demand appraisal of and payment for his
or her shares. Such demand must be in addition to and separate
from any proxy or vote against the combination by the
stockholder.
(3) NOTIFICATION OF EFFECTIVE DATE AND WRITTEN OFFER. Within ten
days after the effective date of the combination, the
resulting association shall:
(i) Give written notice by mail to stockholders of
constituent Federal stock associations who have
complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the
combination, of the effective date of the
combination;
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(ii) Make a written offer to each stockholder to pay for
dissenting shares at a specified price deemed by the
resulting association to be the fair value thereof;
and
(iii) Inform them that, within sixty days of such date, the
respective requirements of paragraphs (c)(5) and
(c)(6) of this section (set out in the notice) must
be satisfied.
The notice and offer shall be accompanied by a balance sheet
and statement of income of the association the shares of which
the dissenting stockholder holds, for a fiscal year ending not
more than sixteen months before the date of notice and offer,
together with the latest available interim financial
statements.
(4) ACCEPTANCE OF OFFER. If within sixty days of the effective
date of the combination the fair value is agreed upon between
the resulting association and any stockholder who has complied
with the provisions of paragraph (c)(2) of this section,
payment therefor shall be made within ninety days of the
effective date of the combination.
(5) PETITION TO BE FILED IF OFFER NOT ACCEPTED. If within sixty
days of the effective date of the combination the resulting
association and any stockholder who has complied with the
provisions of paragraph (c)(2) of this section do not agree as
to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or
certified mail to the resulting association, demanding a
determination of the fair market value of the stock of all
such stockholders. A stockholder entitled to file a petition
under this section who fails to file such petition within
sixty days of the effective date of the combination shall be
deemed to have accepted the terms offered under the
combination.
(6) STOCK CERTIFICATES TO BE NOTED. Within sixty days of the
effective date of the combination, each stockholder demanding
appraisal and payment under this section shall submit to the
transfer agent his certificates of stock for notation thereon
that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates
for such notation shall no longer be entitled to appraisal
rights under this section and shall be deemed to have accepted
the terms offered under the combination.
(7) WITHDRAWAL OF DEMAND. Notwithstanding the foregoing, at any
time within sixty days after the effective date of the
combination, any stockholder shall have the right to withdraw
his or her demand for appraisal and to accept the terms
offered upon the combination.
(8) VALUATION AND PAYMENT. The Director shall, as he or she may
elect, either appoint one or more independent persons or
direct appropriate staff of the Office to appraise the shares
to determine their fair market value, as of the effective date
of the combination, exclusive of any element of value arising
from the accomplishment or
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expectation of the combination. Appropriate staff of the
Office shall review and provide an opinion on appraisals
prepared by independent persons as to the suitability of
the appraisal methodology and the adequacy of the analysis and
supportive data. The Director after consideration of the
appraisal report and the advice of the appropriate staff
shall, if he or she concurs in the valuation of the shares,
direct payment by the resulting association of the appraised
fair market value of the shares, upon surrender of the
certificates representing such stock. Payment shall be
made, together with interest from the effective date of the
combination, at a rate deemed equitable by the Director.
(9) COSTS AND EXPENSES. The costs and expenses of any proceeding
under this section may be apportioned and assessed by the
Director as he or she may deem equitable against all or some
of the parties. In making this determination the Director
shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights
provided by this section.
(10) VOTING AND DISTRIBUTION. Any stockholder who has demanded
appraisal rights as provided in paragraph (c)(2) of this
section shall thereafter neither be entitled to vote such
stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be
taken by stockholders of record at a date which is on or prior
to, the effective date of the combination): PROVIDED, That if
any stockholder becomes unentitled to appraisal and payment of
appraised value with respect to such stock and accepts or is
deemed to have accepted the terms offered upon the
combination, such stockholder shall thereupon be entitled to
vote and receive the distributions described above.
(11) STATUS. Shares of the resulting association into which shares
of the stockholders demanding appraisal rights would have been
converted or exchanged, had they assented to the combination,
shall have the status of authorized and unissued shares of the
resulting association.
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PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of Western Sierra Bancorp
("Bancorp") provide for indemnification of agents including directors,
officers and employees to the maximum extent allowed by California law
including the use of an indemnity agreement. Bancorp's Articles further
provide for the elimination of director liability for monetary damages to the
maximum extent allowed by California law. The indemnification law of the
State of California generally allows indemnification in matters not involving
the right of the corporation, to an agent of the corporation if such person
acted in good faith and in a manner such person reasonably believed to be in
the best interests of the corporation, and in the case of a criminal matter,
had no reasonable cause to believe the conduct of such person was unlawful.
California law, with respect to matters involving the right of a corporation,
allows indemnification of an agent of the corporation, if such person acted
in good faith, in a manner such person believed to be in the best interests
of the corporation and its shareholders; provided that there shall be no
indemnification for: (i) amounts paid in settling or otherwise disposing of a
pending action without court approval; (ii) expenses incurred in defending a
pending action which is settled or otherwise disposed of without court
approval; (iii) matters in which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the court in
which the proceeding is or was pending shall determine that such person is
entitled to be indemnified; or (iv) other matters specified in the California
General Corporation Law.
Bancorp's Bylaws provide that Bancorp shall to the maximum extent permitted
by law have the power to indemnify its directors, officers and employees.
Bancorp's Bylaws also provide that Bancorp shall have the power to purchase
and maintain insurance covering its directors, officers and employees against
any liability asserted against any of them and incurred by any of them,
whether or not Bancorp would have the power to indemnify them against such
liability under the provisions of applicable law or the provisions of
Bancorp's Bylaws. Each of the directors and executive officers of Bancorp has
an indemnification agreement with Bancorp that provides that Bancorp shall
indemnify such person to the full extent authorized by the applicable
provisions of California law and further provide advances to pay for any
expenses which would be subject to reimbursement.
ITEM 21. EXHIBITS
2.1 Agreement and Plan of Reorganization and Merger by and between the
Bancorp and Sentinel dated as of December 27, 1999, as amended attached
as Exhibit I to the Joint Proxy Statement-Prospectus contained in Part
I of this Registration Statement.
3.1 Articles of Incorporation of Registrant filed in the registration
statement of Registrant on Form S-4 file #333-66675 as Exhibit 3.1 is
incorporated here by this reference.
3.2 Bylaws as amended of Registrant of Registrant filed in the registration
statement of Registrant on Form S-4 file #333-66675 as Exhibit 3.2 is
incorporated here by this reference..
5.1 Opinion re: legality.
8.1 Opinion re: tax matters as to the merger of Sentinel Community Bank
with a subsidiary of Registrant by Perry-Smith & Co., LLP
i
<PAGE>
ITEM 21. EXHIBITS (CONTINUED)
10.1 Severance Compensation Agreement for Kirk Dowdell.
10.2 Stock option agreement dated September 22, 1997 for Kirk Dowdell
10.3 Stock option agreement date May 19, 1999 for Kirk Dowdell
10.4 Stock option agreement dated May 19, 1999 for Gary Gall
10.5 Lake Community Bank 1984 Stock Option Plan and form of stock option
agreements is contained in the Registrant's registration statement on
Form S-8 file #333-86653 as Exhibit 99.5 and is incorporated here by
this reference.
10.6 Salary continuation agreement for Gary Gall is contained in the
Registrant's registration statement on Form S-4 file #333-66675 as
Exhibit 10.4 and is incorporated here by this reference.
10.7 Stock option agreement dated April 11, 1995 for Gary Gall is contained
in the Registrant's registration statement on Form S-4 file #333-66675
as Exhibit 10.5 and is incorporated here by this reference.
10.8 Stock option agreement dated November 14, 1996 for Gary Gall is
contained in the Registrant's registration statement on Form S-4 file
#333-66675 as Exhibit 10.6 and is incorporated here by this reference.
10.9 Stock option agreement dated May 20, 1997 for Gary Gall is contained in
the Registrant's registration statement on Form S-4 file #333-66675 as
Exhibit 10.7 and is incorporated here by this reference.
10.10 Western Sierra Bancorp 1999 Stock Option Plan and form of stock option
agreements is contained in the Registrant's registration statement on
Form S-8 file #333-86653 as Exhibit 99.3 and is incorporated here by
this reference.
10.11 Western Sierra National Bank 1989 Stock Option Plan and form of
incentive stock option and nonqualified stock option agreement is
contained in the Registrant's registration statement on Form S-4 file
#333-66675 as Exhibit 10.10 and is incorporated here by this reference.
10.12 Western Sierra Bancorp 1997 Stock Option Plan and form of incentive
stock option agreement and nonqualified stock option agreement is
contained in the Registrant's registration statement on Form S-4 file
#333-66675 as Exhibit 10.11 and is incorporated here by this reference.
10.13 Roseville 1st National Bank 1993 Stock Option Plan and form of stock
option agreements is contained in the Registrant's registration
statement on Form S-8 file #333-86653 as Exhibit 99.4 and is
incorporated here by this reference.
10.14 Indemnification agreement for Gary Gall is contained in the
Registrant's registration statement on Form S-4 file #333-66675 as
Exhibit 10.13 and is incorporated here by this reference.
10.15 Indemnification agreement for Kirk Dowdell.
ii
<PAGE>
ITEM 21. EXHIBITS (CONTINUED)
10.16 Indemnification agreement form for directors of Western Sierra National
Bank is contained in the Registrant's registration statement on Form
S-4 file #333-66675 as Exhibit 10.15 and is incorporated here by this
reference.
10.17 Placerville Branch lease is contained in the Registrant's registration
statement on Form S-4 file #333-66675 as Exhibit 10.1 and is
incorporated here by this reference.
10.18 Shareholder's Agreement for the Sentinel-Western Sierra merger.
10.19 Severance benefits agreement for Gary Gall is contained in the
Registrant's registration statement on Form S-4 file #333-66675 as
Exhibit 10.2 and is incorporated here by this reference.
11. Statement re: computation of per share earnings is included in Note 1
to the financial statements to the prospectus included in Part I of
this registration statement.
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.
23.1 Consent of Counsel is included with the opinion re: legality as Exhibit
5 to this Registration Statement.
23.2 Consent of Perry-Smith & Co., LLP as accountants for the Registrant.
23.3 Consent of Moss Adams LLP as accountants for Sentinel Community Bank.
23.4 Consent of Grant Thornton, LLP as accountants for Sentinel Community
Bank.
23.5 Consent of Hoeffer & Arnett as financial advisor to Sentinel Community
Bank.
b) Financial Statement Schedules
None.
c) OPINIONS
Opinion of Hoeffer & Arnett as financial advisor to Sentinel Community
Bank (included as Exhibit II in the joint proxy statement/prospectus in
Part I herein)
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
iii
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus with is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
iv
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Cameron Park, State of
California, on March 23, 2000.
WESTERN SIERRA BANCORP
/s/ GARY D. GALL
--------------------------------------------------
Gary D. Gall
President & CEO
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ GARY D. GALL , Director and Principal March 23, 2000
- ---------------------------------- Executive Officer
Gary D. Gall
/s/ JOSEPH A. SURRA , Chairman March 23, 2000
- ----------------------------------
Joseph A. Surra
/s/ ROBERT G. ALBRECHT , Director March 23, 2000
- ----------------------------------
Robert G. Albrecht
/s/ CHARLES W. BACCHI , Director March 23, 2000
- ----------------------------------
Charles W. Bacchi
/s/ BARBARA L. COOK , Director March 23, 2000
- ----------------------------------
Barbara L. Cook
/s/ KIRK DOYLE , Director March 23, 2000
- ----------------------------------
Kirk Doyle
/s/ WILLIAM J. FISHER , Director March 23, 2000
- ----------------------------------
William J. Fisher
<PAGE>
/s/ RICHARD L. GOLEMON , Director March 23, 2000
- ----------------------------------
Richard L. Golemon
/s/ JOHN H. HELMS , Director March 23, 2000
- ----------------------------------
John H. Helms
/s/ HOWARD JAHN , Director March 23, 2000
- ----------------------------------
Howard "Skip" Jahn
/s/ THOMAS MANZ , Director March 23, 2000
- ----------------------------------
Thomas Manz
/s/ HAROLD S. PRESCOTT, JR. , Director March 23, 2000
- ----------------------------------
Harold S. Prescott, Jr.
/s/ DAROL B. RASMUSSEN , Director March 23, 2000
- ----------------------------------
Darol B. Rasmussen
/s/ OSVALDO I. SCARIOT , Director March 23, 2000
- ----------------------------------
Osvaldo I. Scariot
/s/ RICHARD C. SEEBA , Director March 23, 2000
- ----------------------------------
Richard C. Seeba
/s/ HOWARD VAN LENTE , Director March 23, 2000
- ----------------------------------
Howard "Bud" Van Lente
/s/ LESA FYNES , Principal Financial March 23, 2000
- ---------------------------------- Officer and Principal
Lesa Fynes Accounting Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
5.1 Opinion re: legality.
8.1 Opinion re: tax matters as to the merger of Sentinel Community
Bank with a subsidiary of Registrant by Perry-Smith & Co., LLP
10.1 Severance compensation agreement for Kirk Dowdell.
10.2 Stock option agreement dated September 22, 1998 for Kirk
Dowdell
10.3 Stock option agreement dated May 19, 1999 for Kirk Dowdell.
10.4 Stock option agreement dated May 19, 1999 for Gary Gall
10.15 Indemnification agreement dated May 1, 1999 for Kirk Dowdell
10.18 Shareholder's Agreement for the Sentinel-Western Sierra
merger.
23.2 Consent of Perry-Smith & Co., LLP as accountants for the
Registrant.
23.3 Consent of Moss Adams LLP as accountants for Sentinel
Community Bank.
23.4 Consent of Grant Thornton LLP as accountants for Sentinel
Community Bank.
23.5 Consent of Hoeffer & Arnett as financial advisor to Sentinel
Community Bank.
viii
<PAGE>
Exhibit 5.1
Gary Steven Findley & Associates
(Letterhead)
March 22, 2000
Western Sierra Bancorp
3350 Country Club Drive, Suite 202
Cameron Park, California 95682
RE: Registration Statement on Form S-4
Gentlemen:
At your request, we have examined the form of Registration Statement to be filed
with the Securities and Exchange Commission in connection with the registration
under the Securities Act of 1933, as amended, for the offer and sale of up to
831,877 shares of your common stock, no par value (the "Common Stock"). We are
familiar with the actions taken or to be taken in connection with the
authorization, issuance and sale of the Common Stock.
It is our opinion that, subject to said proceedings being duly taken and
completed as now contemplated before the issuance of the Common Stock, said
Common Stock, will, upon the issuance and sale thereof be legally and validly
issued and fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement.
Respectfully submitted,
GARY STEVEN FINDLEY & ASSOCIATES
By: /s/ Gary Steven Findley
Gary Steven Findley
Attorney at Law
<PAGE>
Exhibit 8.1 Opinion re: tax matters as to the merger of Sentinel Community
Bank with a subsidiary of Registrant by Perry-Smith & Co., LLP
PERRY SMITH & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
March 22, 2000
Western Sierra Bancorp
3350 Country Club Drive, Suite 202
Cameron Park, California 95682
Dear Sirs:
Tax Opinion for the Registration Statement on Form S-4
Regarding the Merger with Sentinel Community Bank
As requested, we have prepared this opinion letter for Western Sierra
Bancorp, a California corporation ("BANCORP"), in connection with the proposed
merger of Sentinel Community Bank ("SCB"), a federal savings and loan
association organized under the laws of the United States , with and into
Western Sierra National Bank ("WSNB"), a national banking association organized
under the laws of the United States, pursuant to the terms of the Agreement and
Plan of Reorganization and Merger dated as of December 27,1999 and amended as of
March 17, 2000 ("Agreement") by and among BANCORP, WSNB and SCB, each as
described in the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission ("Registration Statement").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction the
Agreement, the Registration Statement and such other documents as we have deemed
necessary or appropriate in order to enable us to render the opinions below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. The opinion is subject to the receipt by us prior to
the Effective Date of certain written representations and covenants of WSNB and
SCB.
Based upon and subject to the foregoing, the discussion contained in the
prospectus included as part of the Registration Statement ("Prospectus") under
the caption "Certain Federal and California Income Tax Consequences," expresses
our opinion as to the material Federal and California income tax consequences
applicable to holders of SCB Stock. You should be aware, however, that the
discussion under the caption "Certain Federal and California Income Tax
Consequences" in the Prospectus represents our conclusions as to the application
of existing law to the instant transactions. There can be no assurance that
contrary positions may not be taken by the tax authorities.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement. We also consent to the references to
Perry-Smith & Co., LLP under the heading "Certain Federal and California Income
Tax Consequences" in the Registration Statement and the Prospectus.
Very truly yours,
/s/ Perry-Smith & Co., LLP
Perry-Smith & Co., LLP
<PAGE>
Exhibit 10.1 Severance compensation agreement for Kirk Dowdell
SEVERANCE COMPENSATION AGREEMENT
This Agreement ("Agreement") is made and entered into as of the 4th day of
December , 1997 between Western Sierra National Bank ("Bank"), and Kirk Dowdell
(hereinafter referred to as "Executive").
WITNESSETH:
WHEREAS, Bank desires to provide Executive with severance compensation in the
event there is a change in control of Bank, and Executive desires severance
compensation in the event there is a change in control of Bank.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
conditions herein contained, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. SEVERANCE PAYMENT
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of Bank. Notwithstanding the foregoing, in the event proceedings for
liquidation of Bank are commenced by regulatory authorities, this Agreement and
all rights and benefits hereunder shall terminate.
In the event of (i) any merger or consolidation where Bank is (A) not the
surviving or resulting corporation or (B) the surviving corporation and the
shareholders of Western Sierra Bancorp (the "Bancorp") 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, (ii)
upon transfer of all or substantially all of the assets of Bank, or (iii) a sale
of the equity securities of Bancorp representing more than 50% of the aggregate
voting power of all outstanding equity securities of the Bancorp 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"), this Agreement shall
continue and be in full force and effect. In the event of an Acquisition, if (i)
Executive is not retained by the resulting corporation for the period of time
equal to the number of months provided in the table below that corresponds to
amount of Employer's total assets as of the month-end immediately prior to the
consummation of the Acquisition from the time of consummation of the Acquisition
in a position comparable to that of the highest level senior vice president of
the resulting corporation or a position accepted by Executive or (ii) the
resulting corporation reduces Executive's base salary from Executive's base
salary at the time immediately prior to the Acquisition at any time within the
period of time equal to the number of months provided in the table below that
corresponds to amount of Employer's total assets as of the month-end immediately
prior to the consummation of the Acquisition after the time of consummation of
the Acquisition, then the resulting corporation shall pay Executive a lump sum
amount in cash equal to the product of the number of months provided in the
table below that corresponds to amount of Employer's total assets as of the
month-end immediately prior to the consummation of the Acquisition times the
Executive's monthly base salary at the time immediately prior to the time of
consummation of the Acquisition.
<TABLE>
<CAPTION>
Total Assets of Employer Number of
in Millions of Dollars Months
---------------------- ------
<S> <C>
150 or less 12
150+ to 200 16
200+ to 250 20
250 or more 24
</TABLE>
1
<PAGE>
Such lump sum payment shall be paid within ten (10) days of the date Executive's
employment is terminated by the resulting corporation or Executive leaves
voluntarily because of (i) a change in Executive's position with the resulting
corporation such that Executive is no longer in a position comparable to that of
the lightest level senior vice president of the resulting corporation or a
position accepted by Executive or (ii) a reduction in Executive's base salary at
the closest time prior to the Acquisition. The lump sum payment shall be
considered to be in full and complete satisfaction of any and all rights which
Executive may enjoy other than (i) rights under the Executive's salary
continuation agreement and (ii) rights, if any, to exercise any of the stock
options vested prior to such termination.
2. TERM OF AGREEMENT
This Agreement shall be for a term of five ( 5 ) years from the date first
above stated ("Termination Date"). Such Termination Date may be amended or
extended by written agreement of the parties. This Agreement shall apply to any
Acquisition that is (i) consummated prior to the Termination Date provided that
Executive is employed by Bank at the date of public announcement of the
Acquisition or (ii) consummated at any time within one (1) year after the
Termination Date, in the event Executive's employment is terminated without
cause by Bank prior to the Termination Date and such termination is within
twelve (12) months prior to the date of consummation of an Acquisition that was
announced within six (6) months before or after the date of Executive's
termination of employment with Bank.
3. APPLICABLE LAW
This Agreement is made and entered into in the State of California and the laws
of the State of California shall govern the validity and interpretation hereof,
and the performance of the parties hereto and their respective duties and
obligations hereunder, except to the extent that the provisions of federal law
are mandatorily applicable.
4. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties and it supersedes
any and all other agreements, either oral or in writing, between Executive and
Bank. Each party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding. This Agreement may not be modified or
amended by oral agreement, but only by an agreement in writing signed by Bank
and Executive.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
WESTERN SIERRA NATIONAL BANK
By:
--------------------------------------------
Joseph A. Surra
EXECUTIVE
-----------------------------------------------
Kirk Dowdell
2
<PAGE>
Exhibit 10.2 Stock Option Agreement dated September 22, 1997 for Kirk Dowdell
DATE OF GRANT: SEPTEMBER 22, 1997
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the "Company") and
Kirk Dowdell ("Optionee"), as of September 22, 1997.
In consideration of the mutual covenants contained herein and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner
and subject to the conditions hereinafter provided, the right, privilege and
option to purchase (the "Option") an aggregate of six thousand (6,000) shares of
the Company's Common Stock, (the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set
forth herein, the term of this Option shall be ten (10) years from the date of
grant (the "Expiration Date"). Any portion of this Option not exercised prior to
the Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1 VESTING OF OPTION. This Option shall become exercisable as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING DATE
---------------- ------------
<S> <C>
1,200 Immediately
1,200 9-22-98
1,200 9-22-99
1,200 9-22-00
1,200 9-22-01
</TABLE>
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined in the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this Option
may be purchased during the term of this Option, but not as to less than 100
shares (unless the remaining shares then constituting the Vested Portion of this
Option is less than 100 shares) at any time.
1
<PAGE>
3.2 MANNER OF EXERCISE. The Vested Portion of this Option may be
exercised from time to time, in whole or in part, by presentation of a Request
to Exercise Form, substantially in the form attached hereto, to the Company at
its principal office, which Form must be duly executed by Optionee and
accompanied by payment, in cash, to the Company, in the aggregate amount of the
Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by the
payment specified, the Optionee shall be deemed to be the record owner of the
Shares purchased, notwithstanding that the stock transfer books of the Company
may then be closed or that certificates representing the Shares purchased under
this Option may not then be actually delivered to the Optionee.
3.3 EXERCISE PRICE. The exercise price (the "Exercise Price") payable
upon exercise of this Option shall be $12.75 per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1 TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceased to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2 PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), or dies while employed by the Company, or
while acting as an officer or director of the Company (or, if the Optionee dies
within the period that the Option remains exercisable after termination of
employment or affiliation), Options then held (to the extent then exercisable)
may be exercised by the Optionee, the Optionee's personal representative, or by
the person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after
disability or death (but in no event after the expiration date of the Option).
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option
shall not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
2
<PAGE>
7. DISSOLUTION, LIQUIDATION, MERGER.
7.1 COMPANY NOT THE SURVIVOR. In the event of a dissolution or
liquidation of the Company, a merger, consolidation, combination, or
reorganization in which the Company is not the surviving corporation, or a sale
of substantially all of the assets of the Company (as determined in the sole
discretion of the Administrator), and if the Optionee does not exercise the
entire Option within 90 days of such event, the Administrator and Optionee may
agree to (i) cancel each outstanding Option upon payment in cash to the Optionee
of the amount by which any cash and the fair market value of any other property
which the Optionee would have received as consideration for the shares of Stock
covered by the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2 COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of the
number and kind of securities with respect to which outstanding Options may be
exercised, and the exercise price at which outstanding Options may be exercised.
The Administrator shall determine, in its sole and absolute discretion, when the
Company shall be deemed to survive for purposes of this Plan.
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of
the expiration of this Option or the exercise and purchase of the total number
of Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any Shares covered by this Option unless the
Optionee shall have exercised this Option, and then only with respect to the
Shares underlying the portion of the Option exercised. The Optionee shall have
no right to vote any Shares, or to receive distributions of dividends or any
assets or proceeds from the sale of Company assets upon liquidation until
Optionee has effectively exercised this Option and fully paid for such Shares.
Subject to Section 6, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date title to the Shares has been
acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this
Option shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon an Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reasons whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, of if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall
3
<PAGE>
act fairly and in good faith and shall give the Optionee an opportunity to
appear and present evidence on the Optionee's behalf.
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits
otherwise, the Optionee shall pay the Company in cash all local, state, and
federal withholding taxes applicable, in the Administrator's absolute
discretion, to the grant or exercise of this Option, or the transfer or other
disposition of Shares acquired upon exercise of this Option. Any such payment
must be made promptly when the amount of such obligation becomes determinable.
The Administrator may, in lieu of such cash payment, withhold that number of
Shares sufficient to satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if
any, attributable to the initial issuance of Shares upon the exercise of the
Option; provided, however, that the Company shall not be required to pay any tax
or taxes which may be payable in respect of any transfer involved in the issue
or delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute or claim arising out of or
relating to this Option which cannot be amicably settled including, but not
limited to, the suspension or termination of Optionee's right in accordance with
Section 11 above, shall be settled by arbitration. Said arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association at a time and place within the above-referenced location
as selected by the arbitrator(s).
15.1 INITIATION OF ARBITRATION. After seven (7) days prior written
notice to the other, either party hereto may formally initiate arbitration under
this Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
15.2 HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration. Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3 BINDING NATURE OF DECISION. The decision of the arbitrator shall
be binding on the parties. Judgement thereon shall be entered in a court of
competent jurisdiction.
15.4 INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right
of either party to seek to obtain injunctive relief or other provisional
remedies against threatened or actual conduct that will cause loss or damages
under the usual equity rules including the applicable rules or obtaining
preliminary injunctions and other provisional remedies.
15.5 COSTS. The cost of arbitration, including the fees of the
arbitrator, shall initially be borne equally by the parties; provided, the
prevailing party shall be entitled to recover such costs, in addition to
attorneys' fees and other costs, in accordance with Section 18 of this
Agreement.
4
<PAGE>
16. NOTICES. All notices, to be given by either party to the other shall be
in writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; PROVIDED, HOWEVER, that notices of change of address or telex
or facsimile number shall be effective only upon actual receipt by the other
party. Notices shall be delivered at the following addresses, unless changed as
provided for herein.
To the Optionee: Kirk Dowdell
1919 8th Avenue
Sacramento, California 95818
To the Company: Western Sierra Bancorp
4011 Plaza Goldorado Circle
Post Office Box 1460
Cameron Park, California 95682
Facsimile: (916) 677-5075
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their respective heirs, executors, and
successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive
stock options under the Internal Revenue Code, Internal Revenue Service Rules,
and Treasury Regulations governing incentive stock options, the Optionee must
meet certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts,
each of which when taken together shall constitute one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, this Option Agreement has been executed as of the 22nd day
of October, 1997, at Cameron Park, California.
WESTERN SIERRA BANCORP
"THE COMPANY"
By /s/ Gary D. Gall
----------------------------------------
President & CEO
KIRK DOWDELL
"OPTIONEE"
/s/ Kirk N. Dowdell
------------------------------------------
Senior Vice President
6
<PAGE>
REQUEST TO EXERCISE FORM
Dated:______________________
The undersigned hereby irrevocably elects to exercise all or part, as specified
below, of the Vested Portion of the option ("Option") granted to him pursuant to
a certain stock option agreement ("Agreement") effective _________, between the
undersigned and Western Sierra Bancorp (the "Company") to purchase an agreement
of _________ (_________) shares of the Company's Common Stock, par value
$__________ (the "Shares").
The undersigned hereby tenders cash in the amount of $_________ per Share
multiplied by _________ (_________), the number of Shares he is purchasing at
this time, for a total of $_________, which constitutes full payment of the
total Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF
SHARES IN THE COMPANY'S TRANSFER BOOKS
Name:
-------------------------------
(Please typewrite or print in
block letters)
Address:
-------------------------------
-------------------------------
Signature:
-------------------------------
ACCEPTED BY WESTERN SIERRA BANCORP:
By
---------------------------------
- -----------------------------------
Name
- -----------------------------------
Title
7
<PAGE>
Exhibit 10.3 Stock option agreement date May 19, 1999 for Kirk Dowdell
DATE OF GRANT: MAY 19, 1999
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the "Company") and
Kirk Dowdell ("Optionee"), as of May 19, 1999.
In consideration of the mutual covenants contained herein and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner and
subject to the conditions hereinafter provided, the right, privilege and option
to purchase (the "Option") an aggregate of Fifteen Hundred ( 1,500 ) shares of
the Company's Common Stock, (the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set forth
herein, the term of this Option shall be ten ( 10 ) years from the date of grant
(the "Expiration Date"). Any portion of this Option not exercised prior to the
Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING DATE
<S> <C>
300 IMMEDIATELY
------------------- ------------------
300 5-1-00
------------------- ------------------
300 5-1-01
------------------- ------------------
300 5-1-02
------------------- ------------------
300 5-1-03
------------------- ------------------
</TABLE>
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined in the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this Option may
be purchased during the term of this Option, but not as to less than 100 shares
(unless the remaining shares then constituting the Vested Portion of this Option
is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be exercised
from time to time, in whole or in part, by presentation of a Request to Exercise
Form, substantially in the form attached hereto, to the
1
<PAGE>
Company at its principal office, which Form must be duly executed by Optionee
and accompanied by payment, in cash, to the Company, in the aggregate amount of
the Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by the
payment specified, the Optionee shall be deemed to be the record owner of the
Shares purchased, notwithstanding that the stock transfer books of the Company
may then be closed or that certificates representing the Shares purchased under
this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price") payable upon
exercise of this Option shall be $ 12.75 per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceases to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently and
totally disabled (within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended), or dies while employed by the Company, or while
acting as an officer or director of the Company (or, if the Optionee dies within
the period that the Option remains exercisable after termination of employment
or affiliation), Options then held (to the extent then exercisable) may be
exercised by the Optionee, the Optionee's personal representative, or by the
person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after the
disability or death (but in no event after the expiration date of the Option).
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option shall
not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
2
<PAGE>
7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or liquidation
of the Company, a merger, consolidation, combination, or reorganization in which
the Company is not the surviving corporation, or a sale of substantially all of
the assets of the Company (as determined in the sole discretion of the
Administrator), and if the Optionee does not exercise the entire Option within
90 days of such event, the Administrator and Optionee may agree to (i) cancel
each outstanding Option upon payment in cash to the Optionee of the amount by
which any cash and the fair market value of any other property which the
Optionee would have received as consideration for the shares of Stock covered by
the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of the
number and kind of securities with respect to which outstanding Options may be
exercised, and the exercise price at which outstanding Options may be exercised.
The Administrator shall determine, in its sole and absolute discretion, when the
Company shall be deemed to survive for purposes of this Plan.
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of the
expiration of this Option or the exercise and purchase of the total number of
Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder
with respect to any Shares covered by this Option unless the Optionee shall have
exercised this Option, and then only with respect to the Shares underlying the
portion of the Option exercised. The Optionee shall have no right to vote any
Shares, or to receive distributions of dividends or any assets or proceeds from
the sale of Company assets upon liquidation until Optionee has effectively
exercised this Option and fully paid for such Shares. Subject to Section 6, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date title to the Shares has been acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this Option
shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
3
<PAGE>
12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits otherwise,
the Optionee shall pay the Company in cash all local, state, and federal
withholding taxes applicable, in the Administrator's absolute discretion, to the
grant or exercise of this Option, or the transfer or other disposition of Shares
acquired upon exercise of this Option. Any such payment must be made promptly
when the amount of such obligation becomes determinable. The Administrator may,
in lieu of such cash payment, withhold that number of Shares sufficient to
satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or relating
to this Option which cannot be amicably settled including, but not limited to,
the suspension or termination of Optionee's right in accordance with Section 11
above, shall be settled by arbitration. Said arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association at a time and place within the above-referenced location as selected
by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written notice
to the other, either party hereto may formally initiate arbitration under this
Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
15.2. HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration. Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall be
binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right of
either party to seek to obtain injunctive relief or other provisional remedies
against threatened or actual conduct that will cause loss or damages under the
usual equity rules including the applicable rules for obtaining preliminary
injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the arbitrator,
shall initially be borne equally by the parties; provided, the prevailing party
shall be entitled to recover such costs, in addition to attorneys' fees and
other costs, in accordance with Section 18 of this Agreement.
16. NOTICES. All notices to be given by either party to the other shall be in
writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; PROVIDED, HOWEVER, that notices of change of address or telex
or facsimile number shall be
4
<PAGE>
effective only upon actual receipt by the other party. Notices shall be
delivered at the following addresses, unless changed as provided for herein.
To the Optionee: Kirk Dowdell
1919 8th Avenue
Sacramento, CA 95818
To the Company: Western Sierra Bancorp
3350 Country Club Drive, Ste. 202
P.O. Box 1460
Cameron Park, CA 95682
Facsimile: (916) 676-2817
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective heirs, executors, and successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive stock
options under the Internal Revenue Code, Internal Revenue Service Rules, and
Treasury Regulations governing incentive stock options, the Optionee must meet
certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts, each
of which when taken together shall constitute one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, this Option Agreement has been executed as of the 19th day
May 1, 1999, at Cameron Park, California.
THE COMPANY: WESTERN SIERRA BANCORP
By: /s/ GARY D. GALL
----------------------------------
President/CEO
OPTIONEE: /s/ KIRK DOWDELL
-------------------------------------
-------------------------------------
6
<PAGE>
REQUEST TO EXERCISE FORM
Dated:_________________
The undersigned hereby irrevocably elects to exercise all or part, as specified
below, of the Vested Portion of the option ("Option") granted to him pursuant to
a certain stock option agreement ("Agreement") effective _____________________,
between the undersigned and Western Sierra Bancorp (the "Company") to purchase
an aggregate of __________________ (________) shares of the Company's Common
Stock, par value $_____ (the "Shares").
The undersigned hereby tenders cash in the amount of $_______ per Share
multiplied by ___________________ (__________), the number of Shares he is
purchasing at this time, for a total of $________, which constitutes full
payment of the total Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:
-----------------------------------
(Please typewrite or print in
block letters)
Address:
----------------------------
----------------------------
Signature:
----------------------------
Accepted by Western Sierra Bancorp:
By:
------------------------------
- ------------------------------------
Name
- ------------------------------------
Title
7
<PAGE>
Exhibit 10.4 Stock option agreement dated May 19, 1999 for Gary Gall
DATE OF GRANT: MAY 19, 1999
WESTERN SIERRA BANCORP
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT MAY BE EXERCISED ONLY IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE WESTERN SIERRA BANCORP 1997 STOCK OPTION PLAN (THE "PLAN"),
INCORPORATED HEREIN. A COPY OF THE PLAN CAN BE OBTAINED FROM THE COMPANY UPON
REQUEST OF THE HOLDER HEREUNDER. THE GRANT OF THIS OPTION SHALL NOT IMPOSE AN
OBLIGATION UPON THE OPTIONEE TO EXERCISE THIS OPTION.
THIS AGREEMENT is made by and between Western Sierra Bancorp (the "Company") and
Gary D. Gall ("Optionee"), as of May 19, 1999.
In consideration of the mutual covenants contained herein and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee, in the manner and
subject to the conditions hereinafter provided, the right, privilege and option
to purchase (the "Option") an aggregate of Twenty-two Thousand ( 22,000 ) shares
of the Company's Common Stock,(the "Shares"). This Option is specifically
conditioned on compliance with the terms and conditions set forth herein and in
the Plan.
2. TERM OF OPTION. Subject to the terms, conditions, and restrictions set forth
herein, the term of this Option shall be Ten ( 10 ) years from the date of grant
(the "Expiration Date"). Any portion of this Option not exercised prior to the
Expiration Date shall thereupon become null and void.
3. EXERCISE OF OPTION.
3.1. VESTING OF OPTION. This Option shall become exercisable as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING DATE
<S> <C>
4,400 IMMEDIATELY
-------------------- ----------------
4,400 5-1-00
-------------------- ----------------
4,400 5-1-01
-------------------- ----------------
4,400 5-1-02
-------------------- ----------------
4,400 5-1-03
-------------------- ----------------
</TABLE>
Each of the foregoing dates shall be referred to as a "Vesting Date" for that
portion of this Option vested on such date ("Vested Portion"). In the event of a
"Change in Control" as defined in the Plan, all outstanding Options shall fully
vest immediately upon the Company's public announcement of such change.
All or any portion of the shares underlying a Vested Portion of this Option may
be purchased during the term of this Option, but not as to less than 100 shares
(unless the remaining shares then constituting the Vested Portion of this Option
is less than 100 shares) at any time.
3.2. MANNER OF EXERCISE. The Vested Portion of this Option may be exercised
from time to time, in whole or in part, by presentation of a Request to Exercise
Form, substantially in the form attached hereto, to the
1
<PAGE>
Company at its principal office, which Form must be duly executed by Optionee
and accompanied by payment, in cash, to the Company, in the aggregate amount of
the Exercise Price (as defined below), multiplied by the number of Shares the
Optionee is purchasing at such time, subject to reduction for withholding for
tax obligations as provided in Section 13.
Upon receipt and acceptance by the Company of such Form accompanied by the
payment specified, the Optionee shall be deemed to be the record owner of the
Shares purchased, notwithstanding that the stock transfer books of the Company
may then be closed or that certificates representing the Shares purchased under
this Option may not then be actually delivered to the Optionee.
3.3. EXERCISE PRICE. The exercise price (the "Exercise Price") payable upon
exercise of this Option shall be $ 12.75 per Share.
4. EXERCISE AFTER CERTAIN EVENTS.
4.1. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. If for any reason other
than permanent and total disability (as defined below) or death an Optionee
ceases to be employed by or to be a director of the Company Options held at the
date of such termination (to the extent then exercisable) may be exercised, in
whole or in part, at any time within three (3) months after the date of such
termination or such lesser period specified in the Option Agreement (but in no
event after the expiration date of the Option).
4.2. PERMANENT DISABILITY AND DEATH. If an Optionee becomes permanently and
totally disabled (within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended), or dies while employed by the Company, or while
acting as an officer or director of the Company (or, if the Optionee dies within
the period that the Option remains exercisable after termination of employment
or affiliation), Options then held (to the extent then exercisable) may be
exercised by the Optionee, the Optionee's personal representative, or by the
person to whom the Option is transferred by will or the laws of descent and
distribution, in whole or in part, at any time within one (1) year after the
disability or death (but in no event after the expiration date of the Option).
5. RESTRICTIONS ON TRANSFER OF OPTION. This Option is not transferable by
Optionee other than by will or the laws of descent and distribution and is
exercisable only by the Optionee during his lifetime except as provided in
Section 4.2. above. In accordance with the Plan, the Option and the Shares
underlying the Option shall not be available for the debts or obligations of the
Optionee, nor shall it be subject to disposition by transfer, alienation,
pledge, or other means of disposition, whether voluntary or involuntary or by
operation of law through judgment, levy, attachment, garnishment, or other legal
proceeding (including bankruptcy).
6. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of this Option shall
not affect the Company's right to effect adjustments, recapitalizations,
reorganizations, or other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Shares, the dissolution or liquidation of the Company's or any other
corporation's assets or business or any other corporate act whether similar to
the events described above or otherwise. If the outstanding shares of the
Company's Common Stock are increased or decreased in number or changed into or
exchanged for a different number or kind of securities of the Company or any
other corporation by reason of a recapitalization, reclassification, stock
split, reverse stock split, combination of shares, stock dividend, or other
similar event, an appropriate adjustment of the number and kind of securities
with respect to which this Option may be exercised and the exercise price at
which this Option may be exercised will be made.
7. DISSOLUTION, LIQUIDATION, MERGER.
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7.1. COMPANY NOT THE SURVIVOR. In the event of a dissolution or liquidation
of the Company, a merger, consolidation, combination, or reorganization in which
the Company is not the surviving corporation, or a sale of substantially all of
the assets of the Company (as determined in the sole discretion of the
Administrator), and if the Optionee does not exercise the entire Option within
90 days of such event, the Administrator and Optionee may agree to (i) cancel
each outstanding Option upon payment in cash to the Optionee of the amount by
which any cash and the fair market value of any other property which the
Optionee would have received as consideration for the shares of Stock covered by
the Option if the Option had been exercised before such liquidation,
dissolution, merger, consolidation, or sale exceeds the exercise price of the
Option, or (ii) assign the Option and all rights and Obligations under it to the
successor entity, with all such rights and obligations being assumed by the
successor entity.
7.2. COMPANY IS THE SURVIVOR. In the event of a merger, consolidation,
combination, or reorganization in which the Company is the surviving
corporation, the Administrator shall determine the appropriate adjustment of the
number and kind of securities with respect to which outstanding Options may be
exercised, and the exercise price at which outstanding Options may be exercised.
The Administrator shall determine, in its sole and absolute discretion, when the
Company shall be deemed to survive for purposes of this Plan.
8. RESERVATION OF SHARES. The Company agrees that prior to the earlier of the
expiration of this Option or the exercise and purchase of the total number of
Shares represented by this Option, there shall be reserved for issuance and
delivery upon exercise of this Option such number of the Company's authorized
and unissued Shares as shall be necessary to satisfy the terms and conditions of
this Agreement.
9. NO RIGHTS AS SHAREHOLDER. The Optionee shall have no rights as a shareholder
with respect to any Shares covered by this Option unless the Optionee shall have
exercised this Option, and then only with respect to the Shares underlying the
portion of the Option exercised. The Optionee shall have no right to vote any
Shares, or to receive distributions of dividends or any assets or proceeds from
the sale of Company assets upon liquidation until Optionee has effectively
exercised this Option and fully paid for such Shares. Subject to Section 6, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date title to the Shares has been acquired by the Optionee.
10. NO RIGHTS TO EMPLOYMENT OR CONTINUED EMPLOYMENT. The grant of this Option
shall in no way be construed so as to confer on Optionee the rights to
employment or continued employment by the Company. Nothing in the Plan or
hereunder shall confer upon any Optionee any right to employment or to continue
in the employ of the Company, or to interfere with or restrict in any way the
rights of the Company, which are hereby expressly reserved, to terminate or
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
11. SUSPENSION AND TERMINATION. In the event the Board or the Administrator
reasonably believes that the Optionee has committed an act of misconduct
specified below, the Administrator may suspend the Optionee's right to exercise
any Option pending final determination by the Board or the Administrator, which
final determination shall be made within five (5) business days of such
suspension. If the Administrator determines that an Optionee has committed an
act of embezzlement, fraud, breach of fiduciary duty, or deliberate disregard of
the Company rules resulting in loss, damage, or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company,
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his estate shall be entitled to
exercise any Option hereunder. In making such determination, the Board or the
Administrator shall act fairly and in good faith and shall give the Optionee an
opportunity to appear and present evidence on the Optionee's behalf.
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12. PARTICIPATION IN OTHER OPTION PLANS. The grant of this Option shall not
prevent Optionee from participating or being granted other options in the same
or other plans provided that the Optionee meets the eligibility requirements,
and such participation or grant does not prevent the other plan from meeting the
requirements of the Internal Revenue Code of 1986, as amended.
13. PAYMENT OF TAXES. Unless the Administrator of the Plan permits otherwise,
the Optionee shall pay the Company in cash all local, state, and federal
withholding taxes applicable, in the Administrator's absolute discretion, to the
grant or exercise of this Option, or the transfer or other disposition of Shares
acquired upon exercise of this Option. Any such payment must be made promptly
when the amount of such obligation becomes determinable. The Administrator may,
in lieu of such cash payment, withhold that number of Shares sufficient to
satisfy such withholding.
14. ISSUE AND TRANSFER TAX. The Company will pay all issuance taxes, if any,
attributable to the initial issuance of Shares upon the exercise of the Option;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for Shares in a name other than that of the
Optionee.
15. ARBITRATION. Any controversy, dispute, or claim arising out of or relating
to this Option which cannot be amicably settled including, but not limited to,
the suspension or termination of Optionee's right in accordance with Section 11
above, shall be settled by arbitration. Said arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association at a time and place within the above-referenced location as selected
by the arbitrator(s).
15.1. INITIATION OF ARBITRATION. After seven (7) days prior written notice
to the other, either party hereto may formally initiate arbitration under this
Agreement by filing a written request therefor, and paying the appropriate
filing fees, if any.
15.2. HEARING AND DETERMINATION DATES. The hearing before the arbitrator
shall occur within thirty (30) days from the date the matter is submitted to
arbitration. Further, a determination by the arbitrator shall be made within
forty-five (45) days from the date the matter is submitted to arbitration.
Thereafter, the arbitrator shall have fifteen (15) days to provide the parties
with his or her decision in writing. However, any failure to meet the deadlines
in this section will not affect the validity of any decision or award.
15.3. BINDING NATURE OF DECISION. The decision of the arbitrator shall be
binding on the parties. Judgment thereon shall be entered in a court of
competent jurisdiction.
15.4. INJUNCTIVE ACTIONS. Nothing herein contained shall bar the right of
either party to seek to obtain injunctive relief or other provisional remedies
against threatened or actual conduct that will cause loss or damages under the
usual equity rules including the applicable rules for obtaining preliminary
injunctions and other provisional remedies.
15.5. COSTS. The cost of arbitration, including the fees of the arbitrator,
shall initially be borne equally by the parties; provided, the prevailing party
shall be entitled to recover such costs, in addition to attorneys' fees and
other costs, in accordance with Section 18 of this Agreement.
16. NOTICES. All notices to be given by either party to the other shall be in
writing and may be transmitted by personal delivery, facsimile transmission,
overnight courier or mail, registered or certified, postage prepaid with return
receipt requested; PROVIDED, HOWEVER, that notices of change of address or telex
or facsimile number shall be
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effective only upon actual receipt by the other party. Notices shall be
delivered at the following addresses, unless changed as provided for herein.
To the Optionee: Gary D. Gall
2520 Greens Landing Court
Cameron Park, CA 95682
To the Company: Western Sierra Bancorp
3350 Country Club Drive, Ste 202
P.O. Box 1460
Cameron Park, CA 95682
Facsimile: (916) 676-2817
17. APPLICABLE LAW. This Option and the relationship of the parties in
connection with its subject matter shall be governed by, and construed under,
the laws of the state of California.
18. ATTORNEYS FEES. In the event of any litigation, arbitration, or other
proceeding arising out of this Option, the prevailing party shall be entitled to
an award of costs, including an award of reasonable attorneys' fees. Any
judgment, order, or award entered in any such proceeding shall designate a
specific sum as such an award of attorney's fees and costs incurred. This
attorneys' fee provision is intended to be severable from the other provisions
of this Agreement, shall survive any judgment or order entered in any
proceeding, and shall not be deemed merged into any such judgment or order, so
that such further fees and costs as may be incurred in the enforcement of an
award or judgment or in defending it on appeal shall likewise be recoverable by
further order of a court or panel or in a separate action as may be appropriate.
19. BINDING EFFECT. This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective heirs, executors, and successors.
20. TAX EFFECT. For the Options to receive possible treatment as incentive stock
options under the Internal Revenue Code, Internal Revenue Service Rules, and
Treasury Regulations governing incentive stock options, the Optionee must meet
certain holding period requirements as follows: the Optionee must (a) not
dispose of any Common Stock acquired upon exercise of this Option within two
years from the date of the grant hereby, and (b) not dispose of any Common Stock
acquired upon exercise of the Option within one year from the date of exercise.
The tax consequences to Optionee from the exercise of this Option and/or sale of
the underlying Common Stock is dependent on Optionee's circumstances, and the
applicable Internal Revenue Service Rules and Treasury Regulations then in
effect. The Company makes no representation with respect to tax consequences.
Each person should consult with his or her tax advisor before exercising any
Option or disposing of any Common Stock acquired upon the exercise of an Option.
21. COUNTERPARTS. This Option may be executed in one or more counterparts, each
of which when taken together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, this Option Agreement has been executed as of the 19th day
of May, 1999 , at Cameron Park, California.
THE COMPANY: WESTERN SIERRA BANCORP
By: /s/ JOSEPH A. SURRA
--------------------------------
Chairman
OPTIONEE: /s/ GARY D. GALL
-----------------------------------
-----------------------------------
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REQUEST TO EXERCISE FORM
Dated:_________________
The undersigned hereby irrevocably elects to exercise all or part, as specified
below, of the Vested Portion of the option ("Option") granted to him pursuant to
a certain stock option agreement ("Agreement") effective _____________________,
between the undersigned and Western Sierra Bancorp (the "Company") to purchase
an aggregate of __________________ (________) shares of the Company's Common
Stock, par value $_____ (the "Shares").
The undersigned hereby tenders cash in the amount of $_______ per Share
multiplied by ___________________ (__________), the number of Shares he is
purchasing at this time, for a total of $________, which constitutes full
payment of the total Exercise Price thereof.
INSTRUCTIONS FOR REGISTRATION OF SHARES
IN THE COMPANY'S TRANSFER BOOKS
Name:
----------------------------------------------
(Please typewrite or print in block letters)
Address:
-----------------------------------------
-----------------------------------------
Signature:
-----------------------------------------
Accepted by Western Sierra Bancorp:
By:
-------------------------------
- ------------------------------------
Name
- ------------------------------------
Title
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Exhibit 10.15 Indemnification agreement dated May 1, 1999 for Kirk Dowdell
WESTERN SIERRA BANCORP
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made and entered into as of
the 1ST day of MAY, 1999 by and between Western Sierra Bancorp, a California
corporation ("Bancorp"), and KIRK DOWDELL, (the "Indemnitee"), a DIRECTOR
(AND/OR OFFICER) of Bancorp.
RECITALS
A. Bancorp and the Indemnitee recognize that statutes, regulations, court
opinions and Bancorp's Articles of Incorporation and Bylaws are indefinite in
providing Bancorp's directors and officers with adequate protection from
liabilities to which they may become personally exposed as a result of
performing their duties in good faith for Bancorp;
B. Bancorp and the Indemnitee are aware of the large number of lawsuits
filed against corporate directors and officers;
C. Bancorp and the Indemnitee recognize that the cost of defending against
such lawsuits may be beyond the financial resources of most directors and
officers of Bancorp;
D. Bancorp and the Indemnitee recognize that the potential risks and
liabilities of being a director and/or officer pose a significant deterrent and
increased reluctance on the part of experienced and capable individuals to serve
as a DIRECTOR AND/OR OFFICER of Bancorp;
E. Bancorp has investigated the availability and sufficiency of liability
insurance for its directors and officers with adequate protection against
potential liabilities and has determined that such insurance provides inadequate
protection to its directors and officers, and, thus, it would be in the best
interests of Bancorp and its shareholders to contract with the Indemnitee, to
indemnify HIM/HER to the fullest extent permitted by law against personal
liability for actions taken in the good faith performance of HIS/HER duties to
Bancorp;
F. Section 317 of the California Corporations Code ("Section 317") sets
forth certain provisions relating to the mandatory and permissive
indemnification of directors and officers (among others) of a California
corporation by such corporation;
G. As inducement and encouragement for experienced and capable persons such
as the Indemnitee to continue to serve as a DIRECTOR AND/OR OFFICER of Bancorp,
the Board of Directors of Bancorp has determined, after due consideration and
investigation, that this Agreement is a reasonable and prudent means to promote
and ensure the best interests of Bancorp and its shareholders; and
H. Bancorp desires to have the Indemnitee continue to serve as a DIRECTOR
OR OFFICER of Bancorp free from undue concern for unpredictable, inappropriate
or unreasonable legal risks and personal liabilities by reason of HIS/HER acting
in good faith in the performance of HIS/HER duty to Bancorp; and the Indemnitee
desires to continue to serve as a DIRECTOR OR OFFICER of Bancorp; provided, and
on the express condition, that the Indemnitee is furnished with the indemnity
set forth hereinafter.
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AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below and based on the premises set forth above, Bancorp and the
Indemnitee do hereby agree as follows:
1. AGREEMENT TO SERVE. The Indemnitee will serve or continue to serve as a
DIRECTOR OR OFFICER of Bancorp to the best of HIS/HER abilities at the will of
Bancorp for so long as the Indemnitee is duly elected or appointed or until such
time as the Indemnitee tenders HIS/HER resignation in writing.
2. DEFINITIONS. As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought in the right of Bancorp or
otherwise and whether of a civil, criminal, administrative or investigative
nature, including, but not limited to, actions, suits or proceedings brought
under and/or predicated upon the Securities Act of 1933, as amended, and/or the
Securities Exchange Act of 1934, as amended, and/or their respective state
counterparts, and/or any rule or regulation promulgated thereunder, in which the
Indemnitee may be or may have been involved as a party or otherwise, by reason
of the fact that the Indemnitee is or was a DIRECTOR OR OFFICER of Bancorp, by
reason of any action taken by HIM/HER or of any inaction on HIS/HER part while
acting as such DIRECTOR OR OFFICER or by reason of the fact that HE/SHE is or
was serving at the request of Bancorp as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
whether or not HE/SHE is serving in such capacity at the time any liability or
expense is incurred for which indemnification or reimbursement can be provided
under this Agreement.
(b) The term "Expenses" includes, without limitation thereto, expenses of
investigations, of judicial or administrative proceedings or appeals, attorneys'
fees and disbursements and any expenses of establishing a right to
indemnification under Paragraph 7 of this Agreement, but shall not include the
amount of judgments, settlements, fines or penalties actually levied against the
Indemnitee.
3. INDEMNITY IN THIRD PARTY PROCEEDINGS. Bancorp shall indemnify the
Indemnitee in accordance with the provisions of this section if the Indemnitee
is a party to or threatened to be made a party to or otherwise involved in any
Proceeding (other than a Proceeding by or in the right of Bancorp to procure a
judgment in its favor), by reason of the fact that the Indemnitee is or was a
director, officer, employee or agent of Bancorp or is or was serving at the
request of Bancorp as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against all
Expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred by the Indemnitee in connection with such Proceeding,
provided it is determined pursuant to Paragraph 7 of this Agreement or by the
court before which such action was brought or by the shareholders of Bancorp in
the manner prescribed by Section 317, that the Indemnitee acted in good faith
and in a manner which HE/SHE reasonably believed to be in the best interests of
Bancorp and, in the case of a criminal proceeding, in addition, had no
reasonable cause to believe that HIS/HER conduct was unlawful. The termination
of any such Proceeding by judgment, order of court, settlement, conviction, or
upon a plea of nolo contendere, or its equivalent, shall not, of itself, create
a presumption that the Indemnitee did not act in good faith and in a manner
which HE/SHE reasonably believed to be in the best interests of Bancorp, and
with respect to any criminal proceeding, that such person had reasonable cause
to believe that HIS/HER conduct was unlawful.
4. INDEMNITY IN PROCEEDINGS BY OR IN THE RIGHT OF BANCORP. Bancorp shall
indemnify the Indemnitee in accordance with the provisions of this section if
the Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding by or in the right of Bancorp to procure a judgment
in its favor by reason of the fact that the Indemnitee is or was a director,
officer, employee or agent of Bancorp or is or was serving at the request of
Bancorp as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust
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or other enterprise against all Expenses actually and reasonably incurred by the
Indemnitee in connection with the defense or settlement of such Proceeding,
provided it is determined pursuant to Paragraph 7 of this Agreement or by the
court before which such action was brought or by the shareholders of Bancorp in
the manner prescribed by Section 317, that the Indemnitee acted in good faith
and in a manner which HE/SHE believed to be in the best interests of Bancorp and
its shareholders. Notwithstanding the foregoing, no indemnification shall be
made under this Paragraph 4:
(a) in respect of any claim, issue or matter as to which the Indemnitee
shall have been adjudged to be liable to Bancorp, unless and only to the extent
that the court in which such Proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, the Indemnitee
is fairly and reasonably entitled to indemnity for such Expenses as such court
shall determine;
(b) of amounts paid in settling or otherwise disposing of a pending
action without court approval;
(c) of Expenses incurred in defending a pending action which is settled
or otherwise disposed of without court approval; or
(d) in respect of any act, omission or transaction set forth in Section
204(a)(10)(A)(i)-(vii) of the California Corporations Code.
5. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any
other provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits in defense of any Proceeding or in defense of any
claim, issue or matter therein, the Indemnitee shall be indemnified against all
Expenses actually and reasonably incurred in connection therewith.
6. ADVANCES OF EXPENSES. The Expenses incurred by the Indemnitee pursuant
to Paragraphs 3 and 4 in defending any Proceeding shall be paid by Bancorp in
advance of the final disposition of such Proceeding at the written request of
the Indemnitee, if the Indemnitee shall provide an undertaking in the form
attached hereto as Exhibit "A" to Bancorp to repay such amount unless it is
ultimately determined that the Indemnitee is entitled to the payment of
Expenses. The written request to Bancorp shall include a description of the
nature of the Proceeding and be accompanied by copies of any documents filed
with a court relating to the Proceeding.
Notwithstanding the foregoing or any other provision of this Agreement, no
advance shall be made by Bancorp if a determination is reasonably and promptly
made by the Board of Directors by a majority vote of a quorum of disinterested
directors, or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs) by independent legal counsel,
that, based upon the facts known to the Board of Directors or counsel at the
time such determination is made, (a) the Indemnitee acted in bad faith or
deliberately breached HIS/HER duty to Bancorp or its shareholders, and (b) as a
result of such actions by the Indemnitee, it is more likely than not that it
will ultimately be determined that the Indemnitee is not entitled to
indemnification under the terms of this Agreement.
7. RIGHTS OF THE INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE
UPON APPLICATION. To the extent a quorum of the Board of Directors of Bancorp
consisting of directors who were or are not parties to a Proceeding is
obtainable, the Board of Directors shall determine within 45 days after receipt
of the written request of the Indemnitee for indemnification whether the
Indemnitee has met the relevant standards for indemnification set forth in
Paragraphs 3 and 4 and, if it determines that such standards have been met, it
shall provide indemnification to the Indemnitee.
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Notwithstanding the foregoing, the Indemnitee may request independent
counsel or may bring suit in the court in which such Proceeding is or was
pending to determine whether the Indemnitee is entitled to indemnification as
provided by this Agreement. The Indemnitee's expenses incurred in connection
with successfully establishing HIS/HER right to indemnification, in whole or in
part, shall also be indemnified by Bancorp.
8. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by Bancorp for some or a portion
of the Expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by HIM/HER in the investigation, defense, appeal or
settlement of any Proceeding but not, however, for the total amount thereof,
Bancorp shall nevertheless indemnify the Indemnitee for the portion of such
Expenses, judgments, fines, settlements or other amounts to which the Indemnitee
is entitled.
9. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The obtaining of
directors' and officers' liability insurance ("D&O Coverage") at the expense of
and by Bancorp shall in no way limit or diminish the obligation of Bancorp to
indemnify the Indemnitee as provided in this Agreement; provided, however, that
any amounts actually recovered by the Indemnitee from the insurer providing D&O
Coverage shall be applied in reduction of amounts otherwise owing by Bancorp by
reason of its indemnification under this Agreement and if Bancorp pays any
amounts to the Indemnitee pursuant to this Agreement, Bancorp shall be
subrogated to the Indemnitee's rights and claims against the insurer providing
D&O Coverage and the Indemnitee shall execute such documents as Bancorp shall
deem necessary to reflect such subrogation.
10. SETTLEMENT OF CLAIMS.
(a) If Bancorp has not obtained D&O Coverage, the Indemnitee shall not
settle any Proceeding for which HE/SHE intends to seek indemnification hereunder
without first attempting to obtain the approval of Bancorp. If the Indemnitee
seeks such approval and such approval is not granted by Bancorp, the Indemnitee
shall be free to settle the Proceeding and pursue any procedures to establish
HIS/HER right to indemnification as provided under this Agreement. If the
Indemnitee seeks such approval and such approval is not granted by Bancorp, but
Bancorp agrees to indemnify the Indemnitee, subject to Paragraph 4 herein,
against any Expenses, judgments, fines, settlements or other amounts actually
and reasonably incurred by the Indemnitee in connection with such Proceeding,
the Indemnitee shall not settle such Proceeding. If, however, under such
circumstances the Indemnitee does settle such Proceeding, the Indemnitee shall
forfeit HIS/HER rights to indemnification under this Agreement.
(b) If Bancorp has obtained D&O Coverage, the Indemnitee shall not
settle any Proceeding for which HE/SHE intends to seek indemnification without
first attempting to obtain any approval required with respect to such settlement
by the insurance carrier of any applicable D&O Coverage. If the Indemnitee seeks
such approval and such approval is not granted by the insurance carrier of any
applicable D&O Coverage, the Indemnitee shall not settle such Proceeding without
then attempting to obtain the approval of Bancorp. In the event the Indemnitee
seeks such approval from Bancorp, Bancorp and the Indemnitee shall have the same
rights and obligations as set forth in Paragraph 10(a). If the Indemnitee seeks
such approval from Bancorp and such approval is granted, Bancorp shall be
subrogated to the Indemnitee's rights and claims against the insurance carrier
of any applicable D&O Coverage and the Indemnitee shall execute such documents
as Bancorp shall deem necessary to effect such subrogation.
11. MUTUAL ACKNOWLEDGMENT. Both Bancorp and the Indemnitee acknowledge that
in certain instances, Federal law or applicable public policy may prohibit
Bancorp from indemnifying the Indemnitee under this Agreement or otherwise.
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12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon Bancorp
and its successors and assigns and shall inure to the benefit of the Indemnitee
and the Indemnitee's spouse, heirs, executors and administrators.
13. SAVINGS CLAUSE. If this Agreement or any portion thereof be invalidated
on any ground by any court of competent jurisdiction, then Bancorp shall
nevertheless indemnify the Indemnitee as to Expenses, judgments, fines,
settlements or other amounts with respect to any Proceeding to the fullest
extent permitted by any applicable portion of this Agreement that shall not have
been invalidated or by any other applicable law.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
15. NOTICES. The Indemnitee shall, as a condition precedent to HIS/HER
right to be indemnified under this Agreement, give to Bancorp notice in writing
as soon as practicable of any claim made against HIM/HER for which
indemnification will or could be sought under this Agreement. Notice to Bancorp
shall be directed to Western Sierra Bancorp, 3350 Country Club Drive, Suite 202,
Cameron Park, California 95682, Attention: Gary D. Gall, President (or such
other address as Bancorp shall designate in writing to the Indemnitee).
16. MODIFICATION AND AMENDMENT. No amendment, modification, termination or
cancellation of this Agreement, except as permitted pursuant to Section 12
above, shall be effected unless in writing signed by both parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year set forth above.
INDEMNITEE WESTERN SIERRA BANCORP
By /s/ Kirk N. Dowdell By: /s/ Gary D. Gall
------------------------- -------------------------
Its: PRESIDENT AND CEO
-----------------------
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EXHIBIT A
WESTERN SIERRA BANCORP
UNDERTAKING
TO: Western Sierra Bancorp
3350 Country Club Drive, Suite 202
Cameron Park, California 95682
Attention: Gary D. Gall
I, ______________, a DIRECTOR OR OFFICER of Western Sierra Bancorp, a
California corporation, pursuant to Section 317(f) of the California
Corporations Code and the terms of my Indemnification Agreement with Western
Sierra Bancorp agree to repay Western Sierra Bancorp for all Expenses advanced
on my behalf in defense of any Proceeding or in defense of any claim, issue or
matter therein, prior to the disposition of such Proceeding, unless it shall be
ultimately determined that I am entitled to indemnification under Section 317 of
the California Corporations Code or Western Sierra Bancorp's Articles of
Incorporation, Bylaws or my Indemnification Agreement.
Dated: ________________ INDEMNITEE
By
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Exhibit 10.18 Shareholder's Agreement
SHAREHOLDER'S AGREEMENT
This Shareholder's Agreement ("Agreement"), dated as of December __, 1999 is
entered into by and between Western Sierra Bancorp, a California corporation
("Bancorp"), and ______________________ ("Shareholder").
RECITALS
A. Bancorp, Western Sierra National Bank and Sentinel Community Bank, a
federal savings and loan association ("SCB") entered into that certain
Agreement and Plan of Reorganization and Merger dated as of December __,
1999 (the "Reorganization Agreement").
B. Shareholder is a member of the Board of Directors of SCB and owns shares of
the common stock, ___ par value, of SCB ("SCB Stock").
C. Shareholder is willing to agree to vote or cause to be voted all shares of
SCB Stock with respect to which Shareholder has voting power on the date
hereof or hereafter acquired to approve the Reorganization Agreement and
the transactions contemplated thereby and all requisite matters related
thereto.
D. Shareholder is willing to agree to not compete with, use trade secrets or
solicit customers or employees of Bancorp or any of Bancorp's Subsidiaries,
or SCB as set forth in this Agreement.
E. Unless otherwise provided in this Agreement, capitalized terms shall have
the meanings given to them in the Reorganization Agreement.
NOW THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Reorganization Agreement, and intending to be legally bound
hereby, Bancorp and Shareholder agree as follows:
ARTICLE I
SHAREHOLDER'S AGREEMENT
1.1 AGREEMENT TO VOTE. Shareholder shall vote or cause to be voted at any
meeting of shareholders of SCB to approve the Reorganization Agreement and the
transactions contemplated thereby (the "Shareholders' Meeting"), all of the
shares of SCB Stock as to which Shareholder has sole or shared voting power (the
"Shares"), as of the record date established to determine shareholders who have
the right to vote at any such Shareholders' Meeting or to give consent to action
in writing (the "Record Date"), to approve the Reorganization Agreement, the
Agreement to Merge and the transactions contemplated thereby, including the
principal terms of the Reorganization and Merger.
1.2 LEGEND. Shareholder agrees to stamp, print or type on the face of his
or her certificates of SCB Stock evidencing the Shares the following legend:
"THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR
OTHER ENCUMBRANCE OR DISPOSITION OF THE
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SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A SHAREHOLDER'S
AGREEMENT DATED AS OF DECEMBER __, 1999 BY AND BETWEEN WESTERN SIERRA
BANCORP, AND ____________________________, COPIES OF WHICH ARE ON FILE
AT THE OFFICES OF SENTINEL COMMUNITY BANK."
1.3 RESTRICTIONS ON DISPOSITIONS. Shareholder agrees that, from and after
the date of this Agreement and during the term of this Agreement, he or she will
not take any action that will alter or affect in any way the right to vote the
Shares, except (i) with the prior written consent of Bancorp or (ii) to change
such right from that of a shared right of Shareholder to vote the Shares to a
sole right of Shareholder to vote the Shares.
1.4 SHAREHOLDER APPROVAL. Shareholder shall (i) recommend shareholder
approval of the Reorganization Agreement, the Agreement to Merge and the
transactions contemplated thereby by the SCB shareholders at the Shareholders'
Meeting and (ii) advise the SCB shareholders to reject any subsequent proposal
or offer received by SCB relating to any purchase, sale, acquisition, merger or
other form of business combination involving SCB or any of its assets, equity
securities or debt securities and to proceed with the transactions contemplated
by the Reorganization Agreement; provided, however, that Shareholder shall not
be obligated to take any action specified above if the Board of Directors of SCB
is advised in writing by outside legal counsel, Bartel Eng Linn & Schroder,
that, in the exercise of his or her fiduciary duties, a director of SCB should
not take such action.
1.5 NONCOMPETITION. For a period of two years after the Effective Time of
the Reorganization, Shareholder agrees not to, directly or indirectly, without
the prior written consent of Bancorp, own more than 1% of, organize, manage,
operate, finance or participate in the ownership, management, operation or
financing of, or be connected as an officer, director, employee, principal,
agent or consultant to any financial institution whose deposits are insured by
the Federal Deposit Insurance Corporation that has its head offices or a branch
office within 50 miles of the head office of SCB. In the event that during the
two year period Bancorp is acquired by another financial institution and is not
the surviving entity of the acquisition, then this Section 1.5 shall terminate
upon the date of Bancorp's acquisition.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
Shareholder represents and warrants to Bancorp that the statements set forth
below are true and correct as of the date of this Agreement, except those that
are specifically as of a different date:
2.1 OWNERSHIP AND RELATED MATTERS.
(a) SCHEDULE 2.1(a) hereto correctly sets forth the number of Shares
and the nature of Shareholder's voting power with respect thereto as of the date
hereof. Within five business days after the Record Date, Shareholder shall amend
said Schedule 2.1(a) to correctly reflect the number of Shares and the nature of
Shareholder's voting power with respect thereto as of the Record Date.
(b) There are no proxies, voting trusts or other agreements or
understandings to or by which Shareholder or his or her spouse is a party or
bound or that expressly requires that any of the Shares be voted in any specific
manner other than as provided in this Agreement.
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2.2 AUTHORIZATION; BINDING AGREEMENT. Shareholder has the legal right,
power, capacity and authority to execute, deliver and perform this Agreement,
and this Agreement is the valid and binding obligation of Shareholder
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by general principles of equity.
2.3 NONCONTRAVENTION. The execution, delivery and performance of this
Agreement by Shareholder will not (a) conflict with or result in the breach of,
or default or actual or potential loss of any benefit under, any provision of
any agreement, instrument or obligation to which Shareholder or his or her
spouse is a party or by which any of Shareholder's properties or his or her
spouse's properties are bound, or give any other party to any such agreement,
instrument or obligation a right to terminate or modify any term thereof; (b)
require any third party consents; (c) result in the creation or imposition of
any encumbrance on any of the Shares or any other assets of Shareholder or his
or her spouse; or (d) violate any applicable laws or rules to which Shareholder
or his or her spouse is subject.
ARTICLE III
GENERAL
3.1 AMENDMENTS. To the fullest extent permitted by law, this Agreement and
any schedule or exhibit attached hereto may be amended by agreement in writing
of the parties hereto at any time.
3.2 INTEGRATION. This Agreement constitutes the entire agreement between
the parties pertaining to the subject matter hereof and (except for the
Reorganization Agreement if executed by Shareholder) supersedes all prior
agreements and understandings of the parties in connection therewith.
3.3 SPECIFIC PERFORMANCE. Shareholder and Bancorp each expressly
acknowledge that, in view of the uniqueness of the obligations of Shareholder
contemplated hereby, Bancorp would not have an adequate remedy at law for money
damages in the event that this Agreement has not been performed by Shareholder
in accordance with its terms, and therefore Shareholder and Bancorp agree that
Bancorp shall be entitled to specific enforcement of the terms hereof in
addition to any other remedy to which it may be entitled at law or in equity.
3.4 TERMINATION. This Agreement shall terminate automatically without
further action at the earlier of two years following the Effective Time of the
Reorganization or the termination of the Reorganization Agreement in accordance
with its terms. Upon termination of this Agreement as provided herein, the
respective obligations of the parties hereto shall immediately become void and
have no further force and effect.
3.5 NO ASSIGNMENT. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by Bancorp or Shareholder, in whole or
in part. Any attempted assignment in violation of this prohibition shall be null
and void. Subject to the foregoing, all of the terms and provisions hereof shall
be binding upon, and inure to the benefit of, the successors of the parties
hereto.
3.6 HEADINGS. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
3.7 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to each party hereto.
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3.8 GENDER, NUMBER, AND TENSE. Throughout this Agreement, unless the
context otherwise requires,
(i) the masculine, feminine and neuter genders each includes the
other;
(ii) the singular includes the plural, and the plural includes the
singular; and
(iii) the past tense includes the present, and the present tense
includes the past.
3.9 NOTICES. Any notice or communication required or permitted hereunder,
shall be deemed to have been given if in writing and (a) delivered in person,
(b) delivered by confirmed facsimile transmission, or (c) mailed by certified or
registered mail, postage prepaid with return receipt requested, addressed as
follows:
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IF TO BANCORP:
WESTERN SIERRA BANCORP
4011 PLAZA GOLDORADO CIRCLE
CAMERON PARK, CALIFORNIA 95682
ATTENTION: GARY D. GALL
FAX: (530) 677-5075
WITH A COPY TO:
GARY STEVEN FINDLEY & ASSOCIATES
1470 NORTH HUNDLEY STREET
ANAHEIM, CALIFORNIA 92806
ATTENTION: GARY STEVEN FINDLEY
FAX: (714) 630-7910
IF TO SHAREHOLDER:
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or at such other address and to the attention of such other person as a party
may notice to the other in accordance with this Section 3.9. Any such notice or
communication shall be deemed received on the date delivered personally or
delivered by confirmed facsimile transmission or on the third Business Day after
it was sent by certified or registered mail, postage prepaid with return receipt
requested.
3.10 GOVERNING LAW. This Agreement shall be construed in accordance with,
and governed by, the laws of the State of California, except to the extent
preempted by the laws of the United States.
3.11 NOT IN DIRECTOR CAPACITY. Except to the extent set forth in Section
1.4, no person executing this Agreement who is, during the term hereof, a
director of SCB, makes any agreement or understanding herein in his or her
capacity as such director. The parties sign solely in their capacities as owners
of or holders of the power to vote shares of SCB Stock.
3.12 ATTORNEYS' FEES. If any legal action or any arbitration upon mutual
agreement is brought for the enforcement of this Agreement or because of an
alleged dispute, breach or default in connection with this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs and expenses incurred in that action or proceeding, in addition to
any other relief to which it may be entitled.
3.13 REGULATORY COMPLIANCE. Each of the provisions of this Agreement is
subject to compliance with all applicable regulatory requirements and
conditions.
IN WITNESS WHEREOF, the parties to this Agreement have caused and duly executed
this Agreement as of the day and year first above written.
WESTERN SIERRA BANCORP
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By:
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Title: President
SHAREHOLDER
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SPOUSAL CONSENT
I am the spouse of _______________________, Shareholder in the above Agreement.
I understand that I may consult independent legal counsel as to the effect of
this Agreement and the consequences of my execution of this Agreement and, to
the extent I felt it necessary, I have discussed it with legal counsel. I hereby
confirm this Agreement and agree that it shall bind my interest in the Shares,
if any.
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(Shareholder's Spouse's Name)
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Exhibit 23.2 Consent of Perry-Smith & Co., LLP as accountants for the
Registrant.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form S-4
for Western Sierra Bancorp of our report dated February 18, 2000 relating to the
financial statements of Western Sierra Bancorp and Subsidiaries for the years
ended December 31, 1999, 1998 and 1997, and to the reference to our Firm under
the caption "Experts" in the Registration Statement.
/s/ Perry-Smith & Co., LLP
Sacramento, California
March 22, 2000
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Exhibit 23.3 Consent of Moss Adams LLP as accountants for Sentinel Community
Bank.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement, on Form S-4 of our report dated January 28, 2000 on the
consolidated balance sheet of Sentinel Community Bank and Subsidiary as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, which appears in
the Prospectus. We also consent to the reference to our Firm under the heading
"Experts" in the Prospectus.
/s/ Moss Adams LLP
Stockton, California
March 22, 2000
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Exhibit 23.4 Consent of Grant Thornton LLP as accountants for Sentinel Community
Bank.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 26, 1999, accompanying the financial
statements of Sentinel Community Bank and Subsidiary contained in the
Registration Statement on Form S-4. We consent to the use of the
aforementioned report in the Registration Statement, and to the use of our
name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
San Francisco, California
March 22, 2000
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Exhibit 23.5 Consent of Hoeffer & Arnett as financial advisor to Sentinel
Community Bank
CONSENT OF HOEFER & ARNETT INCORPORATED
We hereby consent to the inclusion of our opinion letter dated March 17,
2000, to the Board of Directors of Sentinel Community Bank as Exhibit II to the
Joint Proxy Statement/Prospectus relating to the proposed agreement and plan of
reorganization and merger among Western Sierra Bancorp, Western Sierra National
Bank and Sentinel Community Bank contained in the Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission and to the references
to our firm and our opinion in the Joint Proxy Statement/Prospectus. In giving
our consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
HOEFER & ARNETT INCORPORATED
/s/ Jean-Luc Servat
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By: Jean-Luc Servat
Managing Director
Dated: March 22, 2000
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