UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No. 0-15450
SIERRAWEST BANCORP
(Exact name of registrant as specified in its charter)
California 68-0091859
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10181 Truckee-Tahoe Airport Road
P.O. Box 61000 Truckee, CA 96160-9010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (916) 582-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, no par value,
8 1/2 % Convertible Subordinated Debentures due February 1, 2004
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997: $52,938,000 (based on closing sales price at
February 28, 1997)
Number of shares of Common Stock outstanding at March 1, 1997: 2,923,064.
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page No.
PART I
<S> <C> <C>
ITEM 1. BUSINESS................................................................................................3
ITEM 2. PROPERTIES..............................................................................................27
ITEM 3. LEGAL PROCEEDINGS.......................................................................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................27
PART II
ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK...................................................................28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................................................................29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................................................32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................................79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................80
ITEM 11. EXECUTIVE COMPENSATION.................................................................................82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................................87
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 88
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K..................................... 89
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
General Development of the Business
SierraWest Bancorp ("Bancorp", or together with its subsidiary, the "Company")
was incorporated under the laws of the State of California on December 5, 1985
as a bank holding company. Pursuant to a plan of reorganization and merger dated
December 19, 1985, Bancorp acquired 100% of the outstanding shares of common
stock of SierraWest Bank (formerly Truckee River Bank) in a one-for-one exchange
of its stock for the stock of SierraWest Bank. The merger was consummated on
July 31, 1986.
On October 29, 1990, Bancorp acquired 100% of the outstanding shares of Sierra
Bank of Nevada in a one-for-one exchange of its stock for the stock of Sierra
Bank of Nevada. During the first quarter of 1996 Sierra Bank of Nevada's name
was changed to SierraWest Bank and effective October 1, 1996 this subsidiary was
merged into the California subsidiary. Sierra Bank of Nevada was incorporated
under the laws of the State of Nevada on January 12, 1989, and, with the
approval of the Nevada Department of Commerce, Division of Financial
Institutions (the "NDFI"), opened for business in Reno, Nevada on January 9,
1990. In 1995, a second branch was opened in Carson City, Nevada. Bancorp and
SierraWest Bank collectively comprise the operations of the Company.
SierraWest Bank was incorporated under the laws of the State of California on
March 19, 1980, and, with the approval of the Superintendent of Banks of the
State of California (the "CSBD"), opened for business on January 20, 1981.
SierraWest Bank commenced operations in 1981 in Truckee, California, a small
tourist-based town located in the County of Nevada and situated in the High
Sierras about 12 miles north of Lake Tahoe. SierraWest Bank currently maintains
eleven branches offices in the following communities: Truckee (two branches),
South Lake Tahoe, Tahoe City, Kings Beach, Grass Valley (two branches), Auburn
and Sacramento, California, Reno and Carson City, Nevada. In addition,
SierraWest Bank maintains seven separate lending offices, primarily for its
United States Small Business Administration (the "SBA") lending activities, in
the following communities: Truckee, San Francisco, Sacramento, Fresno, and
Chico, California, and Reno and Las Vegas, Nevada.
The Company offers commercial banking services, including the acceptance of
demand, savings and time deposits, and the making of commercial, real estate,
personal, home improvement, automobile and other installment and term loans. It
offers traveler's checks, safe deposit boxes, note collection services, notary
public, ATMs and other customary bank services, except international banking and
trust services. Annuities and mutual fund investments are also offered through
third party providers. Merchant drafts are processed pursuant to established
bank card programs, and customers are offered MasterCard and Visa credit cards
through a correspondent bank. During 1995 the Company expanded its services to
provide a 24 hour automated telephone inquiry service, introduced a P.C. banking
product for its business customers and opened an equipment leasing division. In
1996, the Company started a loan purchase program for the acquisition of real
estate loans which it hopes to securitize in the future in marketable parcels.
Additionally, in January 1997, the Company entered into a definitive agreement
for the acquisition of Mercantile Bank, a Sacramento bank which specializes in
commercial business and has an asset base of approximately $46 million. The
acquisition is expected to be completed by July 1, 1997, subject to the approval
of Mercantile's shareholders and federal and state regulators. Mercantile
shareholders will receive total compensation of $6.6 million, subject to certain
adjustments primarily based upon the level of deposits and capital, consisting
of 50% cash and 50% stock.
Certain statements in this document include forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking statements
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry increases significantly; changes in
the interest rate environment reduce margins; general economic conditions,
either nationally or regionally, are less favorable than expected, resulting in,
among other things, a deterioration in credit quality and an increase in the
provision for possible loan losses; changes in the regulatory environment;
changes in business conditions; volatility of rate sensitive deposits;
operational risks including data processing system failures or fraud;
asset/liability matching risks and liquidity risks; and changes in the
securities markets.
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<PAGE>
Narrative Description of Business
The Company's total assets have grown from $219.6 million at December 31, 1991
to $447.9 million at December 31, 1996, a compound annual increase of 15.3%. The
Company's assets grew 32.7% in 1996 and are expected to grow at a relatively
high rate in 1997. The Company has had earnings in excess of $1.8 million in
each of the last five years. For the year ended December 31, 1996, the Company
reported net income of $3.3 million, or a return on average assets of
approximately 0.87% and return on average equity of 10.5%. At December 31, 1996,
the Company had total loans of $323.4 million, loan loss reserves of $4.5
million, deposits of $399.7 million and total equity capital of $33.9 million.
General Lending Overview
The five general areas in which the Company has directed its lending activities
are: SBA loans; residential and non-SBA commercial real estate loans; commercial
loans; consumer loans to individuals (including home equity lines of credit);
and beginning in 1995, commercial leases. As of December 31, 1996, these five
categories accounted for approximately 45%, 30%,18%,4% and 3%, respectively, of
the Company's total loan portfolio.
SBA Lending
The Company ranked 18th in the nation by number of SBA government guaranteed
("SBA 7(a)") loans generated by banks for the SBA's fiscal year ended September
30, 1996 as published by the SBA, and was the 8th largest SBA lending bank, by
loan count, in Region IX (consisting of the far western states, Hawaii and
Guam), the largest region in the country. In 1996 the Federal government
approved a level of SBA loans guaranteed of $7.8 billion and in 1997 this level
is expected to increase to over $8.5 billion.
The SBA is headquartered in Washington, D.C., and operates through ten regions
throughout the United States. The SBA administers three levels of lender
participation in its general business loan program, pursuant to Section 7(a) of
the Small Business Act of 1953, as amended, and the rules and regulations
promulgated thereunder (the "Small Business Act"). Under the first level of
lender participation, commonly known as the Guaranteed Participant Program or
"Section 7(a)", the lender gathers and processes data from applicants and
forwards it, along with its request for the SBA's guarantee, to the local SBA
office. The SBA then completes an independent analysis and makes its decision on
the loan application. SBA turnaround time on such applications can vary greatly,
depending on the backlog of loan applications.
Under the second level of lender participation, known as the Certified Lender
Program, the lender (the "Certified Lender") gathers and processes the
application and makes its request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs a review of the lender's credit
analysis on an expedited basis, which review is generally completed within three
working days. The SBA requires that lenders originate loans meeting certain
portfolio quality and volume criteria before authorizing lenders to participate
as Certified Lenders. Authorization to act as a Certified Lender is granted
independently by each SBA district office.
The Company operates in California and Nevada as a Preferred Lender ("Preferred
Lender"). This designation is the third and highest lender status granted by the
SBA. Under this level of lender participation, the lender has the authority to
approve a loan and to obligate the SBA to guarantee the loan without submitting
an application to the SBA for credit review. The Preferred Lender is required to
promptly notify the SBA of the approved loan, along with the submission of
pertinent SBA documents. The standards established for participants in the
Preferred Lender Program are more stringent than those for participants in the
lower two levels and involve meeting additional portfolio quality and volume
requirements. In addition, before being granted Preferred Lender status in a
particular SBA district, the lender must have been a Certified Lender in such
SBA district for at least 12 months. The Company may, at its option, submit
loans for approval under the Certified Lender Program.
The Company has, over the last ten years, developed an in-house expertise in the
generation and sale of SBA guaranteed loans. The Company's activities in the SBA
loan area are expected to continue to be a significant factor in the earnings of
the Company. In the past, the Company has acquired SBA loans, mortgage loans and
the rights to service these loans from the RTC and others.
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<PAGE>
The following table summarizes the Company's SBA 7(a) activities for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 (in thousands).
<TABLE>
Summary of SBA Loan Activity
Year Ended December 31
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SBA loans sold........................... 5,621 5,646 38,238 35,120 42,136
Net SBA servicing income................. 4,087 4,660 4,443 4,332 4,443
Net gain on sale of SBA loans............ 339 307 2,300 3,200 2,638
Excess Servicing receivable.............. 14,188 14,813 16,027 16,579 18,576
</TABLE>
The Company has historically sold the guaranteed portion of SBA 7(a) loans
(typically secured by first trust deeds on commercial real estate), generally
70% to 90% of the SBA 7(a) loan value, that it generates in the secondary
marketplace and retained the remaining percentage for its own portfolio.
Currently, the maximum guarantee is 80%. The percentage of the retained portion
of SBA 7(a) loans to total loans included in the loan portfolio of the Company
at December 31, 1996, 1995 and 1994 was 26%, 30% and 46%, respectively. In 1995,
the Company made a decision to change its strategy with respect to the sale of
SBA 7(a) loans. The guaranteed portion of loans is now being retained, and the
Company intends to securitize and sell portions of the unguaranteed amount of
the loans. The Company's first securitization is planned for 1997, pending SBA
approval, and will include approximately $50 million in loans. The Company has
in the past and will continue in the future to sell selected guaranteed portions
of loans to reduce credit concentrations in a particular industry or for other
reasons.
SBA 7(a) loans are made for terms from 7 to 25 years depending on the purpose of
the loan. In addition to being guaranteed by the SBA, most of the Company's SBA
7(a) loans are collateralized by real estate. In the event of a default, the
Company shares in the proceeds upon the sale of collateral on a pro rata basis
with the SBA, e.g., if the unguaranteed portion of a loan is 20%, then 20% of
the net liquidation proceeds would be available to the Company for payment of
the unguaranteed portion of the loan.
Since 1983, to support its SBA program, the Company has relied in part on SBA
packagers who refer SBA loans to the Company and provide certain services to the
borrowers. The packagers receive fees of a fixed amount from the borrower,
subject to limits prescribed by the SBA. The packagers also receive a fee from
the Company for referring SBA loans to the Company. The referral fee payments
are included in the basis of the loans and hence are not disclosed separately in
the Company's financial statements. Referral fees incurred by the Company for
SBA 7(a) loans from the years ended December 31, 1996, 1995 and 1994 were $90
thousand, $200 thousand and $481 thousand, respectively.
The Company's relationship with its SBA packagers are informal arrangements. SBA
packagers accounted for approximately 32% and 27% of the Company's SBA 7(a) loan
volume during the years ended December 31, 1996 and 1995, respectively. During
these same periods, a single SBA packager provided 7% and 26% of the Company's
SBA 7(a) loan volume, respectively. The reduction in packagers volume during
1995 and 1996 includes the loss of loan packages to competition based on price
and underwriting factors and the focus by the Company on its loan production
offices as its primary source for generating new loans.
SBA Guarantees. On October 12, 1995 the President signed the Small Business
Lending Enhancement Act of 1995. This act amended the maximum guarantee
percentage for loans made under the SBA's 7(a) program to 80% for loans up to
$100 thousand and 75% for all loans above $100 thousand. The maximum amount of
any loan that the guarantee can apply to was set at $750 thousand. At the same
time, the fee structure was revised to include a fee of 0.5% per annum on the
guaranteed portion of the outstanding balance of all loans approved on or after
October 12, 1995. Prior to this act in the case of loans made under the
Guaranteed Participant and Certified Lender Programs, the SBA guaranteed 90% of
loans of $155 thousand or less, and 85% of loans in excess of $155 thousand with
terms of less than 10 years. For loans in excess of $155 thousand with terms
greater than 10 years, the maximum guarantee was 75% available under the
Guaranteed Participant and Certified Lender Programs. Under the Preferred Lender
Program, the maximum guarantee was 75% regardless of loan size or terms. Prior
to January 1, 1995, subject to certain exceptions, the SBA's maximum guarantee
per borrower was $750 thousand. Late in 1994, the SBA announced a new ruling
that, beginning January 1, 1995, reduced the maximum loan that may be made under
the SBA 7(a) program to $500 thousand. At the same time, the SBA agreed that
banks would be allowed to make companion loans to accommodate borrowers in need
of financing in excess of the $500 thousand limit. This ruling was reversed with
the October 12, 1995
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<PAGE>
act. Currently the SBA guarantee extends to 80% of the loan amount, with a
maximum guarantee of $750 thousand. As of December 31, 1996, included in total
SBA loans of $147.0 million were portions of loans guaranteed by the SBA
totaling $37.0 million.
The SBA guarantee is conditional upon compliance with SBA regulations. In
connection with the underwriting and closing/servicing process, the Company
examines all loan files for compliance with SBA regulations; however, there can
be no assurance that all loans will comply with SBA regulations in all
instances. In the event of a default by a borrower on an SBA loan, if the SBA
establishes that any resulting loss is attributable to significant technical
deficiencies in the manner in which the loan was originated, documented or
funded by the Company, the SBA may seek recovery of funds from the Company. With
respect to the guaranteed portion of SBA loans that have been sold in the
secondary market, the SBA will honor its guarantee and may then seek
reimbursement from the Company in the event a proven loss is deemed to be
attributable to technical deficiencies. Loss of all or part of the SBA guarantee
on a loan could result in a loss to the Company if the underlying collateral on
the loan is insufficient to cover the outstanding loan value on such loan. The
Company maintains insurance coverage of $2.5 million against losses of the SBA
guarantee related to technical deficiencies.
SBA Servicing. As of December 31, 1996, 1995 and 1994, the Company serviced
1,402, 1,370 and 1,355 SBA loans, respectively, with a total unpaid principal
balance of approximately $420 million, $413 million and $412 million,
respectively.
The servicing of SBA loans entails the collection of principal and interest
payments from borrowers, the remission of the investor's share of principal and
interest payments to Colson Securities Corp. (the exclusive Fiscal and Transfer
Agent for the guaranteed portion of SBA loans sold into the secondary market),
the review of financial statements of borrowers and site inspections. Servicing
also entails the taking of certain actions required to protect the Company's and
the SBA's position in the event of default by the borrower, including the
liquidation of collateral.
To compensate it for the cost of servicing, the Company, pursuant to generally
accepted accounting principles ("GAAP"), sets aside part of the interest
receivable on the portion of loans sold to cover its future costs and a
reasonable future profit. See Note 5 of Notes to the Company's Consolidated
Financial Statements.
SBA Sales. SBA 7(a) loans are primarily written at variable rates of interest
which are limited to a maximum of 275 basis points over the lowest prime lending
rate published in the Western Edition of The Wall Street Journal. The interest
rate on most of the Company's SBA 7(a) loans adjusts on the first day of each
month. With respect to loans sold, the guaranteed portions of SBA loans are
converted into government guaranteed certificates, which are sold to investors,
and which yield for the investor a rate that is lower than the note rates. The
investor may pay a premium over the principal amount of the loan purchased and
additionally a portion of the interest on the sold portion of the loan will be
retained by SierraWest Bank. The difference between the rate on the loan that is
retained by the Company and the rate that the investor receives plus a fee of
0.5% collected by the SBA is referred to as the servicing spread. The servicing
spread less the normal cost of servicing is referred to as "Excess Servicing"
("Excess Servicing"). Lenders are required by the SBA to maintain a minimum of
40 basis points of servicing spread unless loans are sold for cash premiums, in
which case this increases to 100 basis points. When the SBA lender retains
higher levels of Excess Servicing, lower cash premiums are received from
investors. Prior to 1992, the Company sold most of its SBA loans for little or
no cash premium, emphasizing the retention of higher levels of Excess Servicing.
This Excess Servicing was valued in the year of sale under prevailing accounting
rules and recorded as income in the year of the sale. See Note 5 of Notes to
Consolidated Financial Statements.
As of December 31, 1996, the remaining balance of Excess Servicing previously
recorded as a gain was $14.2 million. In addition the Company has purchased
mortgage servicing rights on SBA 7(a) loans with a balance of $0.6 million at
December 31, 1996. Income from the servicing spread received for the years ended
December 31, 1996, 1995 and 1994, was $5.6 million, $6.2 million and $6.4
million, respectively. Amortization of the Excess Servicing asset and purchased
mortgage servicing rights on SBA loans for these same periods was $1.5 million,
$1.5 million and $2.0 million, respectively. The surplus income from the
servicing spread over the amortization represents an important part of the
Company's income. The related Excess Servicing asset included in the Company's
Consolidated Financial Statements represents the book value of the Excess
Servicing, which is based on certain estimates made by management at the time
loans are sold. Such estimates
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<PAGE>
are made based on management's expectations of future prepayment rates and other
considerations. If actual prepayments with respect to sold loans occur more
quickly than was projected at the time such loans were sold, the carrying value
of the Excess Servicing asset may have to be written down through a charge to
earnings in the period of adjustment. Through the period ending December 31,
1996, no write downs have been necessary. If actual prepayments with respect to
sold loans occur more slowly than estimated, the carrying value of the Excess
Servicing asset on the Company's Consolidated Statement of Financial Condition
would not increase, although total income would exceed previously estimated
amounts.
Beginning in 1997, the Company will be required to account for its SBA loan
sales in accordance with Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinquishments
of Liabilities. See Accounting Pronouncements.
The SBA provides long term financing to small businesses through its 504 loan
program, by partnering with banks to assist small businesses in buying land,
buildings, machinery and equipment. Under this program, the bank provides 50% of
the financing and obtains a first lien position on the collateral. The SBA works
through a local Certified Development Company to provide 40% of the required
financing and the small business provides 10% of the project cost. There are no
government guarantees provided under this program, however the bank mitigates
its risk with these loans by having a low loan to value on the collateral, which
is usually real property. Included in the Company's SBA loan portfolio at
December 31, 1996 are loans totaling $24.9 million related to this and similar
lending programs in conjunction with the SBA.
Other Government Lending
The U.S. Department of Agriculture Rural Development ("USDA")offers a guaranteed
loan program, known as the Business & Industry ("B&I") Loan Program. This
program is designed to stimulate economic activity in rural communities with
populations of 50,000 or less. Commercial and industrial businesses and real
estate projects are the target of the program. The Bank participates by
financing up to $10,000,000, with the USDA providing an 80% guarantee on loans
up to $5,000,000 and 70% on loans from $5,000,000 to $10,000,000. These
guarantees are similar to those offered through the SBA 7(a) program and can be
sold on the secondary market. Included in the Company's loan portfolio are B&I
loans totaling $5.8 million at December 31, 1996. In 1996, the Company sold $3.6
million in guaranteed portions of B&I Loans.
Other Lending Activities
The Company's commercial loans are primarily made to small- and medium-sized
businesses and are for terms ranging from one to ten years, with the majority of
loans being due in less than five years. The Bank provides conventional
commercial term real estate loans, both owner occupied and investor owned, with
maturities of 5-7 years and monthly amortizing payments scheduled over 20 years.
Construction loans are also provided, for residential and commercial purposes,
with terms ranging from 6 to 18 months. Consumer loans are typically for a
maximum term of 36 months for unsecured loans and for a term of not more than
the depreciable life of tangible property used as collateral for secured loans.
Beginning in 1996, the Company began to provide 100% equipment lease financing
to small and medium-sized businesses and municipalities. Terms range from two to
seven years, with the current average term approximately 50 months.
Loan Commitments
In the normal course of business, there are various outstanding commitments to
extend credit that are not reflected in the financial statements. As of December
31, 1996, the Company had approximately $78 million in undisbursed loan
commitments and $2 million in standby letters of credit. About 26 percent of the
undisbursed loan commitments relate to SBA loans, while the remaining represent
undisbursed construction, commercial, real estate and personal loans (including
equity lines of credit). Most of these off-balance sheet items are or will be
secured by real estate or other assets; however, a portion are unsecured
commercial lines of credit. Off- balance sheet items undergo a level of
underwriting scrutiny similar to the criteria applied to the Company's loan
portfolio, and outstanding balances are monitored to minimize risk and loss
exposure.
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<PAGE>
Distribution of Loans
The distribution of the Company's loan portfolio, as of the dates indicated, is
shown in the following table (in thousands):
<TABLE>
December 31,
Type of Loan: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SBA loans:
SBA guaranteed loans in process(1)... $ 62,409 $ 45,864 $ 16,299 $ 16,825 $ 15,937
SBA guaranteed loans purchased(2).... 0 0 0 0 1,132
Retained portion of SBA loans(3)..... 84,612 71,201 79,649 71,683 71,160
-------- -------- --------- -------- --------
Total SBA Loans....................... 147,021 117,065 95,948 88,508 88,229
-------- -------- --------- -------- --------
Real estate loans (includes loans secured primarily by real estate, except for
SBA loans):
Construction and land development... 36,261 31,564 18,310 15,450 14,928
Mortgage ........................... 62,883 35,484 18,268 17,908 12,634
Equity lines of credit.............. 4,725 3,735 1,689 1,058 5,980
-------- -------- --------- -------- --------
Total Real Estate Loans............... 103,869 70,783 38,267 34,416 33,542
-------- -------- --------- -------- --------
Commercial and industrial loans....... 57,325 42,204 31,157 26,850 22,796
Individual and other loans............ 6,847 6,537 7,365 9,828 10,270
Lease receivables..................... 8,304 3,380 202 217 508
-------- -------- --------- -------- --------
Total Loans........................... 323,366 239,969 172,939 159,819 155,345
Less allowance for possible loan losses 4,546 3,845 3,546 3,472 2,742
-------- ---------- --------- -------- --------
Total Net Loans....................... $318,820 $236,124 $ 169,393 $156,347 $152,603
======== ======== ========= ======== ========
</TABLE>
(1) Loans guaranteed in part by the SBA which are in process of
disbursement, available for sale, or awaiting sale. The total
guaranteed portion was $37.0 million, $29.2 million, $11.6 million,
$12.6 million and $12.7 million at December 31, 1996, 1995, 1994, 1993
and 1992, respectively.
(2) SBA guaranteed loans repurchased by the Company under repurchase
agreements. These loans are fully guaranteed by the SBA.
(3) Includes primarily the unguaranteed retained portion of loans for which
the guaranteed portion has been sold to investors.
Credit Risk Management
In managing its loan portfolio, the Company utilizes procedures designed to
achieve an acceptable level of qual ity and to bring any potential losses or
potential defaults in existing loans to the attention of the appropriate
management personnel. As used in this discussion, the term "loan" encompasses
both loans and leases. Each loan officer is granted a lending limit by the Chief
Credit Officer, subject to review and approval by the Board of Directors of
SierraWest Bank. Each lending officer has primary responsibility to conduct
credit and documentation reviews of the loans for which he or she is
responsible. The Chief Credit Officer is responsible for the general supervision
of the loan portfolio and adherence by the loan officers to the loan policy of
such bank.
Loan officers evaluate the applicant's financial statements, credit reports,
business reports and plans and other data to determine if the credit and
collateral satisfy the Company's standards as to historic debt service coverage,
reasonableness of projections, strength of management and sufficiency of
secondary repayment and SBA eligibility rules, if applicable. Recommended
applications are approved by loan officers up to their designated lending
limits. Those loans in excess of individual lending limits are approved by the
Chief Credit Officer or other officer with appropriate administrative lending
authority. If a loan exceeds the Chief Credit Officer's lending limit, it is
forwarded to the Director's Loan Committee for approval. Approved SBA loan
applications are then submitted to the district SBA office for approval, except
in the case of loans made pursuant to the Preferred Lender Program for which SBA
credit approval is not required. All SBA loans are secured by various collateral
including, where appropriate, real estate, machinery and equipment, inventory
and accounts
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<PAGE>
receivable, or such other assets as are specified in the SBA loan authorization.
In the case of the Company's SBA loans, approximately 90% were collateralized by
commercial real estate at December 31, 1996. Prior to submission of the
application to the SBA for guarantee, any real property to be taken as
collateral is appraised by independent appraisers.
SierraWest Bank's management presents a written report to the Director's Loan
Committee monthly, listing all loans, regardless of amount, which are 30 days or
more past due. Management and the board of directors of SierraWest Bank also
review all loan evaluations made during periodic examinations by the FDIC and
CSBD. The Director's Loan Committee of SierraWest Bank reviews and approves the
Bank's credit policy, as well as management reports on the quality of the loan
portfolio.
The Company maintains an allowance for possible loan losses to provide for
potential losses in its loan portfolio. The allowance is established through
charges to earnings in the form of provision for possible loan losses. Loan
losses are charged to, and recoveries credited to, the allowance for possible
loan losses. The provision for possible loan losses is determined after
considering various factors such as loan loss experience, current economic
conditions, maturity of the loan portfolio, size of the loan portfolio, industry
concentrations, borrower credit history, the existing allowance for possible
loan losses, independent loan reviews, current charges and recoveries and the
overall quality of the portfolio, as determined by management, regulatory
agencies and independent credit review consultants retained by the Company.
While these factors are essentially subjective, management considers the
allowance of $4.5 million at December 31, 1996 to be adequate.
The Company's credit services department is responsible for monitoring,
collecting and liquidating loans. In addition, on a selective basis, the
servicing staff conducts site inspections after loan funding and periodically
during the life of the loan to verify the use of the proceeds and maintenance of
collateral and to assist in the collection process and management of classified
loans.
Asset Quality
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company places a loan on nonaccrual status when any installment
of principal or interest is 90 days or more past due, unless, in management's
opinion, the loan is well secured and the collection of principal and interest
is probable, or management determines the ultimate collection of principal or
interest on a loan to be unlikely. When a loan is placed on nonaccrual status,
the Company's general policy is to reverse and charge against current income
previously accrued but unpaid interest. Interest income on such loans is
subsequently recognized only to the extent that cash is received and future
collection of principal is deemed by management to be probable.
Loans for which the collateral has been repossessed are written down to fair
value and classified as Other Real Estate Owned ("OREO") or, if the collateral
is personal property, as other assets, on the Company's financial statements.
-9-
<PAGE>
The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated (amounts in thousands except percentage amounts).
<TABLE>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Nonaccrual loans:
SBA............................ $ 4,985 $5,351 $ 2,423 $2,517 $ 2,561
Other. . . . . . . . . . . . . 378 125 59 355 1,223
In-substance foreclosures.......... 0 0 572 711 732
Other real estate owned............ 446 758 542 456 460
------- ------ ------- ------ -------
Total nonperforming assets..... $ 5,809 $6,234 $ 3,596 $4,039 $ 4,976
======= ====== ======= ====== =======
Accruing loans past due 90 days or more:
SBA............................ $ 1,071 $ 816 $ 1,754 $ 496 $ 435
Other. . . . . . . . . . . . . 1,061 207 9 1,029 538
Restructured loans (in compliance
with modified terms)............. $ 275 $ 78 $ 194 $ 201 $ 61
Nonperforming assets to
total assets..................... 1.3% 1.8% 1.4% 1.6% 2.0%
Allowance for possible loan and lease
losses to nonaccrual loans....... 84.8% 70.2% 142.9% 120.9% 72.5%
</TABLE>
Of total gross loans and leases at December 31, 1996, $5.4 million were
considered to be impaired. The allowance for possible loan and lease losses
included $565 thousand related to these loans. The amount of interest received
and recognized on these impaired loans in 1996 was $310 thousand. The average
recorded investment in impaired loans during 1996 was $5.6 million.
Of total gross loans and leases at December 31, 1995, $5.5 million were
considered to be impaired. The allowance for possible loan and lease losses
included $446 thousand related to these loans. The amount of interest received
and recognized on these impaired loans in 1995 was $221 thousnad. The average
recorded investment in impaired loans during 1995 was $3.4 million.
Although the level of nonperforming assets will depend on the future economic
environment, as of March 1, 1997, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $358
thousand in potential problem loans as to which it has serious doubts as to the
ability of the borrowers to comply with the present repayment terms and which
may become nonperforming assets, based on known information about possible
credit problems of the borrower.
-10-
<PAGE>
The following table shows the loans outstanding, actual charge-offs, recoveries
on loans previously charged off, the allowance for possible loan losses and
pertinent ratios during the periods and as of the dates indicated (amounts in
thousands except percentage amounts).
<TABLE>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans....................... $ 284,487 $203,231 $ 166,366 $ 159,463 $ 149,597
Total loans at end of period........ 323,366 239,969 172,939 159,819 155,345
Allowance for possible loan and lease
losses: Balance--beginning of period $ 3,845 $ 3,546 $ 3,472 $ 2,742 $ 2,525
--------- -------- --------- --------- ---------
Actual charge-offs:
SBA............................... 114 595 447 391 671
Commercial and industrial......... 337 350 467 143 65
Leases. . . . . . . . . . . . . . 84 0 0 0 0
Real estate....................... 0 40 60 190 12
Installment....................... 58 40 101 42 32
--------- -------- --------- --------- ---------
Total........................... 593 1,025 1,075 766 780
--------- -------- --------- --------- ---------
Less recoveries:
SBA............................... 87 20 74 14 23
Commercial and industrial......... 182 26 187 52 57
Real estate....................... 0 0 0 0 0
Installment....................... 15 8 3 6 2
--------- -------- --------- --------- ---------
Total........................... 284 54 264 72 82
--------- -------- --------- --------- ---------
Net charge-offs..................... 309 971 811 694 698
Allowance applicable to sold loans.. 0 0 0 (136) 0
Provision for possible loan and lease
losses............................ 1,010 1,270 885 1,560 915
--------- -------- --------- --------- ---------
Balance--end of period.............. $ 4,546 $ 3,845 $ 3,546 $ 3,472 $ 2,742
========= ======== ========= ========= =========
Ratios:
Net loans charged off to average
loans outstanding.............. 0.11% 0.48% 0.49% 0.44% 0.47%
Net loans charged off to total loans
at end of period............... 0.10 0.41 0.47 0.43 0.45
Provision for possible loan and lease
losses to average loans........ 0.36 0.62 0.53 0.98 0.61
Provision for possible loan and lease
losses to total loans at end of period 0.31 0.53 0.51 0.98 0.59
Net loans charged off to end of
period allowance for possible
loan and lease losses.......... 6.80 25.25 22.87 19.99 25.46
</TABLE>
-11-
<PAGE>
The following table sets forth management's historical allocation of the
allowance for possible loan losses by loan category and percentage of loans in
each category. Percentage amounts are the percentage of loans in each category
to total loans at the dates indicated (in thousands except percentage amounts).
<TABLE>
December 31,
1996 1995
---------------------- ------------------------
Amount Percentage Amount Percentage
<S> <C> <C> <C> <C>
SBA loans........................................ $1,561 45% $1,468 38%
Commercial and industrial loans (2).............. 1,720 21 1,592 41
Real estate loans................................ 1,010 30 564 15
Consumer loans to individuals(1)................. 255 4 221 6
------ ----- ------ ----
Total........................................ $4,546 100% $3,845 100%
====== === ====== ===
</TABLE>
<TABLE>
December 31,
1994 1993 1992
----------------------- ---------------------- ------------------------
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
SBA loans...................... $2,372 56% $2,379 55% $2,127 57%
Commercial and industrial loans 627 18 541 17 233 15
Real estate loans.............. 366 21 334 22 138 18
Consumer loans to
individuals(1)............... 181 5 218 6 244 10
------ ------- ------ ---- ------ -----
Total...................... $3,546 100% $3,472 100% $2,742 100%
====== ===== ========== === ====== ===
</TABLE>
(1) Includes equity lines of credit.
(2) Includes commercial leases.
In allocating the Company's loan loss reserve, management has considered the
credit risk in the various loan categories in its portfolio. Historically, most
of the Company's loan losses have been in its commercial lending area. This area
includes local commercial loans and SBA loans. From inception of its SBA lending
program in 1983, the Company has sustained a relatively low level of losses from
these loans, averaging less than 0.5% of loans outstanding per year. Most of the
Company's other commercial loan losses have been for loans to businesses within
the Tahoe basin area or in Reno, Nevada. The Company believes that it has taken
steps to minimize its commercial loan losses, including centralization of
lending approval and processing functions. It is important to the Company to
maintain good relations with local business concerns and, to this end, it
supports small local businesses with commercial loans. To offset the added risk
these loans represent, the Company charges a higher interest rate. It also
attempts to manage risk in this area through its loan review process.
Because the Company's residential real estate loans consist primarily of
construction lending with prearranged loan takeouts, losses on such loans have
been minimal. The Company has not participated in commercial real estate
development projects. Through mid-1995 mortgages were made on single family
residences secured by first deeds of trust and were generally sold in the
secondary market. Mortgage operations were terminated in July, 1995.
While every effort has been made to allocate the reserve to specific categories
of loans, management believes that any breakdown or allocation of the loan loss
reserve into loan categories lends an appearance of exactness which does not
exist, in that the reserve is utilized as a single unallocated reserve available
for losses on all types of loans.
-12-
<PAGE>
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the distribution by maturity date of certain of
the Company's loan categories (in thousands) as of December 31, 1996. In
addition, the table shows the distribution between total loans with
predetermined (fixed) interest rates and those with variable (floating) interest
rates (in thousands). Floating rates generally fluctuate with changes in the
prime rate of leading banking institutions.
<TABLE>
Year Ended
December 31, 1996
After One
Within But Within After
One Year(1) Five Years Five Years Total
<S> <C> <C> <C> <C>
Real estate - construction.................. 27,294 4,109 4,858 36,261
Commercial, except SBA...................... 33,939 16,285 7,101 57,325
SBA......................................... 11,229 19,439 116,353 147,021
Distribution between fixed and floating interest rate:
Fixed interest rates..................... 17,203 24,314 5,989 47,506
Floating interest rates.................. 69,114 59,737 147,009 275,860
</TABLE>
(1) Demand loan and overdrafts are shown as "Within One Year"
-13-
<PAGE>
Average Assets, Liabilities and Shareholders' Equity;Interest Income and Expense
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and share holders' equity, as well as the total
dollar amount of interest income from average interest-earning assets and
resultant yields and the dollar amounts of interest expense and average
interest-bearing liabilities and resultant rates (in thousands except percentage
amounts):
<TABLE>
Year Ended December 31,
1996 1995 1994
--------------------------------- ------------------------------- -----------------
Average Yield/ Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest Balance Rate Interest
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans(1)........... $ 284,487 10.72% $ 30,506 $203,231 11.60% $ 23,582 $ 166,366 10.45% $ 17,386
Investment securities(2)28,712 5.62 1,614 26,546 5.29 1,403 31,168 4.68 1,459
Mutual funds....... 1,342 7.30 98 1,627 8.05 131 4,178 5.43 227
Federal funds sold. 18,017 5.21 938 10,534 5.64 594 11,872 4.03 478
Other deposits..... 2,225 5.08 113 2,097 5.77 121 1,983 5.40 107
--------- --------- -------- -------- --------- ---------
Total interest-earning
assets......... 334,783 9.94 33,269 244,035 10.58 25,831 215,567 9.12 19,657
Allowance for possible
loan losses......... (4,497) (3,685) (3,653)
Non-earning assets:
Cash and due from
banks.......... 19,894 16,444 15,936
Premises and equipment,
net............ 11,224 7,817 7,178
Excess Servicing on
SBA loans...... 14,304 15,492 16,114
Other assets..... 5,912 6,091 6,467
--------- -------- ---------
Total average assets$ 381,620 $286,194 $ 257,609
========= ======== =========
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities:
Transaction account $ 102,963 2.54% $2,620 $ 87,600 2.28% $ 1,995 $ 94,430 2.01% $ 1,894
Savings accounts. 13,573 2.09 283 13,409 2.13 286 14,696 2.16 317
Certificates of deposit155,585 5.68 8,832 91,517 5.85 5,352 61,408 4.17 2,559
Convertible debentures 9,294 8.22 764 10,000 8.50 850 9,155 8.55 783
Other liabilities 289 (1.38) (4) 376 2.13 8 351 12.54 44
--------- -------- ------------ -------- --------- ---------
Total interest-bearing
liabilities...... 281,704 4.44 12,495 202,902 4.18 8,491 180,040 3.11 5,597
Non-interest-bearing liabilities:
Transaction accounts 63,638 51,261 48,421
Other liabilities 4,556 2,767 2,289
--------- -------- ---------
Total liabilities 349,898 256,930 230,750
Shareholders' equity:
Common stock..... 11,450 10,799 10,865
Retained earnings 20,399 18,793 16,338
Unrealized loss on
securities....... (127) (328) (344)
--------- --------- ---------
Total shareholders'
equity......... 31,722 29,264 26,859
--------- -------- ---------
Total liabilities and
shareholders'
equity......... $ 381,620 $ 286,194 $ 257,609
========= ========= ==========
-------- --------- --------
Net interest income. $ 20,774 $ 17,340 $ 14,060
-========= ========== =======
Interest income as a
percentage of interest -
earning assets 9.94% 10.58% 9.12%
Interest expense as a
percentage of interest -
earning assets. . . (3.73) (3.48) (2.60)
------ ----- -----
Net interest margin 6.21% 7.10% 6.52%
==== ==== =====
</TABLE>
(1) Includes nonaccrual loans with an average balance of $5.6 million, $3.4
million, and $3.0 million for the years ended December 31, 1996, 1995
and 1994, respectively.
(2) Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because such securities are not significant.
Investment Securities & Investments in Mutual Funds
The Company's current investment policy provides for the purchase of U.S.
Treasury securities, obligations of U.S. government agencies, U.S. government
sponsored agencies, corporate bonds, commercial paper, banker's acceptances,
pass-through mortgage-backed securities, adjustable rate mortgage pass-through
securities, collateralized mortgage obligations, asset-backed securities,
municipal general obligation and revenue bonds, and certificates of deposit. The
Company's policy requires all corporate bonds, commercial paper, mortgage-backed
securities, collateralized mortgage obligations or municipal securities be rated
"A" or better by any
-14-
<PAGE>
nationally recognized rating agency. If a local municipality is issuing an
unrated bond, the Company may purchase it after normal credit underwriting
procedures are performed.
The Company's investment committee reviews all securities transactions on a
monthly basis and presents a monthly report to the Board of Directors of the
Company covering this review. Under California law, SierraWest Bank may not
invest an amount exceeding 15% of its shareholders' equity in the securities of
any one obligor, subject to certain exceptions (e.g., obligations of the United
States and the State of California). Acceptable securities (i.e., Federal or
state government or any county or municipality securities) may be pledged to
secure public deposits in excess of $100 thousand.
In May 1993, FASB issued Statement of Financial Accounting Standards No. 115
("SFAS No. 115") entitled "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 requires, among other things, that certain investments
in debt and equity securities be classified under three categories--held to
maturity, trading securities and securities available for sale. Securities
classified as held to maturity are to be reported at amortized/ accreted cost.
Securities classified as trading securities are to be reported at fair value
with unrealized gains and losses included in earnings. Securities classified as
available for sale are to be reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity. The Company adopted SFAS No. 115 effective at December 31,
1993. At December 31, 1996 and 1995, $31.9 million and $25.0 million of the
Company's investment securities were classified as available for sale. The
remaining $2.0 million and $3.4 million, consisting primarily of pledged or
formerly pledged securities, were classified as held to maturity. The Company
does not classify any securities as trading securities.
The following table summarizes the amounts and the distribution of the Company's
investment securities (in thousands):
<TABLE>
December 31,
1996 1995 1994
-------------------- -------------------- ------------------
Book Market Book Market Book Market
Value(1) Value Value(1) Value Value(1) Value
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.................... $ 19,463 $ 19,462 $ 18,137 $ 18,144 $ 23,873 $ 23,711
Securities of U.S. government
agencies.................................. 1,005 1,005 7,486 7,486 6,363 6,363
Securities of states and
political subdivisions.................... 5,991 5,991 2,608 2,608 418 418
Other securities............................ 7,422 7,422 112 112 429 429
----- ------ ------------ ----------- --------- ---------
Total..................................... $ 33,881 $ 33,880 $ 28,343 $ 28,350 $ 31,083 $ 30,921
======== ======== ========= ========== ========== ==========
</TABLE>
(1) Securities held to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount. Securities
available for sale are recorded at market.
In addition the Company invests in mutual funds whose assets are invested
primarily in U.S. government securities. At December 31, 1996 and 1995, mutual
funds with an estimated market value of $1.3 million and $1.4 million have been
classified as available for sale. At these same dates the Company had recorded
an unrealized loss on mutual funds, net of tax, of $99 thousand and $72
thousand. The weighted average maturity of portfolio securities held by the
mutual funds at December 31, 1996 and 1995 was 7.2 and 7.6 years.
-15-
<PAGE>
Maturity of Investment Securities
The following table presents the maturities for investment securities (except
for investments in mutual funds with a carrying value of $1,335 thousand) as of
December 31, 1996 (in thousands except percentage amounts).
<TABLE>
December 31, 1996
Weighted
Book Average Market
Value Rate Value
<S> <C> <C> <C>
U.S. Treasury securities:
Within 1 year................................................................... $ 7,014 5.41% $ 7,014
After 1 year but within 5 years............................................... 12,449 6.06 12,448
--------- ---------
Total U.S. Treasury securities................................................ 19,463 5.82 19,462
--------- ---------
U.S. government agencies:
Within 1 year................................................................... 1,005 6.00 1,005
Securities of states and political subdivisions(1):
After 1 year but within 5 years................................................. 344 3.78 344
After 5 years but within 10 years............................................... 99 4.55 99
Over 10 years................................................................... 5,548 5.29 5,548
--------- ---------
Total securities of states and political subdivisions ...................... 5,991 5.19 5,991
--------- ---------
Mortgage - backed securities:..................................................... 7,422 6.39 7,422
--------- ---------
Total............................................................................. $ 33,881 5.84 $ 33,880
========= =========
</TABLE>
(1) Interest on these tax-exempt obligations has not been grossed up for
the related tax benefits in calculating the average yield.
Deposits
As of December 31, 1996, the Company had a total of $200.9 million in demand
deposits (including money market and NOW accounts), with an average account
balance of $10,688; $13.3 million in savings deposits for individuals and
corporations, with an average balance of $2,135; and $185.4 million in CDs, of
which $58.1 million were in the form of CDs in denominations greater than $100
thousand. Average CD balances for the year ended December 31, 1994 were 28.1% of
average total deposits. Average CD balances increased to 37.5% of average total
deposits for the year ended December 31, 1995 and increased again to 46.3% of
average total deposits for the year ended December 31, 1996. Deposit accounts at
SierraWest Bank are insured by the FDIC to the maximum amount permitted by law.
As of December 31, 1996, approximately 5% of total deposits were held on behalf
of public entities. Deposits of public entities in excess of amounts insured by
the FDIC are secured by SierraWest Bank by pledging securities and/or the
guaranteed portion of SBA loans. Included in deposits at December 31, 1996 were
certificates of deposit of $10.6 million which were generated directly through
brokers.
In 1992, SierraWest Bank began to make available to its customers money market
investment funds and annui ties. Only a modest volume of business has been
generated to date. The Company does not believe that placement by customers of
funds in these alternative investment sources has had any overall negative
impact on the level of the Banks' deposits.
The Company's business is subject to some seasonal influences. Deposits tend to
decrease during the off- season for tourism, which is between March and May.
-16-
<PAGE>
The following table indicates the maturity of the Company's CDs in excess of
$100 thousand as of December 31, 1996 (amounts in thousands except percentage
amounts):
<TABLE>
December 31, 1996
Percentage
Balance of Total
<S> <C> <C>
Three months or less................................................................... $23,041 39.6%
Over three months through six months................................................... 18,533 31.9
Over six months through twelve months.................................................. 12,379 21.3
Over twelve months.................................................................... 4,157 7.2
--------- -------
Total.................................................................................. $58,110 100.0%
========= =====
</TABLE>
Repricing of Interest-Earning Assets and Interest-Bearing Liabilities
The following table sets forth the distribution of repricing opportunities of
the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap and the cumulative gap as a percentage of total interest-earning assets, as
of December 31, 1996. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant and may be affected by many factors, including the behavior
of customers in response to changes in interest rates. This table should,
therefore, be used only as a guide as to the possible effect changes in interest
rates might have on the net margins of the Company (amounts in thousands except
percentage amounts).
<TABLE>
December 31, 1996
Next Day Over Three One Year
to Three Months Through Through Over
Immediately Months Twelve Months Five Years Five Years Total
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold............... $ 32,200 $ 0 $ 0 $ 0 $ 0 $ 32,200
Mutual funds..................... 1,335 0 0 0 0 1,335
Taxable investment securities.... 0 3,238 5,919 16,209 2,524 27,890
Non-taxable investment securities 0 0 0 344 5,647 5,991
Loans............................ 128,472(2) 154,064 10,525 24,314 5,991 323,366
---------- ---------- --------- --------- --------- ---------
Total interest-earning assets 162,007 157,302 16,444 40,867 14,162 390,782
---------- ----------- ---------- ---------- ---------- -----------
Liabilities:
Savings deposits(1).............. 133,706 0 0 0 0 133,706
Time deposits.................... 0 65,497 96,611 23,037 275 185,420
Convertible debentures........... 0 0 0 0 8,520 8,520
Lease obligations................ 0 2 5 39 227 273
--------- ---------- --------- --------- --------- ---------
Total interest-bearing liabilities 133,706 65,499 96,616 23,076 9,022 327,919
--------- --------- --------- --------- --------- ---------
Net interest-earning assets (liabilities) $ 28,301 $ 91,803 $ (80,172) 17,791 $ 5,140 $ 62,863
========= ============ ========== ========= ========= =========
Cumulative net interest earning assets
(liabilities) ("GAP")............ $ 28,301 $ 120,104 $ 39,932 $ 57,723 $ 62,863
=========== =========== =========== =========== =========
Cumulative GAP as a percentage of
total interest-earning assets.... 7.2% 30.7% 10.2% 14.8% 16.1%
=========== =========== =========== ========== ==========
</TABLE>
(1) Savings deposits include interest-bearing transaction accounts.
(2) Includes loans which matured on or prior to December 31, 1996.
At December 31, 1996, the Company had $335.8 million in assets and $295.8
million in liabilities repricing within one year. This means that $40 million
more in interest rate sensitive assets than interest rate sensitive liabilities
will change to the then current rate (changes occur due to the instruments being
at a variable rate or because the maturity of the instrument requires its
replacement at the then current rate). Interest income is likely to be affected
to a greater extent than interest expense for any changes in interest rates
during the Immediately to Twelve Month periods. If rates were to fall during
this period, interest income would decline by a greater amount than interest
expense and net income would be reduced. Conversely, if rates were to rise, the
reverse would apply.
-17-
<PAGE>
Competition from Other Financial Institutions
The Company competes for deposits and loans principally with major commercial
banks, other independent banks, savings and loan associations, savings banks,
thrift and loan associations, credit unions, mortgage companies, insurance
companies and other lending institutions. With respect to deposits, additional
significant competition arises from corporate and governmental debt securities,
as well as money market mutual funds. Several of the nation's largest savings
and loan associations and commercial banks have a significant number of branch
offices in the areas in which the Company conducts operations. Among the
advantages of the larger of these institutions are their ability to make larger
loans, finance extensive advertising campaigns, access international money
markets and generally allocate their investment assets to regions of highest
yield and demand.
The Company ranked 18th in the nation by number of SBA 7(a) loans generated by
banks for the SBA's fiscal year ended September 30, 1996.
The Company's competitive position in respect to deposit gathering in its
respective market places is illustrated in the following chart(1) (dollar
amounts in thousands):
<TABLE>
Total Deposits Held
# of Company # of Banking Deposits Held by all Banks
County State Branches Offices by Company and offices
<S> <C> <C> <C> <C> <C>
El Dorado California 1 20 $ 22,986 $ 548,789
Nevada California 5 19 $ 157,780 $ 588,853
Placer California 2 49 $ 48,098 $ 1,310,081
Sacramento California 1 162 $ 22,887 $ 6,985,162
Carson City Nevada 1 10 $ 8,198 $ 453,899
Washoe Nevada 1 59 $ 76,255 $ 2,379,689
</TABLE>
A total of 8 banks in Nevada County at June 30, 1996 were included in the above
survey. Of these eight, SierraWest Bank ranked second in terms of total deposits
held. In Placer County, SierraWest Bank ranked sixth out of fourteen banks. As
disclosed above, SierraWest Bank's presence in the other counties is not
significant.
(1) Based on the annual survey of banking office deposits as of June 30, 1996
conducted by the FDIC. Banking offices include each banking office of branch
banking systems and each U.S. branch of a foreign bank for all FDIC insured
commercial banks, savings banks, and U.S. branches of foreign banks.
Supervision and Regulation
The Effect of Governmental Policy on Banking
The earnings and growth of SierraWest Bank are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Federal Reserve influences the supply of
money through its open market operations in U.S. Government securities and
adjustments to the discount rates applicable to borrowings by depository
institutions and others. Such actions influence the growth of loans, investments
and deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of future changes in such policies on the
business and earnings of SierraWest Bank cannot be predicted.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of Federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company. See "Recently
Enacted Legislation" herein.
-18-
<PAGE>
Regulation and Supervision of Bank Holding Companies
Bancorp is a bank holding company subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). Bancorp reports to, registers with, and may be
examined by, the Federal Reserve. The Federal Reserve also has the authority to
examine Bancorp's subsidiary. The costs of any examination by the Federal
Reserve are payable by Bancorp.
The Federal Reserve has significant supervisory and regulatory authority over
Bancorp and its affiliates. The Federal Reserve requires Bancorp to maintain
certain levels of capital. See "--Capital Standards." The Federal Reserve also
has the authority to take enforcement action against any bank holding company
that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed in writing by the Federal Reserve. See
"--Prompt Corrective Action and Other Enforcement Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of the
Federal Reserve before it exercises a controlling influence over, or acquires
directly or indirectly, more than 5% of the voting shares or substantially all
of the assets of any bank or bank holding company. Thus, Bancorp is required to
obtain the prior approval of the Federal Reserve before it acquires, merges or
consolidates with any bank or bank holding company; any company seeking to
acquire, merge or consolidate with Bancorp also would be required to obtain the
approval of the Federal Reserve.
Bancorp is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the Federal
Reserve, may engage, or acquire the voting shares of companies engaged, in
activities that the Federal Reserve has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
bank holding company must demonstrate that the benefits to the public of the
proposed activity will outweigh the possible adverse effects associated with
such activity.
The Federal Reserve generally prohibits a bank holding company from declaring or
paying a cash dividend which would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements
that might adversely affect a bank holding company's financial position. The
Federal Reserve's policy is that a bank holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and overall
financial condition.
Transactions between Bancorp and its subsidiary are subject to a number of other
restrictions. Federal Reserve policies forbid the payment by bank subsidiaries
of management fees which are unreasonable in amount or exceed the fair market
value of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Additionally, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
the extension of credit, sale or lease of property, or furnishing of services.
Subject to certain limitations, depository institution subsidiaries of bank
holding companies may extend credit to, invest in the securities of, purchase
assets from, or issue a guarantee, acceptance, or letter of credit on behalf of,
an affiliate, provided that the aggregate of such transactions with affiliates
may not exceed 10% of the capital stock and surplus of the institution, and the
aggregate of such transactions with all affiliates may not exceed 20% of the
capital stock and surplus of such institution. Bancorp may only borrow from
depository institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the loan. Further,
Bancorp may not sell a low-quality asset to a depository institution subsidiary.
Commercial banking organizations, insured depository institutions, and mortgage
bankers are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations. In addition to
substantive penalties and corrective measures that may be required for a
violation of such laws, the Federal banking agencies may take compliance with
such laws into account when regulating and supervising other activi ties. The
Federal Reserve may not approve applications to acquire the voting shares of
another insured depository institution based on incorrect reporting of home
mortgage lending data, and the possibility that applicants may have engaged in
discriminatory treatment of minorities in mortgage lending in violation of the
Equal Credit Opportunity Act.
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Bank Regulation and Supervision
As a California state-chartered bank, SierraWest Bank is regulated, supervised
and regularly examined by the CSBD. Under California law, SierraWest Bank is
subject to various restrictions on, and requirements regarding, its operations
and administration including the maintenance of branch offices and automated
teller machines, capital and reserve requirements, deposits and borrowings,
stockholder rights and duties, and investment and lending activities. Whenever
it appears that the contributed capital of a California bank is impaired, the
CSBD shall order the bank to correct such impairment. If the bank is unable to
correct the impairment, such bank is required to levy and collect an assessment
upon its common shares. If such assessment becomes delinquent, such common
shares are to be sold by the bank. SierraWest Bank is not a member of the
Federal Reserve System; SierraWest Bank, however, is subject to certain
regulations of the Federal Reserve including reserve requirements. The primary
Federal regulator of SierraWest Bank is the FDIC.
Capital Standards
The FDIC and other Federal banking agencies have risk based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing its
qualifying capital by its total risk- adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, term preferred stock, term subordinated debt
and certain other instruments with certain characteristics of equity. The
inclusion of elements of Tier 2 capital are subject to certain other
requirements and limitations of the Federal banking agencies. Since December 31,
1992, the Federal banking agencies have required a minimum ratio of qualifying
total capital to risk-adjusted assets and off balance sheet items of 8%, and a
minimum ratio of Tier 1 capital to risk-adjusted assets and off balance sheet
items of 4%.
In addition to the risked-based guidelines, Federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio must
be at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, must be at least 4% to 5%.
In addition to these uniform risk based capital guidelines and leverage ratios
that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the regulators to improve capital standards to take account of risks
other than credit risk. On September 1, 1995, the Federal banking agencies
(excluding the Office of Thrift Supervision) issued a final rule to take account
of interest rate risk in calculating risk based capital. The final rule did not
put forth the process for measuring a bank's exposure to interest rate risk. On
June 26, 1996 a joint agency policy statement was issued by all of the Federal
banking agencies except the OTS to provide guidance on sound practices for
managing interest rate risk. The agencies did not in the policy statement elect
to implement a standardized measure and quantitative capital charge, though the
matter was left open for future implementation. Rather, the policy statement
provided standards for the banking agencies to evaluate the adequacy and
effectiveness of a bank's interest rate risk management and guidance to bankers
for managing interest rate risk. Specifically, effective interest rate risk
management requires that there be (i) effective board and senior management
oversight of the bank's interest rate risk activities, (ii) appropriate policies
and practices in place to control and limit risks, (iii) accurate and timely
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identification and measurement of interest rate risk, (iv) an adequate system
for monitoring and reporting risk exposures and (v) appropriate internal
controls for effective risk management.
In determining the capital level SierraWest Bank is required to maintain, the
FDIC does not, in all respects, follow GAAP and has special rules which have the
effect of reducing the amount of capital it will recognize for purposes of
determining the capital adequacy of SierraWest Bank. These rules are called
Regulatory Accounting Principles ("RAP"). SierraWest Bank's qualifying capital,
as calculated under RAP, at December 31, 1996, totaled $31.7 million. This
compares to $37.1 million as calculated under GAAP at the same date. The most
significant factor in the difference between the capital level calculated under
RAP and the capital level calculated under GAAP is the use of cash basis
accounting for RAP in the recognition of the gain on sale of SBA loans.
Effective in 1997 regulatory reports of condition and income will be reported on
a GAAP basis; however regulatory capital ratios will continue to be calculated
in accordance with the regulatory agency's capital standards. This can result in
significant differences in the amount of capital reported under GAAP and the
amount included in the regulatory ratios. Future changes in FDIC regulations or
practices could further reduce the amount of capital recognized for purposes of
capital adequacy. Such changes could affect the ability of the Company to grow
and could restrict the amount of profits, if any, available for the payment of
dividends.
The Company, as a registered bank holding company, is regulated by the Federal
Reserve. In computing the capital level required for bank holding companies, the
Federal Reserve follows GAAP in the computation of the components of the capital
ratios. The following tables present the capital ratios for the Company and
SierraWest Bank, computed in accordance with their applicable regulatory
guidelines, compared to the standards for well- capitalized depository
institutions, as of December 31, 1996 (amounts in thousands except percentage
amounts). Because of the above-referred to differences in accounting principles,
the capital adequacy ratios of the Company as a whole and SierraWest Bank vary
significantly.
<TABLE>
The Company
Actual Well Minimum
Qualifying Capitalized Capital
Capital Ratio Ratio Requirement
<S> <C> <C> <C> <C>
Leverage...................................... $ 33,846 7.9% N/A 4.0%
Tier 1 Risk Based............................. 33,846 9.8 N/A 4.0
Total Risk Based.............................. 46,668 13.6 N/A 8.0
</TABLE>
<TABLE>
SierraWest Bank
Actual Well Minimum
Qualifying Capitalized Capital
Capital Ratio Ratio Requirement
<S> <C> <C> <C> <C>
Leverage...................................... $ 31,670 7.6% 5.0% 4.0%
Tier 1 Risk Based............................. 31,670 9.4 6.0 4.0
Total Risk Based.............................. 35,866 10.7 10.0 8.0
</TABLE>
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each Federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The most recent regulations from the Federal banking agencies defined the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
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"Well capitalized"
Total risk-based capital of at least 10%; Tier 1 risk-based capital of at least
6%; and Leverage ratio of at least 5%.
"Adequately capitalized" Total risk-based capital of at least 8%; Tier 1
risk-based capital of at least 4%; and Leverage ratio of at least 4%.
"Undercapitalized" Total risk-based capital less than 8%; Tier 1 risk-based
capital less than 4%; or Leverage ratio less than 4%. "Significantly
undercapitalized" Total risk-based capital less than 6%; Tier 1 risk-based
capital less than 3%; or Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than
2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "under capitalized" may be treated as
though it were in the next lower capital category if the appropriate Federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The Federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely
monitored by the appropriate Federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate Federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the Federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required Federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, the
use of brokered deposits and the aggregate extensions of credit by a depository
institution to an executive officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee benefits
accounts.
In addition to the statutory limitations, FDICIA requires the Federal banking
agencies to prescribe, by regulation, standards for all insured depository
institutions for such things as classified loans and asset growth. The Riegle
Community Development and Regulatory Improvement Act of 1994 amended FDICIA to
allow the Federal banking regulators to implement these standards by either
regulation or guidelines. See "Recently Enacted Legislation."
In December 1992, the Federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by
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<PAGE>
real estate. The policies must address loan portfolio management, underwriting
standards and loan to value limits that do not exceed the supervisory limits
prescribed by the regulations.
On July 10, 1995 the federal banking agencies published Interagency Guidelines
Establishing Standards for Safety and Soundness. By adopting the standards as
guidelines, the agencies retained the authority to require an institution to
submit to an acceptable compliance plan as well as the flexibility to pursue
other more appropriate or effective courses of action given the specific
circumstances and severity of an institution's noncompliance with one or more
standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
In addition to the restrictions imposed under Federal law, banks chartered under
California law generally may only pay cash dividends to the extent such payments
do not exceed the lesser of retained earnings of the bank or the bank's net
income for its last three fiscal years (less any distributions to shareholders
during such period). In the event a bank desires to pay cash dividends in excess
of such amount, the bank may pay a cash dividend with the prior approval of the
CSBD in an amount not exceeding the greatest of the bank's retained earnings,
the bank's net income for its last fiscal year, or the bank's net income for its
current fiscal year.
State and federal regulators also have authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
Community Reinvestment Act and Fair Lending Developments
SierraWest Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
On March 8, 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of
disparate impact.
In 1996, new compliance and examination guidelines for the CRA were promulgated
by each of the federal banking regulatory agencies, fully replacing the prior
rules and regulatory expectations with new ones ostensibly more performance
based than before to be fully phased in as of July 1, 1997. The guidelines
provide for streamlined examinations of smaller institutions.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. See
Recently Enacted Legislation - 1996 Act. Effective November 14, 1995, the new
assessment rate schedule for deposit premiums ranges from $0 per $100 of
deposits to $.27 per $100 of deposits applicable to BIF members.
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<PAGE>
FDICIA requires all insured depository institutions to undergo a full-scope,
on-site examination by their primary Federal banking agency at least once every
12 months. A special rule allows for examination of certain small well
capitalized and well managed institutions every 18 months. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate Federal banking agency against each institution or
affiliate as it deems necessary or appropriate.
Recently Enacted Legislation
On September 29, 1994, the President signed into law the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"),
which has eliminated many of the current restrictions to interstate banking and
branching. The Interstate Banking Act permits full nationwide interstate banking
to adequately capitalized and adequately managed bank holding companies
beginning September 29, 1995 without regard to whether such transaction is
expressly prohibited under the laws of any state. The Interstate Banking Act's
branching provisions permit full nationwide interstate bank merger transactions
to adequately capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate bank
mergers and to continue to require that out-of-state banks comply with the
states' rules governing entry.
The states that opt out must enact a law after September 29, 1994 and before
June 1, 1997 that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States which
opt out of allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in other states. In
addition, banks located in states that opt out are not permitted to have
interstate branches. States can also "opt in" which means states can permit
interstate branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide that
transactions, which result in the bank holding company or bank controlling or
holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the thirty percent
provision for such state. In addition, a state may impose a cap of less than
thirty percent of the total amount of deposits held by a bank holding company or
bank provided such cap is not discriminatory to out-of-state bank holding
companies or banks.
On September 23, 1994, the President signed into law the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "1994 Act") which covers
a wide range of topics including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act include an
examination schedule that has been eased for the top rated banks and will be
every 18 months for CAMEL 1 banks with less than $250 million in total assets
and CAMEL 2 banks with less than $100 million in total assets (the $100 million
amount was amended to $250 million by the 1996 Act discussed below). The 1994
Act amends the Federal Deposit Insurance Corporation Improvement Act of 1991
with respect to Section 124, the mandate to the federal banking agencies to
issue safety and soundness regulations, including regulations concerning
executive compensation allowing the federal banking regulatory agencies to issue
guidelines instead of regulations.
Further regulatory relief is provided in the 1994 Act, as each of the federal
regulatory banking agencies including the National Credit Union Administration
Board is required to establish an internal regulatory appeals process for
insured depository institutions within 6 months. In addition, the Department of
Justice 30 day waiting period for mergers and acquisitions is reduced by the
1994 Act to 15 days for certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires the Secretary
of the Treasury to allow financial institutions to file such reports
electronically. The 1994 Act also requires the Secretary of the Treasury to
publish written rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual basis.
The procedures for forming a bank holding company have also been simplified. The
formal application process is now a simplified 30 day notice procedure.
On September 28, 1995, Governor Pete Wilson signed Assembly Bill 1482 (known as
the Caldera, Weggeland, and Killea California Interstate Banking and Branching
Act of 1995 and referred to herein as the "CIBBA") which allows
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for early interstate branching in California. Under the federally enacted
Interstate Banking Act, discussed above and in more detail below, individual
states could "opt-out" of the federal law that would allow banks on an
interstate basis to engage in interstate branching by merging out-of-state banks
with host state banks after June 1, 1997. In addition under the Interstate
Banking Act, individual states could also "opt-in" and allow out-of-state banks
to merge with host state banks prior to June 1, 1997. The host state is allowed
under the Interstate Banking Act to impose certain nondiscriminatory conditions
on the resulting depository institution until June 1, 1997.
Section 3824 of the California Financial Code ("Section 3824") as added by CIBBA
provides for the election of California to "opt-in" under the Interstate Banking
Act allowing interstate bank merger transactions prior to July 1, 1997 of an
out-of -state bank with a California bank that has been in existence for at
least five years. The early "opt in" has the reciprocal effect of allowing
California banks to merge with out-of-state banks where the states of such
out-of-state banks have also "opted in" under the Interstate Banking Act. The
five year age limitation is not required when the California bank is in danger
of failing or in certain other emergency situations.
Under the Interstate Banking Act, California may also allow interstate branching
through the acquisition of a branch in California without the acquisition of an
entire California bank. Section 3824 provides an express prohibition against
interstate branching through the acquisition of a branch in California without
the acquisition of the entire California bank. The Interstate Banking Act also
has a provision allowing states to "opt-in" with respect to permitting
interstate branching through the establishment of de novo or new branches by
out-of-state banks. Section 3824 provides that California expressly prohibits
interstate branching through the establishment of de novo branches of
out-of-state banks in California, or in other words, California did not "opt-in"
this aspect of the Interstate Banking Act. CIBBA also amends the California
Financial Code to include agency provisions to allow California banks to
establish affiliated insured depository institution agencies out of state as
allowed under the Interstate Banking Act.
Other provisions of CIBBA amend the intrastate branching laws, govern the use of
shared ATM's, allow the repurchase of stock with the prior written consent of
the Superintendent, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of certain disparities and allowing the California Superintendent of
Banks authority to implement certain changes in California banking law which are
parallel to changes in national banking law such as closer conformance of
California's version of Regulation O to the FRB's version of Regulation O.
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 of approximately 65 basis points per
$100 of deposits of SAIF insured deposits including Oakar deposits payable on
November 30, 1996. For the years 1997 through 1999 the banking industry will
assist in the payment of interest on FICO bonds that were issued to help pay for
the clean up of the savings and loan industry. Banks 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 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.
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Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets to be Disposed Of, which was adopted by the Company January 1, 1996. SFAS
No. 121 established standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill for all entities. It does not apply to
financial instruments, long-term customer relationships of a financial
institution, mortgage or other servicing rights, or deferred tax assets.
Adoption of SFAS No. 121 has not had a significant impact on the financial
condition or operations of the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. This standard defines a fair value
method of accounting for stock options and other equity instruments, such as
stock purchase plans. Under this method, compensation cost is measured based on
the fair value of the stock award when granted and is recognized as an expense
over the service period, which is usually the vesting period. SFAS No. 123
permits companies to continue accounting for equity transactions with employees
under existing accounting rules, requiring disclosure in the notes to the
financial statements of the proforma net income and earnings per share as if the
new method had been applied. This statement was adopted by the Company January
1, 1996. The Company has elected to continue to account for stock based
compensation under the existing accounting rules and include the pro forma
disclosures; accordingly, this statement has not had an impact on the financial
condition or operations of the Company.
The Company is required to adopt SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities, in 1997. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This standard is based
on consistent application of a financial-component approach that focuses on
control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Management has not assessed the
effect that the adoption of SFAS No. 125 will have on the financial condition or
operations of the Company.
Employees
As of March 1, 1997, the Company employed 282 persons (238 full-time and 44
part-time). The Company's employees are not represented by a union or covered by
a collective bargaining agreement and management believes that, in general, its
employee relations are good.
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ITEM 2. PROPERTIES
The Company currently maintains an administrative facility in Truckee,
California which is utilized by Bancorp and SierraWest Bank. During 1996 the
Company completed construction on a regional facility/branch in Reno, Nevada and
a branch in Carson City, Nevada. Additionally, the Company maintains eleven
branches, four stand-alone loan production offices, and one remote off-site ATM
machine. All branches and loan production offices are leased to the Company
except for the administrative facility and the Reno and Caron City branches
which are owned by the Company. The Company believes that it has adequate space
within its current facilities to provide for expansion and growth in the near
future.
ITEM 3. LEGAL PROCEEDINGS
During 1987, SierraWest Bank ("the Bank") took title, through foreclosure, of a
property located in Placer County which subsequent to the Bank's sale of the
property was determined to be contaminated with a form of hydrocarbons. At the
time it owned the property, the Bank became aware of and investigated the status
of certain underground tanks that had existed on the property. The Bank hired a
consultant to study the tanks and properly seal them. Several years later, and
after resale of the property, contamination was observed in the area of at least
one of the buried tanks and along an adjoining riverbank of the Yuba River. The
Bank, at the time of resale of the property, was not aware of this contamination
adjacent to the tanks but was aware of the existence of the tanks and disclosed
this to its purchaser.
A formal plan of remediation has not been approved by the County of Placer or
the State Regional Water Quality Board but is being finalized by an independent
consultant retained for this purpose. As a result of the discovery of the
contamination, two civil lawsuits were instituted against the Bank and other
prior owners by the current owner of the property, Rainbow Holding Company, who
is also the Bank's borrower. One of the actions, the state court matter, was
dismissed by agreement of the parties. The other matter, filed in the summer of
1995 in the U.S. District Court, Eastern District of California, is ongoing,
with a settlement conference anticipated in the next several months.
The Bank's external and internal counsel on this matter believe that the Bank's
share of the cost of remediation and the costs of defense will not be material
to the Bank's or the Company's performance and will be within existing reserves
established by the Bank for this matter. It is also expected that clean-up of
the property will be undertaken during 1997.
In addition, the Company is subject to some minor pending and threatened legal
actions which arise out of the normal course of business and, in the opinion of
Management and the Company's General Counsel, the disposition of these claims
currently pending will not have a material adverse affect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
-27-
<PAGE>
PART II
ITEM 5. MARKET FOR THE BANCORP'S COMMON STOCK
On July 16, 1991 Bancorp's Common Stock commenced quotation on Nasdaq under the
symbol "STBS". Effective with the change in the Bancorp's name during 1996 to
SierraWest Bancorp, this symbol changed to "SWBS". The following table sets
forth the high and low sales prices of the Bancorp's stock as reported on Nasdaq
for the periods indicated.
High Low
1995
First Quarter.............................. 9.25 7.50
Second Quarter............................. 9.50 8.25
Third Quarter.............................. 11.25 8.25
Fourth Quarter............................. 12.00 10.50
1996
First Quarter.............................. 13.13 10.63
Second Quarter............................. 15.38 12.50
Third Quarter.............................. 15.00 12.88
Fourth Quarter............................. 15.75 14.13
1997
First Quarter (through March 1, 1997)...... 19.25 15.38
At March 1, 1997, there were 956 shareholders of record, although management
believes there are approximately 2,200 beneficial holders of its Common Stock.
On February 28, 1997, the closing sales price of Bancorp's common stock on
Nasdaq was $19.00.
Bancorp paid cash dividends of $0.30 per share in 1996 and $0.24 per share in
1995. During 1997, Bancorp's Board of Directors will continue its policy of
reviewing dividend payments on a semi-annual basis. No dividends were paid in
1994, 1993 or 1992 because of temporary restrictions placed on the Company by
the FDIC, Federal Reserve and the Nevada Department of Commerce, Division of
Financial Institutions.
There are regulatory limitations on cash dividends that may be paid by Bancorp,
as well as limitations on cash dividends that may be paid by the Bank, which
could, in turn, limit Bancorp's ability to pay dividends. Under Federal law and
applicable Federal regulations, capital distributions would be prohibited, with
limited exceptions, if a bank were categorized as "undercapitalized." Further,
the FDIC has the authority to prohibit the payment of dividends by SierraWest
Bank if it finds that such payment would constitute an unsafe or unsound
practice. See "Supervision and Regulation--Bank Regulation and Supervision."
Additionally, further restrictions on the payment of dividends are imposed by
covenants under the Company's 8 1/2% convertible subordinated debentures,
including the prohibition of the payment of dividends in the event of default on
payment of principal or interest on the debentures until such default is cured.
-28-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company as of and for each of the five years in the period ended December 31,
1996. The statements of operations data and statements of financial condition
data for each of the five years in the period ended December 31, 1996 are
derived from the consolidated financial statements of the Company and the notes
thereto. The information below is qualified in its entirety by the detailed
information included elsewhere herein and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein. Average assets and equity are computed as the
average of daily balances (dollars in thousands, except per share amounts).
<TABLE>
At or for the Year Ended
December 31,
---------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Total interest income.................................. $ 33,269 $ 25,831 $ 19,657 $ 17,246 $ 16,597
Total interest expense................................. 12,495 8,491 5,597 4,503 6,876
-------- --------- --------- --------- ---------
Net interest income.................................... 20,774 17,340 14,060 12,743 9,721
Provision for possible loan and lease losses........... 1,010 1,270 885 1,560 915
-------- --------- --------- --------- ---------
Net interest income after provision for possible
loan and lease losses................................ 19,764 16,070 13,175 11,183 8,806
Total non-interest income.............................. 7,338 7,969 9,177 10,214 9,406
Total non-interest expense............................. 21,697 20,944 17,486 17,023 15,616
Provision for income taxes............................. 2,077 1,179 1,863 1,670 763
-------- --------- --------- --------- ---------
Net income............................................. $ 3,328 $ 1,916 $ 3,003 $ 2,704 $ 1,833
======== ========= ========= ========= =========
Statements of Financial Condition Data
Total assets........................................... $447,889 $ 337,518 $ 259,975 $ 250,065 $ 243,758
Loans and leases, net(1)............................... 318,820 236,124 169,393 156,347 152,603
Allowance for possible loan and lease losses........... 4,546 3,845 3,546 3,472 2,742
Total deposits......................................... 399,651 293,154 218,876 220,768 211,976
Convertible debentures................................. 8,520 10,000 10,000 250 250
Shareholders' equity................................... 33,916 29,833 28,163 25,645 22,907
Per Share Data(2)
Book value............................................. $ 12.24 $ 11.51 $ 10.75 $ 9.90 $ 8.84
Net income:
Primary.............................................. 1.19 0.72 1.12 1.04 0.73
Fully diluted........................................ 1.01 0.66 0.96 1.02 0.71
Cash dividends declared................................ 0.30 0.24 0 0 0
Shares used to compute net income per share:
Primary.............................................. 2,802 2,678 2,678 2,609 2,503
Fully diluted........................................ 3,747 3,687 3,606 2,657 2,642
Dividend payout ratio:
Primary.............................................. 25.2% 33.3% 0.0% 0.0% 0.0%
Fully diluted........................................ 29.7 36.4 0.0 0.0 0.0
Selected Ratios
Return on average assets............................... 0.9% 0.7% 1.2% 1.2% 0.8%
Return on average shareholders' equity................. 10.5 6.5 11.2 11.1 8.6
Net interest margin(3)................................. 6.2 7.1 6.5 6.7 5.4
Average shareholders' equity to average assets......... 8.3 10.2 10.4 10.4 9.7
</TABLE>
-29-
<PAGE>
<TABLE>
At or for the Year Ended
December 31,
---------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for possible loan and lease losses to total loans 1.4% 1.6% 2.1% 2.2% 1.8%
Allowance for possible loan and lease
losses to nonaccrual loans............................. 84.8 70.2 142.9 120.9 72.5
Net charge-offs to average loans outstanding.............. 0.1 0.5 0.5 0.4 0.5
Nonaccrual and restructured performing loans to total loans 1.7 2.3 1.5 1.9 2.5
Nonperforming assets to total assets...................... 1.3 1.8 1.4 1.6 2.0
Ratio of Earnings to Fixed Charges(4)
Excluding interest paid on deposits..................... 5.0x 3.2x 5.0x 13.1x 8.2x
Including interest paid on deposits..................... 1.4x 1.3x 1.8x 1.9x 1.4x
</TABLE>
(1) The term "Loans and leases, net" means total loans, including loans
held for sale, less the allowance for possible loan and lease losses.
(2) All per share data has been adjusted to reflect stock dividend and
stock splits. See "Market for the Bancorp's Common Stock." Book value
per share is calculated as total shareholders' equity divided by the
number of shares outstanding at the end of the period.
(3) Ratio of net interest income to total average earning assets.
(4) Computed by dividing income before income taxes plus fixed charges by
fixed charges. Fixed charges excluding interest paid on deposits
consist of interest on other borrowings, interest on convertible
debentures and amortization of debt expense. Fixed charges including
interest paid on deposits consist of the foregoing plus interest on
deposits.
-30-
<PAGE>
Selected Quarterly Financial Information
The following table sets forth the Company's unaudited data regarding operations
for each quarter of 1996 and 1995. This information, in the opinion of
management, includes all adjustments (which are of a normal recurring nature)
necessary to state fairly the information therein. The operating results for any
quarter are not necessarily indicative of results for any future period (amounts
in thousands except per share data).
<TABLE>
Quarter
First Second Third Fourth
1996
<S> <C> <C> <C> <C>
Interest income.................................... $ 7,426 $ 7,803 $ 8,714 $ 9,326
Interest expense................................... 2,748 2,889 3,275 3,583
---------- ------------ ----------- -----------
Net interest income................................ 4,678 4,914 5,439 5,743
Provision for possible loan and lease losses....... 510 150 250 100
------------ -------------- ------------- ------------
Net interest income after provision for possible
loan and lease losses............................ 4,168 4,764 5,189 5,643
Total non-interest income.......................... 1,666 1,755 1,825 2,092
Total non-interest expense......................... 4,910 5,920 5,472 5,395
---------- ------------- ------------- -------------
Income before provision for income taxes........... 924 599 1,542 2,340
Provision for income taxes......................... 357 211 602 907
------------ -------------- ------------- ------------
Net income......................................... $ 567 $ 388 $ 940 $ 1,433
========== ============ ============ ============
Primary earnings per share......................... $ 0.21 $ 0.14 $ 0.33 $ 0.50
Fully diluted earnings per share................... 0.18 0.13 0.28 0.41
1995
Interest income.................................... $ 5,601 $ 6,134 $ 6,766 $ 7,330
Interest expense................................... 1,625 1,930 2,286 2,650
-------- --------- --------- ---------
Net interest income................................ 3,976 4,204 4,480 4,680
Provision for possible loan and lease losses....... 270 320 390 290
-------- --------- --------- ---------
Net interest income after provision for possible
loan and lease losses............................ 3,706 3,884 4,090 4,390
Total non-interest income.......................... 2,157 1,924 1,977 1,911
Total non-interest expense......................... 5,034 5,105 5,020 5,785
-------- --------- --------- ---------
Income before provision for income taxes........... 829 703 1,047 516
Provision for income taxes......................... 301 267 424 187
-------- --------- --------- ---------
Net income......................................... $ 528 $ 436 $ 623 $ 329
======== ========= ========= =========
Primary earnings per share......................... $ 0.20 $ 0.16 $ 0.23 $ 0.12
Fully diluted earnings per share................... 0.18 0.15 0.20 0.12
</TABLE>
-31-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations For the Years Ended December 31, 1996, 1995 and 1994
The Company derives or has derived income from three principal areas of
business: (1) net interest income, which is the difference between the interest
income the Company receives on interest-bearing loans and investments and the
interest expense it pays on interest-bearing liabilities such as deposits and
borrowings; (2) the origination and sale of SBA loans; and (3) servicing fee
income which results from the ongoing servicing of loans sold by the Company and
other loans pursuant to purchased servicing rights.
Net income for the year ended December 31, 1996 increased 73.7%, from $1.9
million during 1995 to $3.3 million during 1996. This increase resulted from a
19.8% increase in net interest income. Partially offsetting the increase in net
interest income was a decline of 7.9% in non-interest income and an increase of
3.6% in non-interest expenses.
The following table summarizes the operating results for the years ended
December 31, 1996, 1995, and 1994 (amounts in thousands except percentage
amounts):
<TABLE>
December 31, 1996 over 1995 1995 over 1994
------------------------------------ ---------------------- ------------------
1996 1995 1994 Amount Percentage(1) Amount Percentage(1)
---- ---- ---- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income......... $ 33,269 $ 25,831 $19,657 $ 7,438 28.8% $ 6,174 31.4%
Total interest expense........ 12,495 8,491 5,597 4,004 47.2 2,894 51.7
------- ------- ------- ------- -------
Net interest income........... 20,774 17,340 14,060 3,434 19.8 3,280 23.3
Provision for possible
loan and lease losses....... 1,010 1,270 885 (260) (20.5) 385 43.5
------- ------- ------- --------- -------
Net interest income after
provision for possible
loan and lease losses. . 19,764 16,070 13,175 3,694 23.0 2,895 22.0
Total non-interest income..... 7,338 7,969 9,177 (631) ( 7.9) (1,208) (13.2)
Total non-interest expense.... 21,697 20,944 17,486 753 3.6 3,458 19.8
------- ------- ------- ------- -------
Income before provision for taxes 5,405 3,095 4,866 2,310 74.6 (1,771) (36.4)
Provision for income taxes . . 2,077 1,179 1,863 898 76.2 (684) (36.7)
----- ------- ------- ------- --------
Net Income $ 3,328 $ 1,916 $ 3,003 $ 1,412 73.7 $(1,087) (36.2)
======= ======= ======= ======== ========
</TABLE>
(1) Increase (decrease) over previous year's amount.
Net Interest Income. Net interest income is influenced by a number of factors
such as the volume and distribu tion of interest earning assets, the rate
charged on loans for interest and fees, the rate earned on investments and
federal funds sold and the rate paid for deposits and other liabilities.
-32-
<PAGE>
The following table sets forth (in thousands), for the periods indicated, a
summary of the changes in interest income and interest expense resulting from
changes in volume and from changes in rates. Income from tax-exempt securities
has not been presented on a tax-equivalent basis as it is not significant. For
purposes of this table, the change not solely attributable to volume or rate has
been allocated to change due to rate.
<TABLE>
1996 over 1995 1995 over 1994
---------------------------------- -----------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income:
Loans....................................... $ 9,429 $ (2,505) $ 6,924 $ 3,853 $ 2,343 $ 6,196
Mutual funds................................ (23) (10) (33) (139) 43 (96)
Taxable securities.......................... (57) 99 42 (231) 163 (68)
Tax-exempt securities....................... 139 30 169 16 (4) 12
Federal funds sold.......................... 422 (78) 344 (54) 170 116
Other deposits.............................. 7 (15) (8) 6 8 14
-------- --------- --------- -------- -------- ---------
Total....................................... 9,917 (2,479) 7,438 3,451 2,723 6,174
-------- --------- -------- -------- -------- ---------
Increase (Decrease) in Interest Expense:
Deposits:
Savings deposits.......................... 3 (6) (3) (28) (3) (31)
Transaction accounts...................... 350 275 625 (137) 238 101
Time deposits............................. 3,747 (267) 3,480 1,255 1,538 2,793
-------- --------- -------- -------- -------- ---------
Total....................................... 4,100 2 4,102 1,090 1,773 2,863
-------- -------- -------- -------- -------- ---------
Other borrowings............................ (2) (10) (12) 5 (41) (36)
Convertible debentures...................... (60) (26) (86) 72 (5) 67
--------- --------- --------- -------- --------- ---------
Total....................................... 4,038 (34) 4,004 1,167 1,727 2,894
-------- --------- -------- -------- -------- ---------
Increase in
net interest income....................... $ 5,879 $ (2,445) $ 3,434 $ 2,284 $ 996 $ 3,280
======== ========= ======== ======== ======== =========
</TABLE>
As disclosed in the foregoing table, the Company's net interest income in 1996
and 1995 increased over preceding years. In both 1996 and 1995 volume increases
were related to an increase in the asset size of the Company. During 1996 and
1995, total daily average assets increased by 33.3% and 11.1%, respectively.
During these same periods, the volume component of the increase in net interest
income was 33.9% and 16.3%, respectively.
During 1995 and 1996, the rate of increase in the volume component of the
increase in net interest income exceeded the increase in average daily assets,
primarily as a result of an increase in the percentage of average interest
earning assets to average total assets from 83.7% in 1994 to 85.3% during 1995
and 87.7% in 1996. This increase in average interest earning assets was
partially offset by a decrease in average non-interest-bearing deposits as a
percentage of average total deposits from 22.0% in 1994 to 21.0% in 1995 and
19.0% during 1996.
During 1994 and in 1995 and 1996, the Company found itself in the position of
funding much of its growth through the use of interest-bearing deposits. The
Company charges interest rates and fees in accordance with general economic
conditions, capital and liquidity constraints, and desired net interest margin
levels.
Approximately 79% of the Company's loan portfolio consists of variable rate
loans tied to the prime rate for leading west coast U.S. banks. The prime
interest rate is influenced by forces outside the Company's control. Because the
Company has less variable rate deposits than variable rate loans, the Company
would expect to incur a reduction in its net interest margin when interest rates
fall, and when interest rates rise, the reverse would be expected to apply.
-33-
<PAGE>
During the first quarter of 1996 the Company moved to mitigate the effect of the
change in the prime rate on its net interest income by entering into a three
year $20 million notional amount interest rate swap agreement with a major bank.
Under this agreement the other bank pays a fixed rate of 8.17% and receives from
the Company the prime rate. If prime increases by 1%, the Company would pay the
other bank $216 thousand on an annual basis. Conversely, if prime decreases by
1%, the other bank would pay the Company $184 thousand on an annual basis. At
the current prime rate of 8.25%, the Company will pay the other bank $16
thousand annually. Any payments made or received by the Company under the terms
of the agreement are more than offset by the corresponding increase or decrease
in interest on its variable rate loans. This transaction has a similar effect to
that of converting approximately 7% of the Company's variable rate loans to a
fixed rate.
The average prime rate for leading banks and as used by the Company ("prime
rate") for 1996 was 8.27% compared to 8.83% in 1995. This decrease equates to a
negative price variance in 1996 of $1.3 million compared to an actual negative
price variance of $2.5 million. The difference includes a decrease in the
contribution of loan fees. As a percentage of average loans, loan fees
represented 0.42% in 1996, 0.55% in 1995 and 0.78% in 1994. In addition to the
decrease in prime and the decline in loan fees as a percentage of average loans,
during 1996 the Company has experienced increased competition in the pricing of
its loans.
In 1995, the average prime rate was 8.83% compared to 7.13% for 1994. This 1995
increase equated to a positive price variance in 1995 of $2.9 million compared
to an actual positive price variance of $2.3 million. The difference is
primarily related to a decrease in the contribution of loan fees.
The positive volume variance in federal funds sold during 1996 resulted from the
Company's increase in liquid assets as its overall size increased. During 1995
and continuing into 1996 the positive spread between short-term U.S. Government
securities and federal funds sold narrowed from 1994 levels and the Company
therefore increased its reliance on federal funds sold for short-term investment
purposes. In addition, a higher level of federal funds sold was desired given
the increase in loan funding levels.
The 1996 and 1995 rate variances in federal funds sold are primarily attributed
to the interest rate changes during these periods. The negative volume variance
in 1995 includes the effect of the Company's lowering its average investment in
these funds while increasing its holdings of the guaranteed portion of SBA
loans.
The Company has kept its investment portfolio relatively short-term in recent
years, with the goal of focusing its attention on short-term liquidity needs.
During 1995 and 1996 the Company increased its holding of guaranteed portions of
SBA loans. These loans, which can be sold in relatively short periods of time,
provide an available source of additional liquidity. During 1996 the Company has
decreased its reliance on short-term U.S. securities in funding its liquidity
needs while increasing its holdings of longer term tax-exempt securities. These
tax-exempt securities provide an attractive investment alternative given the
current interest rate environment and the increase in the average maturity of
the investment portfolio is consistent with the additional sources of short-term
liquidity.
The positive rate variance during 1996 in taxable investment securities and
tax-exempt securities is primarily related to an increase in the average
maturity of these portfolios, from a weighted average of 2.2 years in 1995 to
4.0 years in 1996, excluding mortgage-backed securities.
Mutual funds consist of investments in mutual funds whose assets are invested
primarily in U.S. government securities. Mutual funds held during 1995 and 1996
related to a non money market mutual fund held principally for investment
purposes. The price variances for both 1995 and 1996 reflect the general changes
in interest rates during these periods and additionally during 1995 includes the
effect of the discontinuance of the use of money market mutual funds in the
Company's investment portfolio.
Other assets consist primarily of the cash surrender value of officers' life
insurance policies. Interest earned on these policies is reduced by insurance
costs incurred including, at the start of the second and third years for each
policy, a surrender charge. The modest volume increases in both 1996 and 1995 is
due to retention of accrued interest in the policies. Because the Company is now
funding new employee participation with traditional pay as you go life insurance
versus single premium life insurance, the volume increases in this asset will
for the future be limited to retained income for existing single premium
policies. The rate variances in 1995 and 1996 are associated with market rate
conditions.
-34-
<PAGE>
The average balance and average rate paid on interest bearing transaction
accounts during 1996 and 1995 are as follows:
<TABLE>
Year Ended December 31,
1996 1995
---------------------------------- -------------
Money Money
NOW Market NOW Market
<S> <C> <C> <C> <C>
Average Balance.................. $ 43,660 $59,303 $36,995 $50,606
Rate paid........................ 1.23% 3.51% 1.26% 3.02%
</TABLE>
The rates paid on the Company's deposits are primarily driven by market
conditions in its service areas. During 1995 the Company incurred an increase in
the average rate paid on its time deposits, from 4.17% in 1994 to 5.85% in 1995.
The average rate paid on interest bearing transaction accounts increased as
well, however at a slower rate.
In 1996 the average rate paid on time deposits declined to 5.68%, but the rate
paid on money market accounts increased. The increase in money market rates
includes the effect of tiering money market accounts at the Company's Nevada
operations and general market conditions in the Company's service area.
Average interest bearing transaction accounts increased by $15.4 million in
1996. During 1995 the Company added four new branches located in Carson City,
Nevada, and in Sacramento, South Grass Valley and Auburn, California. Average
interest bearing transaction accounts increased in 1996 by $14.9 million at
these branches.
The Company has relied on time deposits to fund most of its growth during 1995
and 1996. Average time deposits increased by $64.1 million during 1996. Of this
increase, $23.0 million was generated at the four new branches and average
out-of-area CD's increased by $8.6 million. In addition, average time deposits
held by public agencies increased by $8.3 million. Out-of-area CD's totaled
$45.8 million at December 31, 1996 or 11.5% of total deposits at that same date.
During the 1995 period the Company's average time deposits increased by $30.1
million or 49.0% while its average Money Market accounts decreased by $11.3
million or 18.3%. The Company attributes the decrease in Money Market accounts
both to a movement into higher interest rate time deposits and a movement into
non-bank money market accounts.
The increase in average time deposits during 1995 included both an increase in
out-of-area CD's as well as retail CD's generated through the Company's branch
network. Out-of-area CD's at December 31, 1995 totaled $34.8 million or 11.9% of
total deposits at this same date. This represents an increase of $17.1 million
over the December 31, 1994 balance. Total CD's increased by $70.7 million
between December 31, 1994 and December 31, 1995 while average CD's increased by
$30.1 million during this same time period of which $6.5 million represents
out-of-area time deposits.
The rate variances in time deposits for 1995 and 1996 primarily relate to market
conditions.
Other borrowings consist primarily of federal funds purchased from other banks
and a $300 thousand capital lease related to the Company's Gateway branch. The
negative rate variance experienced during 1995 and 1996 includes the effect of
capitalizing interest expense on the construction of branch facilities in Reno
and Carson City, Nevada.
The volume variance in convertible debentures in 1995 relates to the issuance of
the Bancorp's 8 1/2% optional convertible debentures. The negative rate and
volume variances during 1996 in convertible debentures relate to the conversion
into common stock of debentures having a principal balance of $1.48 million.
When presented for conversion any accrued but unpaid interest on debentures is
forfeited by the debenture holder.
Provision for Possible Loan and Lease Losses. At December 31, 1996,
approximately 73% of the Company's loan portfolio was held in loans
collateralized primarily by real estate. Particular attention is given by the
Company to factors affecting the real estate markets. The primary risk elements
considered by management with respect to commercial real estate loans are
changes in real estate values in the Company's market area and
-35-
<PAGE>
general economic conditions. The primary risks associated with other commercial
loans are the financial condition of the borrower, general economic conditions
in the Company's market area, the sufficiency of collateral, the timeliness of
payment, and interest rate fluctuations. The primary risk elements considered by
management with respect to other loans are the lack of timely payment and the
value of collateral. The Company has a reporting system that monitors past due
loans and management has adopted policies to preserve the Company's position as
a creditor.
The Company maintains its allowance for possible loan and lease losses to
provide for potential losses in its loan and lease portfolio. The allowance is
established through charges to earnings in the form of provision for possible
loan and lease losses. Loan losses are charged to, and recoveries are credited
to, the allowance for possible loan and lease losses. The provision for possible
loan and lease losses is determined after considering various factors such as
loan loss experience, current economic conditions, maturity of the loan
portfolio, size of the loan portfolio, industry concentrations, borrower credit
history, the existing allowance for possible loan and lease losses, independent
loan reviews, current charges and recoveries and the overall quality of the
portfolio, as determined by management, regulatory agencies and independent
credit review consultants retained by the Company.
In evaluating the Company's loan loss reserve, management considers the credit
risk in the various categories in its portfolio. Historically, most of the
Company's loan losses have been in its commercial lending portfolio which
includes SBA loans and local commercial loans. From inception of its SBA lending
program in 1983, the Company has sustained a relatively low level of losses from
these loans, averaging less than 0.5% of loans outstanding per year.
Most of the Company's non-SBA commercial loan losses have been for loans to
businesses within the Tahoe basin area and during 1994 and 1995 at the Company's
Reno, Nevada branch. The Company believes that it has taken steps to minimize
its commercial loan losses, including centralization of lending approval and
processing functions. It is important for the Company to maintain good relations
with local business concerns and, to this end, it supports small local
businesses with commercial loans. To offset the added risk these loans may
represent, the Company typically charges a higher interest rate. It also
attempts to mitigate this risk through the loan review and approval process.
The provision for loan and lease losses for the year ended December 31, 1996 was
$1.0 million and net loan losses were $309 thousand. The provision in 1996 is
primarily attributable to growth in the loan portfolio. Excluding the guaranteed
portion of loans, loans increased $76 million and $49 million during 1996 and
1995, respectively. The end of period allowance for possible loan and lease
losses was $4.55 million or 1.41% of loans and leases at December 31, 1996.
During 1995 the provision for possible loan and lease losses was $1.3 million
and net loan losses were $971 thousand. The allowance for possible loan and
lease losses at December 31, 1995 totaled $3.85 million, which represented 1.60%
of loans and leases outstanding. Excluding loans and portions of loans
guaranteed by the federal government, the allowance for possible loan and lease
losses to total loans and leases was 1.59% at December 31, 1996 and 1.83% at
December 31, 1995.
The following table sets forth the ratio of the allowance for possible loan and
lease losses to nonperforming loans, the ratio of the allowance for possible
loan and lease losses to total loans and leases and the ratio of nonperforming
loans to total loans and leases as of the dates indicated.
<TABLE>
Year Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Allowance for possible loan and lease losses to nonperforming loans............. 84.8% 70.2% 142.9%
Allowance for possible loan and lease losses to total loans and leases.......... 1.4% 1.6% 2.1%
Nonperforming loans to total loans and leases................................... 1.7% 2.3% 1.4%
</TABLE>
The balance of nonperforming loans at December 31, 1995 includes $564 thousand
in loans which were classified as in-substance foreclosures at December 31,
1994. Non-performing loans at December 31, 1996 and 1995 include loans and
portions of loans guaranteed by the federal government totaling $2.2 million
and $1.9 million, respectively. There were no non-performing loans guaranteed
by the federal government at December 31, 1994. Excluding the guaranteed loans
the allowance for possible loan and lease losses to nonperforming loans
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<PAGE>
increases to 141.8% at December 31, 1996 and 107.1% at December 31, 1995.
Additionally, nonperforming loans to total loans and leases drops to 1.0% at
December 31, 1996 and 1.5% at December 31, 1995.
Management considers the allowance of $4.55 million at December 31, 1996, to be
adequate as a reserve against foreseeable losses at that time.
Total Non-Interest Income. Total non-interest income for the year ended December
31, 1996 decreased by 7.9% from the 1995 level. For 1995 non-interest income
decreased by 13.2% as compared to 1994.
The following table summarizes the principal elements of total non-interest
income and discloses the increases (decreases) and percent of increases
(decreases) for 1996 and 1995 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
Year Ended December 31, 1996 over 1995 1995 over 1994
1996 1995 1994 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Service charges $ 1,722 $1,755 $1,517 $ (33) (1.9)% $ 238 15.7%
Securities (losses)/gains...... (8) (62) (4) 54 87.1 (58) (1,450.0)
Net gain on sale of loans...... 373 307 2,300 66 21.5 (1,993) (86.7)
Net loan servicing income...... 4,087 4,667 4,474 (580) (12.4) 193 4.3
Other income................... 1,164 1,302 890 (138) (10.6) 412 46.3
------- ------ ------ ------ -------
$ 7,338 $7,969 $9,177 $ (631) (7.9) $(1,208) (13.2)
======= ====== ====== ====== ========
</TABLE>
Service charges on deposit accounts increased by 15.7% in 1995 over 1994 levels
and declined 1.9% in 1996 as compared to 1995 levels. The increase in 1995
includes the effect of an increase in average non-interest-bearing demand
accounts and an increase in overdraft charges generated from the Company's
Nevada operations.
The securities loss of $62 thousand incurred in 1995 included a loss of $46
thousand generated on the sale of $500 thousand in mutual funds. The Company
currently maintains in its investment portfolio mutual funds with a market value
of $1.34 million at December 31, 1996 and an original cost of $1.5 million at
this same date. The net gain on the sale of loans includes net gains on sale of
SBA loans of $339 thousand, $307 thousand and $2.3 million in 1996, 1995 and
1994, respectively.
Sales of SBA 7(a) loans in 1996, 1995, and 1994 were $5.6 million, $5.6 million,
and $38.2 million, respectively. In 1995 the Company altered its strategy with
respect to the sale of SBA 7(a) loans. Rather than continuing to sell the
guaranteed portion of the portfolio the Company began to retain the guaranteed
portion and plans to securitize and sell portions of unguaranteed SBA loans. The
Company estimates that the decline in sales between 1994 and 1995 would have
been reduced by up to $15.4 million if it had continued to sell the guaranteed
portion of loans available for sale in 1995, resulting in an estimated decline
in sales of approximately $17.2 million. This decline includes the effect of
temporary restrictions in the SBA program which were in place during most of
1995. These temporary restrictions reduced the maximum loan that could be made
under the SBA 7(a) program and in most cases eliminated guarantees for
refinanced debt. At December 31, 1996 the Company had $29.1 million of
guaranteed portions of SBA loans, which it could sell, an increase of $13.7
million over the $15.4 million held at December 31, 1995. SBA loan sales during
1996 primarily relate to loans to the hotel/motel industry. By selling these
guaranteed portions the Company is able to take advantage of new lending
opportunities in this industry while maintaining an acceptable level of loans to
this industry in its portfolio. The decline in SBA loan production in 1996 as
compared to 1994 and earlier years includes the effect of increased competition
in the SBA market place, a temporary shortage of qualified SBA underwriters and
a reduction in the dollar volume of loans referred by SBA loan packagers.
To support its SBA program the Company has, since 1983, relied in part on third
party SBA loan packagers. In 1996, approximately 32% of the Company's SBA loans
were generated by SBA packagers. This compares to 27% during 1995. The packagers
refer proposed SBA loans to the Company and provide certain services to the
borrowers. The packagers receive fees of a fixed amount from the borrowers, not
exceeding limits prescribed by the SBA, for preparing the SBA loan application
for the borrower. They also receive a fee from the Company for referring the
loans. These referral fee payments are included in the basis of loans and hence
are not disclosed separately in the Company's financial statements. Referral
fees for 1996, 1995, and 1994 totaled $90
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<PAGE>
thousand, $200 thousand, and $481 thousand, respectively. The reduction in
packagers volume in 1995 and 1996 includes the loss of loan packages to
competition based on price and underwriting factors and the focus by the Company
on its loan production offices as its primary source for generating new loans.
To mitigate the effect of the changes in the SBA program, the Company has begun
expanding its ability to generate an increased volume of SBA loans through the
establishment of new loan production offices in Las Vegas in December 1993, in
Buena Park in Southern California in February 1995 and in Fresno in December
1995, and the addition of personnel at other offices. During 1997 the Company
expects to open a new loan production office in Denver, Colorado.
The Company experienced disappointing results at its Buena Park facility and
closed it during 1996. In lieu of providing a full office, the Company
contracted with an established loan broker to provide SBA loan referrals from
the Southern California market. The contract gives the Company an exclusive
right of first refusal on all 7(a) loans referred by this broker. To date, loans
referred through this source have not been significant.
In addition, the Company has increased its efforts to diversify its lending
activities and during 1995 and 1996 has experienced significant gains in its
construction, real estate and non-SBA commercial loan portfolios.
Net loan servicing income decreased by 12.4% in 1996 as compared to 1995. This
compares to an increase of 4.3% in 1995 over 1994. Net loan servicing income
primarily consists of net servicing income on SBA loans. For the years ended
December 31, 1996, 1995 and 1994, net servicing income on SBA loans totaled $4.1
million, $4.7 million and $4.5 million, respectively. Servicing income on SBA
loans is reported net of the amortization of the Excess Servicing recorded on
the sale of the same loans and the amortization of purchased servicing.
Amortization is based on the expected average life of the related loans. To
date, actual prepayment experience reflects an average life in excess of the
estimated life.
The increase in net servicing income on SBA loans in 1995 is primarily
attributable to a change made by the Company during the third quarter of 1994
related to its estimates of the prepayment speeds of the SBA loans it services.
The effect of this change was to decrease amortization expense by approximately
$400 thousand in 1994 and $800 thousand in 1995. Servicing income exclusive of
amortization, has declined from $6.4 million in 1994 to $6.2 million in 1995 and
$5.6 million during 1996. These declines relate to payments on existing loans
including normal amortization and prepayments. During 1996 the Company
experienced an increase in prepayments associated with refinancing by other
banks.
Other income consists primarily of merchant credit card fees and gains during
1995 and 1994 on sale of the right to service mortgage loans. In 1996 the
Company increased its staffing and emphasis on sale of mutual funds and
annuities through a third party marketer generating revenue of $333 thousand
from this source, an increase of $240 thousand from the $93 thousand generated
from these sales during 1995.
Merchant credit card revenue totaled $473 thousand in 1996, $442 thousand in
1995 and $410 thousand in 1994.
Gain on sales of servicing rights on mortgage loans totaled $190 thousand in
1995 and $223 thousand in 1994. During 1994 and into 1995 the Company
experienced a reduction in demand and a decline in profit margins in its
mortgage banking operations. During 1995, as a result of the decline in
profitability of this operation and to focus on the Company's most strategically
important activities, the Company closed its mortgage banking operations. As a
result of a termination of its mortgage banking operations, the Company did not
generate gains from the sale of mortgage servicing rights in 1996.
Other significant sources of Other income during 1996 include rental income of
$129 thousand and an $84 thousand insurance recovery on a 1995 foreclosure loss.
During 1995 the Company recorded income of $242 thousand related to its mortgage
banking operations and $83 thousand in rental income. Additionally, during
December 1995, the Company sold $5.3 million in commercial real estate loans
from the portfolio and recorded a gain of $176 thousand on this sale.
Non-Interest Expense. The ratio of the Company's non-interest expenses to total
assets is higher than for California banks in general because SierraWest Bank
experiences higher operating expenses in its Lake Tahoe area of operation and
employs additional personnel and utilizes additional facilities to manage its
SBA loan program. Because of the extreme climatic conditions in the Lake Tahoe
area of operations (temperatures range
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<PAGE>
from -35 degrees to +100 degrees and average snow levels exceed 150 inches per
year), local building codes require more expensive construction and the Company
experiences added costs of heating and snow removal which increase occupancy
costs. Additionally, the Company's supplies are generally more expensive than in
larger metropolitan regions because of the added cost of freight.
The following table computes the ratio of major non-interest expense categories
to total average assets (in thousands except for percentage amounts):
<TABLE>
Salaries Occupancy
and and Other
Year Ended Average Related Equipment Non-Interest
December 31, Assets Benefits(1) Expenses Expenses
<S> <C> <C> <C> <C> <C>
1996 $381,620 3.1% 0.9% 1.6%
1995 286,194 3.7 1.2 2.4
1994 257,609 3.7 1.1 1.7
</TABLE>
(1) Excludes bonuses. Including bonuses, percentages would be 3.2%, 3.7% and
3.9% for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table summarizes the principal elements of non-interest expenses
and discloses the increases (decreases) and percent of increases (decreases) for
1996 and 1995 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
Year Ended December 31, 1996 over 1995 1995 over 1994
1996 1995 1994 Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and related benefits $11,884 $10,564 $ 9,537 $ 1,320 12.5% $ 1,027 10.8%
Bonuses...................... 202 63 544 139 220.6 (481) (88.4)
Occupancy and equipment...... 3,486 3,401 2,960 85 2.5 441 14.9
Insurance.................... 242 277 286 (35) (12.6) (9) (3.1)
Postage...................... 337 304 249 33 10.9 55 22.1
Stationery and supplies...... 416 334 252 82 24.6 82 32.5
Telephone.................... 374 350 262 24 6.9 88 33.6
Advertising.................. 600 715 298 (115) (16.1) 417 139.9
Legal fees................... 484 470 149 14 3.0 321 215.4
Consulting fees.............. 506 263 128 243 92.4 135 105.5
Audit and accounting fees.... 151 150 131 1 0.7 19 14.5
Directors' fees and expenses. 429 909 349 (480) (52.8) 560 160.5
FDIC assessments............. 4 284 575 (280) (98.6) (291) (50.6)
Other........................ 2,582 2,860 1,766 (278) (9.7) 1,094 61.9
------- ------- ------- -------- -------
$21,697 $20,944 $17,486 $ 753 3.6 $ 3,458 19.8
======= ======= ======= ======= =======
</TABLE>
The increase in salary expense includes the effect of the four new branches
opened in 1995, partially offset by the termination of the Company's mortgage
operations. In addition in 1996, the Company has increased the number of
employees whose compensation is partially commission based and has changed the
commission structure of many of its loan production personnel. In total,
commissions and incentive pay have, exclusive of mortgage banking operations,
increased by $883 thousand during 1996 as compared to 1995, including a $438
thousand increase in commissions paid for the generation of SBA and other
government guaranteed loans. This increase includes the changes described above
as well as an increase in volume of loan originations.
During 1996, the Company maintained four bonus plans. The first plan pays
bonuses to full time noncommissioned employees below the rank of Senior Vice
President. A total of $93 thousand was paid under this plan during 1996. A
second plan provides optional bonuses to employees below the rank of Assistant
Vice President for accomplishments that are beyond the general expectation of
their supervisor. Payments totaled $37 thousand under this plan in 1996. A third
plan is reserved for the Audit and Legal departments of the
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<PAGE>
Company whose bonus is determined by the Company's Audit and Personnel
Committees. A total of $37 thousand is included in bonus expense at December 31,
1996 for this plan. The fourth plan covers Senior management of the Company and
is payable upon achieving certain predefined goals. No incentive bonuses were
earned in 1996 under this plan. Additionally, the Company's CEO may make
recommendations to the Personnel Committee outside of the plans for bonus
payments to Senior Management employees. Included in the 1996 bonus expense is
$35 thousand related to these recommendations.
The bonus expense in 1995 relates to the Legal and Audit departments. In
addition, during 1995 the Company had an incentive plan in place covering all
non-commissioned employees; however, no bonuses were earned under this plan. A
total of $544 thousand was earned under bonus plans in place during 1994.
The Company maintains a financial institutions bond for its operations and
directors and officers insurance. The decrease in overall insurance costs from
1994 levels resulted from a softening of the insurance market for financial
institutions and a change in insurance carriers. The increase in postage
includes both an increase in the size of the Company and an increase in rates
effective January, 1995. Stationery and supplies costs increased in excess of
the increase in average assets during 1995 primarily related to $45 thousand
incurred for the start up and 1995 operations of the four new branches. This
cost remained high in 1996 because of costs associated with printing forms and
supplies following the change in the Company's name. Telephone costs during 1995
and 1996 included the costs of an expanded branch system and an upgrade and
expansion of the Company's data communication telephone lines. Advertising in
1995 includes an expanded budget and costs related to the new branches.
The increase in legal expense during 1996 relates primarily to two litigation
matters. One matter went to trial in June 1996 and was decided in the Company's
favor. Increased costs were incurred in the second matter, which is ongoing and
relates to a property acquired by the Company through foreclosure and
subsequently sold. See Item 3. "Legal Proceedings" for a description of this
matter. The increase in legal expenses during 1995 relates to general litigation
matters and a voluntary internal investigation of the Company's investment in an
entity known as Community Assets Management. The change in consulting costs
during 1995 is primarily related to a corporate identity study, a review of
directors' compensation and assistance in strategic planning. The increase in
consulting during 1996 primarily relates to costs associated with the changing
of the name of the Company's subsidiary. Other significant components of
consulting expenses during 1996 include payments made for outside credit reviews
of the Company's loan portfolio and $90 thousand paid to an SBA loan broker who
provides referrals from the southern California marketplace.
The decrease in FDIC assessments is related to a reduction in rates. Effective
June 1, 1995, the FDIC revised its rate schedule reducing rates to reflect the
fact that the Bank Insurance Fund was fully recapitalized at the end of May
1995.
Included in other expense in 1996 are $352 thousand related to a reduction in
staffing effective May 1, 1996, $70 thousand on a litigation matter and $114
thousand related to a servicing error on an SBA loan. Other expense in 1995
includes a $100 thousand business loss related to other real estate owned, $232
thousand related to two litigation matters, $243 thousand related to the
termination of the Company's mortgage operations, and a pretax charge of $530
thousand during the fourth quarter related to the closing of the Company's
branch located in the Crescent V Shopping Center in South Lake Tahoe,
California. The customer accounts formerly maintained in this branch were
transferred to the Company's Bijou branch which is located approximately one
mile away.
Provision for Income Taxes. The provision for income taxes was $2.08 million,
$1.18 million and $1.86 million for the years ended December 31, 1996, 1995 and
1994, respectively, representing 38.4%, 38.1% and 38.3%, of income before
taxation for the respective years.
Included in the Company's earnings are items which are exempt from federal and,
in some cases, state income taxes. These items include interest on certain loans
and securities of state and county municipalities and the increase in the cash
surrender value of life insurance policies on certain officers and directors.
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<PAGE>
Liquidity
Liquidity refers to the Company's ability to maintain adequate cash flows to
fund operations and meet obligations and other commitments on a timely basis.
The Company's liquidity management policies are structured so as to maximize the
probability of funds being available to meet present and future financial
obligations and to take advantage of business opportunities. Financial
obligations arise from withdrawals of deposits, repayment on maturity of
purchased funds, extensions of loans or other forms of credit, purchase of
loans, payment of interest on deposits and borrowings, payment of operating
expenses, and capital expenditures.
The Company has various sources of liquidity. Increases in liquidity result from
the maturity or sale of assets. Other than cash itself, short-term investments
like federal funds sold are the most liquid assets. Also, investment securities
available for sale can be sold prior to maturity as part of prudent
asset/liability management in response to changes in interest rates and/or
prepayment risk as well as to meet liquidity needs. Additionally, liquidity is
provided by loan repayments and by selling loans in the normal course of
business. At December 31, 1996, the Company had $29.1 million in guaranteed
portions of SBA loans available for sale, most of which could be sold within a
short period of time compared to $15.4 million of SBA loans available for sale
at December 31, 1995. In management's view, these loans represent an available
source of liquidity. Deposits such as demand deposits, savings deposits and
retail time deposits also provide a source of liquidity. They tend to be stable
sources of funds except that they are subject to seasonal fluctuations. The
Company maintains an adequate level of cash and quasi-cash items to meet its
day-to-day needs and in addition, at December 31, 1996, the Company had
unsecured lines of credit totaling $6 million with its correspondent banks.
During 1995 the Company changed its strategy from the selling of the guaranteed
portion of SBA loans to retaining these portions of loans in its portfolio.
Additionally the Company announced that it intends to securitize and sell the
unguaranteed portion of SBA loans. The Company expects to complete the first
such securitization during 1997 and expects to include up to $50 million of the
unguaranteed portion of SBA loans in this securitization.
Cash and due from banks and federal funds sold as a percentage of total deposits
were 14.7% at December 31, 1996 as compared to 13.4% at December 31, 1995. Cash
and due from banks totaled $26.4 million at December 31, 1996 as compared to
$18.7 million at December 31, 1995, and federal funds sold totaled $32.2 million
at December 31, 1996 as compared to $20.5 million at December 31, 1995. Federal
funds sold represent deposits with major banks and are predominantly uninsured.
The uninsured portion of these deposits together with the uninsured portion of
cash deposited with other institutions totaled $32.6 million as of December 31,
1996. In the event of a failure of any of these institutions, the Company could
lose all or part of its deposits. To mitigate this risk, the Company
periodically examines the financial statements of these institutions and limits
the amount it deposits with any single institution.
The federal funds levels at December 31, 1996 is higher than the Company
currently considers necessary for day-to-day liquidity needs. Consistent with
the Company's on-going asset/liability management policies the Company will look
to invest excess federal fund holdings in appropriate alternative
interest-earning assets.
Total gross loans and leases, exclusive of unearned income on leases and
deferred loan fees/costs, increased by $84.3 million from $240.8 million at
December 31, 1995 to $325.1 million at December 31, 1996. The increase included
$29.7 million in SBA loans, $15.1 million in other commercial loans, $28.5
million in real estate mortgage, $4.9 million in real estate-construction, $5.8
million in leases and $0.3 million in individual and other loans. The increase
in SBA loans relates primarily to the Company's decision to retain the
guaranteed portion of SBA loans and additionally to an increase in lending
directed towards the SBA's 504 program. The increase in other loans reflects the
Company's efforts to expand and diversify its non-SBA lending activities. The
increase in real estate - mortgage loans primarily relates to Sacramento and
Reno operations. The $84.3 million increase in the loan portfolio since December
31, 1995 was primarily funded with increased time deposits and an increase in
other deposits acquired at the Company's four branches opened in 1995.
Deposits increased by $106.5 million from $293.2 million at December 31, 1995 to
$399.7 million at December 31, 1996. A decrease of $0.4 million in savings
accounts was offset by increases of $29.1 million in interest-bearing
transaction accounts, $20.0 million in non-interest-bearing demand accounts and
$57.8 million in time deposits.
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<PAGE>
The increase in time deposits includes an increase in out-of-area certificates
of deposit of $11.1 million, an increase in time deposits to public entities of
$11.6 million and time deposit growth at the four new branches of $26.7 million.
Non-interest bearing demand accounts grew by $7.4 million at the new branches
and interest-bearing transaction accounts grew by $19.0 million at the same
branches.
In part to mitigate the effect of seasonality of its deposit sources which is
due to the local tourist-based economy in much of the Company's service area,
SierraWest Bank utilizes a "money desk" to solicit out-of-area CDS. These CDs
supplement its other deposit sources, provide additional liquidity and
additionally, help support its loan growth. These deposits, which at December
31, 1994, 1995 and 1996 totaled $17.6 million, $34.7 million and $45.8 million,
respectively, represented 8.0%, 11.9% and 11.5% of total deposits as of December
31, 1994, 1995 and 1996, respectively.
To attract out-of-area CDS, SierraWest Bank subscribes to a listing service
which lists nationally the rate the Bank is prepared to pay. Customers call
SierraWest Bank directly and place deposits. Additionally, beginning in 1995
SierraWest Bank began accepting referrals by brokers which can result in a
slightly lower cost of those deposits. At December 31, 1996 $10.6 million of
out-of-area CD's have been acquired through broker referrals. To attract
deposits, SierraWest Bank pays a market rate which may at times be above the
comparable rate offered by SierraWest Bank to its local depositors. The overhead
costs associated with these out-of-area deposits is, however, lower than that
for local deposits since local deposits require the use of bank branch
facilities and hence the Company believes the cost of these funds does not
normally exceed the cost SierraWest Bank incurs to generate comparable deposits
through its branch system. While out-of-area deposits are acquired at an
acceptable cost, SierraWest Bank monitors the level of these deposits because it
is concerned that out-of- area deposits are more rate sensitive and volatile and
that there may be some exposure for increased costs in the future should the
supply tighten. If interest rates rise rapidly, the Company's reliance on these
deposits could have an adverse impact on net interest income if the costs to
retain those deposits rise faster than rates charged on interest-earning assets.
Capital Resources
At December 31, 1996, the Company had shareholders' equity of $33.9 million as
compared to $29.8 million at December 31, 1995. The Company's growth strategy is
to expand its banking business, internally and through possible acquisitions.
Such expansion is contingent on the retention of internally generated earnings,
and the possible issuance of new equity or additional debt, as well as the
satisfaction of other factors including obtaining regulatory approvals.
The Company's strategy is to expand its banking business, through internal
growth and acquisitions, both within its present service areas, particularly in
the Reno metropolitan market and adjacent areas, and the Sacramento Valley
locations. It also plans to increase the volume and geographic scope of its SBA
lending to leverage on its SBA loan origination and servicing capabilities. In
connection with this objective, the Company established a loan production office
in Las Vegas during December 1993, in February 1995 in Buena Park in southern
California, and during December 1995 in Fresno, California. The Buena Park
office was closed in 1996. See page 38 herein. The Company plans to finance its
expansion program through the retention of internally generated earnings,
through the use of the proceeds of its $10 million debt offering completed in
February 1994, and through the possible future issue of equity and/or further
debt offerings. Factors which could impede the Company's growth strategy include
possible non-approval by the banking regulators of applications for acquisitions
or new branches, and the possible inability of Bancorp to raise future capital
through the issuance of equity or debt.
On January 24, 1997 the Company announced that it had signed a definitive
agreement to acquire Mercantile Bank. Based in Sacramento, Mercantile is a
business bank primarily servicing the commercial and real estate loan industry
and has total assets of $46 million. The acquisition, which is scheduled to
close in June, 1997, is subject to the approval of Mercantile's shareholders and
federal and state regulators. Under the terms of the proposed transaction,
shareholders of Mercantile will receive total compensation of $6.6 million,
subject to certain adjustments primarily based upon the level of deposits and
capital. The compensation will consist of 50% cash and 50% stock.
During June 1996 the Company completed construction of a new regional facility
in Reno, Nevada. Total costs incurred for the land and building at December 31,
1996 was $3.8 million. The Company currently occupies
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<PAGE>
approximately 13,000 square feet of this 28,600 square foot facility. The
remaining space is leased or to be leased until needed by the Company for
expansion. At February 28, 1997 a total of 3,375 square feet had been leased
out. Tenant improvements paid for by the Company are not expected to exceed $0.3
million on this facility.
During December 1996, the Company completed construction on its Carson City
facility. This 5,200 square foot facility was built at a cost of $1.3 million.
Prior to occupying this new building, the Company's Carson City office was
located in a 780 square foot leased facility.
On February 8, 1994, the Company sold to the public $10,000,000 of 8 1/2%
optional convertible subordinated debentures, convertible at the option of the
holder at $10.00 per share. These debentures mature on February 1, 2004 and are
redeemable on or after February 1, 1997 in whole or in part at the option of the
Company. Convertible debentures outstanding at December 31, 1996 and 1995
consisted of $8,520,000 and $10,000,000, respectively of these 8 1/2% optional
convertible subordinated debentures. A total of $1,480,000 of debentures were
converted into 148,000 shares of common stock during 1996 and there have been
significant conversions in 1997.
A portion of the net proceeds from these debentures have been utilized to pay
operating expenses of the holding company, to provide a $2.3 million equity
infusion into the Company's subsidiary bank, to repurchase 50,000 shares of
stock on the open market and to pay dividends to the Company's shareholders. Of
the $2.7 million remainder at December 31, 1996, $1.8 million has been used to
reduce the Company's reliance on out-of-area time deposits, and $0.9 million
provides operating cash resources for the holding company.
The Company paid dividends of fifteen cents per share during April and September
1996 and twelve cents per share during March and September 1995. During June
1995, the Company repurchased 50,000 shares of its common stock on the open
market at a total cost of $445 thousand.
On December 21, 1995, the Company designated 200,000 shares of its 10,000,000
authorized preferred shares as Series A Junior Participating Preferred Stock.
These shares were created by the Company to facilitate a shareholder protection
rights plan. During January of 1996 a dividend of rights was made to existing
stockholders to acquire stock of the Company. This plan is designed to protect
the Company and its stockholders against abusive takeover attempts and tactics.
In essence, the rights plan would dilute the interests of an entity attempting
to take control of the Company if the attempt is not deemed by the Board of
Directors to be in the best interests of all stockholders. If the Board of
Directors determines that an offer is in the best interests of the stockholders,
the stock rights may be redeemed for nominal value, allowing the entity to
acquire control of the Company.
In the first quarter of 1996, the names of both the Bancorp's banking
subsidiaries were changed to SierraWest Bank. Effective October 1, 1996 the
operations of the Company's Nevada subsidiary were merged into the California
subsidiary.
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<PAGE>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Independent Auditors' Report................................................................................45
Consolidated Financial Statements of SierraWest Bancorp
Consolidated Statements of Financial Condition............................................................46
Consolidated Statements of Income.........................................................................48
Consolidated Statements of Shareholders' Equity...........................................................50
Consolidated Statements of Cash Flows.....................................................................51
Notes to Consolidated Financial Statements................................................................55
</TABLE>
-44-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
SierraWest Bancorp
Truckee, California
We have audited the consolidated statements of financial condition of SierraWest
Bancorp and Subsidiary ("Company") as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company'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 financial position of SierraWest
Bancorp and Subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Sacramento, California
January 24, 1997
-45-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31,
1996 1995
(in thousands)
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks................................... $ 26,434 $ 18,689
Federal funds sold........................................ 32,200 20,500
---------- -----------
Total Cash and Cash Equivalents........................... 58,634 39,189
Investment securities (Note 2):
Investments in mutual funds available for sale............ 1,335 1,391
Held to maturity, market value $2,000 and $3,380.......... 2,001 3,373
Available for sale........................................ 31,880 24,970
Loans held for sale (Note 3)................................. 29,489 16,529
Loans and leases, net of allowance for possible loan
and lease losses of $4,546 and $3,845 (Note 3)............ 289,331 219,595
Excess servicing on SBA loans (Note 5)....................... 14,338 14,813
Bank premises, leasehold improvements
and equipment, net (Note 4)............................... 12,358 8,972
Accrued interest receivable and
other assets.............................................. 8,523 8,686
----------- ----------
TOTAL ASSETS.............................................. $447,889 $337,518
======== ========
</TABLE>
See notes to consolidated financial
statements.
-46-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
1996 1995
(in thousands except share amounts)
Deposits (Note 6):
<S> <C> <C>
Non-interest-bearing demand............................... $ 80,525 $ 60,579
Savings................................................... 13,289 13,693
Interest bearing transaction accounts..................... 120,417 91,273
Time ..................................................... 185,420 127,609
------------ ------------
Total Deposits............................................ 399,651 293,154
Other liabilities and interest payable....................... 5,802 4,531
Convertible debentures (Note 13)............................. 8,520 10,000
------------ ------------
Total Liabilities......................................... 413,973 307,685
Shareholders' equity (Notes 15 and 16):
Preferred stock, no par value;
9,800,000 shares authorized;
none issued............................................. 0 0
Preferred stock series A, no par value; 200,000
shares authorized; none issued.......................... 0 0
Common stock, no par value; 10,000,000
shares authorized; 2,771,139 and 2,592,419 shares
issued and outstanding at December 31, 1996 and
1995, respectively...................................... 12,291 10,709
Retained earnings......................................... 21,654 19,131
Unrealized loss on investment securities
available for sale, net of tax of
$21 and $6.............................................. (29) (7)
------------ ------------
Total Shareholders' Equity................................ 33,916 29,833
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.................................... $ 447,889 $ 337,518
=========== ============
</TABLE>
See notes to consolidated financial
statements.
-47-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
(in thousands, except per share amounts)
Interest income:
<S> <C> <C> <C>
Loans and leases.............................................. $ 30,506 $ 23,582 $ 17,386
Federal funds sold............................................ 938 594 478
Investment securities
U.S. Treasury............................................... 931 976 1,103
U.S. Government agencies.................................... 85 385 272
States and political subdivisions........................... 198 29 17
Other....................................................... 498 144 294
Other assets.................................................. 113 121 107
---------- ---------- -----------
Total Interest Income......................................... 33,269 25,831 19,657
Interest expense:
Savings deposits.............................................. 283 286 317
Transaction accounts.......................................... 2,620 1,995 1,894
Time deposits ................................................ 8,832 5,352 2,559
Convertible debentures (Note 13).............................. 764 850 783
Other......................................................... (4) 8 44
---------- ---------- -----------
Total Interest Expense........................................ 12,495 8,491 5,597
---------- ---------- -----------
Net Interest Income........................................... 20,774 17,340 14,060
Provision for possible loan and lease losses (Note 3)......... 1,010 1,270 885
---------- ---------- -----------
Net Interest Income After Provision for Possible
Loan and Lease Losses....................................... 19,764 16,070 13,175
</TABLE>
See notes to consolidated financial
statements.
-48-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(continued)
Year Ended December 31,
1996 1995 1994
(in thousands, except per share amounts)
Non-interest income:
<S> <C> <C> <C>
Net servicing income (Note 5).............................. $ 4,087 $ 4,667 $ 4,474
Net gain on sale of loans (Note 5)......................... 373 307 2,300
Service charges on deposit accounts........................ 1,722 1,755 1,517
Other...................................................... 1,156 1,240 886
---------- ---------- -----------
Total Non-interest Income................................. 7,338 7,969 9,177
Non-interest expense:
Salaries and related benefits.............................. 12,086 10,627 10,081
Net occupancy and equipment expense (Notes 4 and 8) 3,486 3,401 2,960
Other expense (Note 17).................................... 6,125 6,916 4,445
---------- ----------- -----------
Total Non-interest Expense................................. 21,697 20,944 17,486
---------- ---------- -----------
Income before provision for income taxes................... 5,405 3,095 4,866
Provision for income taxes (Note 7)........................ 2,077 1,179 1,863
---------- ---------- -----------
Net Income................................................. $ 3,328 1,916 $ 3,003
========== ========== ===========
Income per common and equivalent share, based on
weighted average shares outstanding (including dilutive
effect of options)
(Notes 1, 12 and 13):
Primary.................................................... $ 1.19 $ 0.72 $ 1.12
Weighted average shares outstanding........................ 2,802 2,678 2,678
Fully diluted.............................................. $ 1.01 $ 0.66 $ 0.96
Weighted average shares outstanding........................ 3,747 3,687 3,606
Dividends per share.......................................... $ 0.30 $ 0.24 $ 0.00
</TABLE>
See notes to consolidated financial
statements.
-49-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Loss on
Common Stock Retained Investment
Shares Amounts Earnings Securities Total
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.................. 2,591 $ 10,825 $ 14,836 $ (16) $ 25,645
Net Income............................... 0 0 3,003 0 3,003
Stock options exercised.................. 2 12 0 0 12
Common stock issued on
conversion of debentures............... 27 165 0 0 165
Net change in unrealized loss on
investment securities available for
sale, net of tax ...................... 0 0 0 (662) (662)
------------------------------------------- ------- ---------
Balance at December 31, 1994................ 2,620 11,002 17,839 (678) 28,163
Net Income . . . . . . . . . . . . . . . . 0 0 1,916 0 1,916
Stock options exercised . . . . . . . . . . 20 142 0 0 142
Common stock issued on
conversion of debentures............... 2 10 0 0 10
Common stock repurchased . . . . . . (50) (445) 0 0 (445)
Dividends paid........................... 0 0 (624) 0 (624)
Net change in unrealized loss on
investment securities available
for sale, net of tax................... 0 0 0 671 671
------------ ----------- -------------- -------- -------
Balance at December 31, 1995 ............... 2,592 10,709 19,131 (7) 29,833
Net Income . . . . . . . . . . . . . . . . 0 0 3,328 0 3,328
Stock options exercised . . . . . . . . . . 31 212 0 0 212
Common stock issued on
conversion of debentures............... 148 1,370 0 0 1,370
Dividends paid........................... 0 0 (805) 0 (805)
Net change in unrealized loss on
investment securities available
for sale, net of tax................... 0 0 0 (22) (22)
------------ ---------- ------------ ---------- ----------
Balance at December 31, 1996 ............... 2,771 $ 12,291 $ 21,654 $ (29) $ 33,916
============= ======== ========== ========= ========
</TABLE>
See notes to consolidated financial
statements.
-50-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
(in thousands)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
Cash flows from operating activities:
<S> <C> <C> <C>
Interest and fees received................................. $ 32,506 $ 24,411 $ 18,900
Service charges............................................ 1,722 1,754 1,517
Servicing income received.................................. 5,574 6,186 6,439
Other income received...................................... 1,038 1,147 877
Interest paid.............................................. (12,292) (8,251) (5,221)
Cash paid to suppliers and employees....................... (20,141) (18,142) (13,916)
Income taxes paid.......................................... (1,640) (1,334) (1,838)
Mortgage loans originated or purchased for sale............ 0 (25,176) (26,769)
Government guaranteed loans originated for sale............ (7,672) (22,163) (36,276)
Mortgage loans sold........................................ 0 27,000 28,352
Government guaranteed loans sold........................... 9,214 5,646 38,238
---------- ----------- ----------
Net cash provided by (used in) operating activities........ 8,309 (8,922) 10,303
Cash flows from investing activities:
Proceeds from:
Sales of mutual funds................................... 0 454 6,516
Maturities of investment securities held to maturity.... 1,378 773 1,854
Maturities of investment securities available for
sale.................................................. 10,958 3,500 13,025
Sales of investment securities available for sale....... 8,239 8,484 4,986
Sales of investment securities -
held to maturity (Note 2)............................. 0 999 0
Purchase of investment securities -
held to maturity......................................... 0 0 (1,488)
Purchase of investment securities -
available for sale....................................... (26,248) (9,999) (28,370)
Loans made net of principal collections.................... (84,700) (52,571) (19,531)
Capital expenditures....................................... (4,536) (3,012) (1,317)
Decrease (increase) in other assets........................ 141 83 (109)
---------- --------- -------
Net cash used in investing activities...................... (94,768) (51,289) (24,434)
</TABLE>
See notes to consolidated financial
statements.
-51-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended December 31,
1996 1995 1994
(in thousands)
Cash flows from financing activities:
<S> <C> <C> <C>
Net increase in demand, interest bearing,
and savings accounts........................................ 48,686 3,606 5,389
Net increase (decrease) in time deposits...................... 57,811 70,672 (7,281)
Proceeds from issuance of debentures.......................... 0 0 10,000
Net proceeds from issuance of common stock ................... 212 142 12
Dividend paid................................................. (805) (624) 0
Repurchase of common stock.................................... 0 (445) 0
Cash paid to redeem debentures................................ 0 0 (73)
---------- ---------- -----------
Net cash provided by financing activities..................... 105,904 73,351 8,047
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents......... 19,445 13,140 (6,084)
Cash and cash equivalents - beginning of period............... 39,189 26,049 32,133
---------- ---------- -----------
Cash and cash equivalents - end of period..................... $ 58,634 $ 39,189 $ 26,049
========= ========== ===========
</TABLE>
See notes to consolidated financial
statements.
-52-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Year Ended December 31,
1996 1995 1994
---- ---- ----
(in thousands)
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income.................................................... $ 3,328 $ 1,916 $ 3,003
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization.............................. 1,197 1,119 1,139
Provision for possible loan and lease losses............... 1,010 1,270 885
Deferred taxes............................................. 309 (140) 29
(Increase) decrease in prepaid expenses.................... (313) 110 44
Gain on sale of government guaranteed loans
(over)/under cash received ............................... (392) 108 321
Amortization of excess servicing on SBA loans.............. 1,315 1,348 1,793
Amortization of purchased mortgage servicing
rights.................................................... 172 172 172
Change in:
Interest receivable....................................... (347) (534) (501)
Interest payable.......................................... 203 241 376
Deferred loan fees........................................ 14 (312) 309
Other deferred income..................................... (13) (101) 17
Accrued expenses.......................................... 671 1,139 (261)
Current taxes payable..................................... 127 (15) (6)
Write down of other real estate owned ..................... 21 16 54
Amortization of premium/discount on securities............. 133 (104) (58)
Amortization of premium/discount on loans.................. (563) (469) (507)
Increase in cash surrender value of life
insurance policies........................................ (113) (121) (105)
Deferred gain on sale of other loans....................... 0 66 0
Loss on sale of securities................................. 8 62 4
Decrease (increase) in loans originated for sale........... 1,542 (14,693) 3,545
Write off of investments................................... 0 0 50
---------- ---------- -----------
Total adjustments.......................................... 4,981 (10,838) 7,300
---------- ----------- -----------
Net cash provided by (used in) operating activities $ 8,309 $ (8,922) $ 10,303
========== =========== ===========
</TABLE>
See notes to consolidated financial
statements.
-53-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Supplemental Schedule of Non Cash Investing and Financing Activities
Common stock was issued in conversion of $1,370,000, $10,000 and $167,000
of convertible debentures in 1996, 1995 and 1994, respectively. The $1,370,000
is net of $110,000 of debenture offering costs.
For the years ended December 31, 1996, 1995 and 1994, $446,000, $373,000
and $682,000 of loans, respectively, were transferred to other real estate
owned.
In the 1995 period, $572,000 of assets formerly classified as in-substance
foreclosures were reclassified as loans.
In 1996, $9.2 million of government guaranteed loans were transferred to
held for sale status and subsequently sold and included in the Statement of Cash
Flows.
In 1995, $20.0 million of unguaranteed SBA loans originated in earlier
years were transferred to held for sale status. Concurrently, $21.4 million of
guaranteed SBA loans were transferred to the Company's investment portfolio at
cost, which was lower than market.
See notes to consolidated financial
statements.
-54-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting and Reporting Policies:
The accompanying consolidated financial statements include the accounts of
SierraWest Bancorp ("Bancorp") and its subsidiary, SierraWest Bank (collectively
referred to as the "Company"). Bancorp was incorporated under the laws of the
State of California on December 5, 1985. During 1996, SierraWest Bancorp's two
banking subsidiaries changed their names to SierraWest Bank (the "Bank"), and on
October 1, 1996, Bancorp's Nevada subsidiary, formerly Sierra Bank of Nevada,
was merged into its California subsidiary, formerly Truckee River Bank.
Effective December 19, 1996, SierraWest Bank's subsidiary, Sierra Tahoe Mortgage
Company, was dissolved. Operations of this line of business were terminated in
1995.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practices within the banking
industry. The more significant accounting and reporting policies not described
elsewhere in these notes to financial statements are discussed below.
Significant intercompany transactions have been eliminated in consolidation.
Nature of Operations. The Company is a one-bank holding company and
operates nine branches in Northern California and two in Northern Nevada. Its
primary source of revenue is interest on SBA, real estate, and other commercial
loans provided to customers, who are predominantly small businesses and
individuals.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents in the consolidated
statements of cash flows include cash and due from banks and federal funds sold.
Investments in Mutual Funds. Investments in mutual funds consist of mutual
funds whose assets are invested primarily in U.S. Government securities. At
December 31, 1996 and 1995, all mutual fund investments are classified as
available for sale and carried at market value. Unrealized gains and losses on
mutual funds are reported, net of tax, as a separate component of shareholders'
equity. Interest income on mutual funds is recorded as earned.
Investment Securities. In accordance with Statement of Financial Accounting
Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has classified its investment securities and mutual
funds as held to maturity or available for sale. Securities held to maturity are
carried at cost adjusted by the accretion of discounts and amortization of
premiums. The Company's policy of carrying such investment securities at
amortized cost is based upon its ability and management's intent to hold these
investment securities to maturity. Securities available for sale may be sold to
implement the Company's asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors. These
securities are recorded at their market values. Unrealized gains or losses are
included as a separate component of shareholders' equity, net of tax. Gains or
losses on sales of investment securities are based on the specific
identification method.
Loans Held for Sale. Loans held for sale are valued at the lower of cost or
market value. Valuation adjustments, if any, are charged through the income
statement. In practice, the adjustment is charged against the gain (loss) on
sale of loans. At December 31, 1996 and 1995, SBA loans held for sale consist of
the unguaranteed portion of loans which the Company intends to sell on a
securitized basis. (See Note 3).
Loans and Loan Fees. Loans receivable that Management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding principal balances reduced by any charge-offs and
net of any deferred fees or costs and unamortized premiums and discounts on
purchased loans.
-55-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Interest income on loans and leases is recognized as earned. When a loan is 90
days past due with respect to principal or interest, and in the opinion of
Management, interest or principal is not collectible, or at such earlier time as
Management determines that the collectibility of such principal or interest is
unlikely, the accrual of interest is discontinued and all accrued but
uncollected interest income is reversed. Cash payments subsequently received on
nonaccrual loans are recognized as income only where the future collection of
the recorded value of the loan is considered by management to be probable. Loan
fees net of certain related direct costs to originate loans are deferred and
amortized over the contractual life of the loan using a method that approximates
the interest method.
Allowance for Possible Loan and Lease Losses. The allowance for possible
loan and lease losses is maintained at a level considered adequate to provide
for losses that can be reasonably anticipated. The allowance is increased by
provisions and reduced by charge-offs (net of recoveries). The Company's
provision is based on Management's overall evaluation of the inherent risks in
the loan and lease portfolio and detailed evaluations of the collectibility of
specific loans. This evaluation process requires the use of current estimates,
which may vary from the ultimate collectibility experienced in the future. The
estimates used are reviewed periodically, and, as adjustments become necessary,
they are charged to operations in the period in which they become known.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan" and No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure". SFAS No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient at the loan's observable market rate
or the fair value of the collateral if the loan is collateral dependent. The
Company's impaired loans are collateral dependent and therefore measured using
the fair value of the collateral. SFAS No. 114 also requires that impaired loans
for which foreclosure is probable should be accounted for as loans. SFAS No. 118
amends SFAS No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans and requires certain information to be
disclosed. Interest is recognized on impaired loans when cash is received and
the future collection of principal is considered by management to be probable.
A loan is impaired when, based upon current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Loans are measured for impairment
as part of the Company's normal loan review process. Impairment losses are
included in the allowance for possible loan and lease losses through a charge to
provision for loan and lease losses.
Lease Receivables. Leases are accounted for as direct financing leases and
are carried net of unearned income. Income from these leases is recognized on a
basis which produces a level yield on the outstanding net investment in the
lease.
Bank Premises, Leasehold Improvements and Equipment. Premises, leasehold
improvements and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets, which are: buildings, 30 years;
leasehold improvements, 1 to 10 years; furniture and equipment, 3 to 5 years.
Fixed assets are assessed for impairment in accordance with SFAS No. 121.
Other Real Estate Owned. Property acquired by the Company through
foreclosure is initially recorded in the consolidated statements of financial
condition at the lower of estimated fair value less the cost to sell or cost at
the date of foreclosure. At the time a property is acquired, if the fair value
is less than the loan amounts outstanding, any difference is charged against the
allowance for possible loan and lease losses. After acquisition, valuations are
periodically performed and, if the carrying value of the property exceeds the
fair value, less estimated costs to sell, a valuation allowance is established
by a charge to operations.
Operating costs on foreclosed real estate are expensed as incurred. Costs
incurred for physical improve ments to foreclosed real estate are capitalized if
the value is recoverable through future sale.
-56-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Property held at December 31, 1996 and 1995 in the amounts of $446,000 and
$714,000, respectively, are expected to be disposed of within one year.
Sales and Servicing of SBA Loans. The Company originates loans to customers
under a Small Business Administration ("SBA") program that generally provides
for SBA guarantees of up to 80% of each loan. Prior to 1995, the Company sold
the guaranteed portion of each loan to a third party and retained the
unguaranteed portion in its own portfolio. Beginning in 1995, the Company
retained both the guaranteed and unguaranteed portions of most of the loans
generated in its portfolio. For SBA loans sold, the Company may be required to
refund the sales premium received on such sales, if the borrower defaults or the
loan prepays within 90 days of the settlement date. A gain is recognized on the
sale of SBA loans through collection on sale of a premium over the adjusted
carrying value, through retention of an ongoing rate differential less a normal
service fee (excess servicing fee) between the rate paid by the borrower to the
Company and the rate paid by the Company to the purchaser, or both.
To calculate the gain (loss) on sale, the Company's investment in an SBA
loan is allocated among the retained portion of the loan, the excess servicing
retained and the sold portion of the loan, based on the relative fair market
value of each portion. The gain (loss) on the sold portion of the loan is
recognized at the time of sale based on the difference between the sale proceeds
and the allocated investment. As a result of the relative fair value allocation,
the carrying value of the retained portion is discounted, with the discount
accreted to interest income over the life of the loan. The excess servicing fees
are reflected as an asset which is amortized over an estimated life using a
method approximating the level yield method; in the event future prepayments
exceed Management's estimates and future expected cash flows are inadequate to
cover the unamortized excess servicing asset, additional amortization would be
recognized. In its calculation of excess servicing fees the Company has used
0.4% as its estimate of a normal servicing fee.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees. Accordingly, nocompensation expense
has been recognized in the financial statements for employee stock arrangements.
However, the required pro forma disclosures have been presented in accordance
with SFAS No. 123.
Accounting Pronouncements. On January 1, 1996 the Company adopted SFAS 121,
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS 121
establishes standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill for all entities. It does not apply to
financial instruments, long-term customer relationships of a financial
institution, mortgage or other servicing rights, or deferred tax assets.
Adoption of SFAS 121 has not had a significant impact on the financial condition
or operations of the Company.
The Company is required to adopt SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in 1997. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-component approach
that focuses on control. Under this approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. Management has not
assessed the effect that the adoption of SFAS 125 will have on the financial
condition or results of operations of the Company.
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.
-57-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Earnings per Share. Primary earnings per share are based on net income,
divided by the weighted average shares outstanding (including the dilutive
effect of stock options). Fully diluted earnings per share are determined by
adjusting net income for the after tax effect of interest on convertible
debentures and dividing this by the weighted average shares outstanding adjusted
for the conversion of the convertible debentures.
Derivative Financial Instruments. Through the date of termination of
mortgage banking operations in 1995, the Company utilized forward sales
commitments on mortgage loans as part of its interest rate risk management
strategy. These commitments could be optional or mandatory. Under optional
commitments, a commitment fee was paid and the Company was not at risk of loss
if it did not fulfill the commitment. Mandatory commitments could entail
possible financial risk to the Company if it did not deliver sufficient mortgage
loans to fulfill the commitment.
During the first quarter of 1996, the Company entered into an interest rate
swap agreement with a major bank to reduce its exposure to fluctuations in
interest rates. The notional principal amount is $20 million, and the term is
three years. Under the agreement, the other bank pays a fixed rate of 8.17% and
receives from the Company the prime rate. Net interest income or expense
resulting from the differential between the fixed and prime rates is recorded on
a current basis and any resultant accrual is settled quarterly. The related
amount payable to or receivable from the other bank is included in other
liabilities or assets. The fair value of the swap is not recognized in the
financial statements. The net interest expense recognized in 1996 was
approximately $13,000.
Reclassifications. Certain items in the 1995 financial statements have been
reclassified to conform to the 1996 presentation.
-58-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. Investment Securities and Investments in Mutual Funds:
The amortized cost and estimated market values of investments in securities
and mutual funds are as follows (amounts in thousands):
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market Carrying
Cost Gains Losses Value Value
December 31, 1996
Held to Maturity:
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities................ $ 2,001 $ 0 $ 1 $ 2,000 $ 2,001
Other securities........................ 0 0 0 0 0
----------- ------------ -------- -------- --------
Total held to maturity.................. $ 2,001 $ 0 $ 1 $ 2,000 $ 2,001
=========== ============= ======== ======== =========
Available for Sale:
U.S. Treasury securities................ $ 17,428 $ 49 $ 15 $ 17,462 $ 17,462
Securities of U.S.
government agencies................. 999 6 0 1,005 1,005
Securities of states and
political subdivisions.............. 5,951 59 19 5,991 5,991
Mortgage-backed securities.............. 7,387 45 10 7,422 7,422
---------- ---------- -------- ---------- ---------
Total available for sale................ $ 31,765 $ 159 $ 44 $ 31,880 $ 31,880
========== ========= ========= ========= ========
Mutual funds............................ $ 1,500 $ 0 $ 165 $ 1,335 $ 1,335
=========== ========== ========== ========== ========
December 31, 1995
Held to Maturity:
U.S. Treasury securities................ $ 3,261 $ 10 $ 3 $ 3,268 $ 3,261
Other securities........................ 112 0 0 112 112
----------- ----------- -------- ---------- ---------
Total held to maturity.................. $ 3,373 $ 10 $ 3 $ 3,380 $ 3,373
=========== ========== ========= =========== =========
Available for Sale:
U.S. Treasury securities................ $ 14,792 $ 105 $ 21 $ 14,876 $ 14,876
Securities of U.S.
government agencies................. 7,494 40 48 7,486 7,486
Securities of states and
political subdivisions.............. 2,575 38 5 2,608 2,608
----------- ----------- -------- ---------- ----------
Total available for sale................ $ 24,861 $ 183 $ 74 $ 24,970 $ 24,970
=========== =========== ======== =========== ==========
Mutual funds............................ $ 1,500 $ 0 $ 109 $ 1,391 $ 1,391
============ =========== ======== =========== ==========
</TABLE>
-59-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Scheduled maturities of investment securities at December 31, 1996 were as
follows:
<TABLE>
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Within 1 year.............................................. $ 1,001 $ 1,001 $ 7,015 $ 7,018
After 1 year but within 5 years............................ 1,000 999 11,759 11,792
After 5 years but within 10 years.......................... 0 0 100 99
After 10 years............................................. 0 0 5,504 5,549
-------- -------- ---------- ----------
2,001 2,000 24,378 24,458
Mortgage-backed securities. . . . . . . . . . . . . . . . . 0 0 7,387 7,422
---- -------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,001 $ 2,000 $ 31,765 $ 31,880
======= ========= ========== ==========
</TABLE>
Expected maturities of mortgage-backed securities can differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. In addition, such
factors as prepayments and interest rates may affect the yield and the carrying
value of mortgage-backed securities. At December 31, 1996 and 1995, the Company
had no high-risk collateralized mortgage obligations as defined by regulatory
agencies.
The weighted average maturity of portfolio securities held by mutual
funds classified as available for sale was 7.2 years at December 31, 1996.
Assets, principally loans and investment securities, carried at
approximately $24,201,000 at December 31, 1996 and $14,594,000 at December 31,
1995 were pledged to secure public deposits and for other purposes required or
permitted by law.
Proceeds from sales of investments in debt securities were $8,351,000
during 1996, and $9,483,000 and $4,986,000 during 1995 and 1994, respectively.
The Company recorded gross realized losses of $8,000 and $62,000 on the sales of
investment securities during 1996 and 1995, respectively. The Company realized
tax benefits of $3,000 and $25,000 on securities losses in 1996 and 1995,
respectively. Sales of investment securities classified as held to maturity in
1995 consisted of a single security which was sold within 90 days of its
maturity date. The amortized cost at the date of sale was $998,203 and the loss
realized was $1,172.
3. Loans, Leases, Allowance for Possible Loan and Lease Losses and Loans Held
for Sale:
The Company's customers are located throughout its service areas covering
primarily the whole of Northern California including San Francisco and
Sacramento and Reno, Nevada. Approximately 45% of the Company's loans at
December 31, 1996, have been generated through the Company's SBA lending
activities. Of these loans, the SBA guarantee extends to approximately 25%.
$69,030,000 of the Company's loan portfolio represents the retained portion of
SBA loans for which the SBA guaranteed portion has been sold to investors.
Approximately 90% of these loans are collateralized by commercial real estate
and the balance by other business assets. The Company's loans are not
concentrated in any particular industry segment.
-60-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At December 31, 1996 and 1995, the loan portfolio consisted of the
following (amounts in thousands):
<TABLE>
1996 1995
----- ----
<S> <C> <C>
Commercial................................................................ $ 174,445 $ 142,622
Real estate--mortgage..................................................... 67,690 39,219
Real estate--construction................................................. 36,633 31,718
Individual and other...................................................... 6,824 6,530
Lease receivables......................................................... 9,994 4,164
------------- --------
Total gross loans and leases.............................................. 295,586 224,253
Unearned income on leases................................................. 1,690 808
Net deferred loan fees.................................................... 19 5
Allowance for possible loan and lease losses.............................. 4,546 3,845
------------- -----------
Total loans and leases, net of unearned income on leases, net
deferred fees and allowance for possible loan and lease losses......... $ 289,331 $ 219,595
=========== ===========
Loans held for sale....................................................... $ 29,489 $ 16,529
============ ============
</TABLE>
Included in commercial loans and loans held for sale are SBA loans
totaling $146,266,000 and $116,529,000 at December 31, 1996 and 1995,
respectively. The guaranteed portion of SBA loans in process of disbursement
totaled $5,559,000 and $11,448,000 at December 31, 1996 and 1995, respectively.
When these loans are fully disbursed, they will be available for sale. The
guaranteed portion of loans which are in the Company's loan portfolio and
available for sale totaled $29,066,000 and $15,377,000 at December 31, 1996 and
1995, respectively. Loans and portions of loans guaranteed by the federal
government were approximately $37,444,000 and $29,947,000 at December 31, 1996
and 1995, respectively.
The following schedule provides a summary of the future minimum lease
receivable payments to be received over the next five years (in thousands).
1997 $ 2,924
1998 2,725
1999 1,837
2000 1,336
2001 750
Thereafter 422
--------
Total $ 9,994
========
There are no contingent rentals included in income for each of the three years
in the period ended December 31, 1996.
Of total gross loans and leases at December 31, 1996, $5,400,000 were
considered to be impaired. The allowance for possible loan and lease losses
included $565,000 related to these loans. The amount of interest received and
recognized on these impaired loans in 1996 was $310,000. The average recorded
investment in impaired loans during 1996 was $5,600,000.
Of total gross loans and leases at December 31, 1995, $5,500,000 were
considered to be impaired. The allowance for possible loan and lease losses
included $446,000 related to these loans. The amount of interest received and
recognized on these impaired loans in 1995 was $221,000. The average recorded
investment in impaired loans during 1995 was $3,400,000.
-61-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The changes in the allowance for possible loan and lease losses for the
years ended December 31, 1996, 1995, and 1994 were as follows (amounts in
thousands):
<TABLE>
Year Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year.................................... $ 3,845 $ 3,546 $ 3,472
Provision for possible loan and lease losses.................. 1,010 1,270 885
Loans charged off............................................. (593) (1,025) (1,075)
Recoveries.................................................... 284 54 264
--------- --------- --------
Balance, end of period........................................ $ 4,546 $ 3,845 $ 3,546
======== ======== ========
</TABLE>
As of December 31, 1996 and 1995, loans totaling $5,363,000 and $5,476,000,
respectively, were on nonaccrual status. Interest earned but not recorded on
loans that were on nonaccrual status for the years ended December 31, 1996, 1995
and 1994, was $320,000, $243,000, and $97,000, respectively. Cash collections of
interest on nonaccrual loans for the same periods of $310,000, $221,000, and
$145,000, respectively, were included in interest on loans in the Consolidated
Statements of Income. The principal balance of loans where scheduled payments
are more than 90 days past their due date and where interest has been accrued
totaled $2,132,000 ,$1,023,000, and $1,763,000, as of December 31, 1996, 1995
and 1994, respectively. These loans are adequately secured and Management
believes interest recorded on these loans will be collected.
Other real estate owned was $446,000 and $758,000 at December 31, 1996, and
1995, respectively, and is recorded in other assets. At December 31, 1996 and
1995 the balance in the allowance for losses on other real estate owned was
zero. During the years ended December 31, 1996 and 1995, there was no
significant activity in the allowance for losses on other real estate owned.
4. Bank Premises, Leasehold Improvements and Equipment:
Bank premises, leasehold improvements and equipment at December 31, 1996
and 1995, consisted of the following (amounts in thousands):
<TABLE>
December 31, 1996
Accumulated
Depreciation/ Net
Cost Amortization Book Value
<S> <C> <C> <C>
Land...................................................... $ 1,425 $ 0 $ 1,425
Buildings................................................. 9,439 1,059 8,380
Leasehold improvements.................................... 639 501 138
Furniture and equipment................................... 6,814 4,399 2,415
-------------- --------------- ------------
Total..................................................... $ 18,317 $ 5,959 $ 12,358
============== ============= ============
</TABLE>
-62-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
December 31, 1995
Accumulated
Depreciation/ Net
Cost Amortization Book Value
<S> <C> <C> <C>
Land...................................................... $ 958 $ 0 $ 958
Building ................................................. 6,729 796 5,933
Leasehold improvements.................................... 740 603 137
Furniture and equipment................................... 5,890 3,946 1,944
-------------- ------------- -------------
Total..................................................... $ 14,317 $ 5,345 $ 8,972
============== ============= =============
</TABLE>
Depreciation and amortization amounts included in net occupancy and
equipment expenses were $1,145,000, $1,076,000 and $1,061,000, for the years
ended December 31, 1996, 1995 and 1994, respectively.
5. Sales and Servicing of SBA Loans:
A summary of the activity in SBA loans for the years ended December 31,
1996, 1995 and 1994, is as follows (amounts in thousands):
<TABLE>
December 31,
1996 1995 1994
<S> <C> <C> <C>
SBA loans sold............................................................. $ 5,621 $ 5,646 $ 38,238
Premium received at sale................................................... 52 496 3,132
Excess servicing retained(1)............................................... 690 134 1,241
Amortization charged against earnings...................................... 1,315 1,348 1,793
Balance of excess servicing retained at period end......................... 14,188 14,813 16,027
</TABLE>
(1) Net of estimated future servicing fee rate.
For the years ended December 31, 1996 and 1995, $7.3 million and $22.2
million of unguaranteed portions of SBA loans, respectively, were originated for
sale. For the year ended December 31, 1994, $36.3 million of guaranteed portions
of SBA loans were originated for sale.
In addition to the above, excess servicing retained at December 31, 1996
includes $150,000 generated on the sale of business and industry loans
guaranteed by Farmer Mac.
During 1994, the Company changed its estimates regarding the prepayment
speeds of SBA loans it originates and services for investors. The net effect on
income before provision for income taxes for 1994 was an increase of
approximately $330,000.
During June 1990, the Company purchased the rights to service the
guaranteed portion of SBA loans from a third party. The unpaid principal balance
of such loans serviced for others by the Company exclusive of nonaccrual loans,
was $11,651,000 and 11,580,000 at December 31, 1996 and 1995, respectively. The
balance of purchased servicing rights was $600,000 and $772,000 at December 31,
1996 and 1995, respectively. Amortization of purchased servicing rights was
$172,000 in 1996, 1995 and 1994.
-63-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Deposits:
The aggregate amount of certificates of deposit with balances in excess of
$100,000, was $58,110,000 and $31,595,000 at December 31, 1996 and 1995,
respectively.
Maturities of certificates of deposit at December 31, 1996 were as follows
(amounts in thousands):
Year
1997...................................... $157,908
1998...................................... 25,024
1999...................................... 1,477
2000...................................... 857
2001...................................... 154
------------
$185,420
============
7. Income Taxes:
The current and deferred amounts of the tax provision for the years ended
December 31, 1996, 1995 and 1994 are as follows (amounts in thousands):
<TABLE>
December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal Currently payable...................... $ 1,392 $ 1,030 $ 1,439
Deferred............................... 234 (93) 50
State Currently payable...................... 376 289 395
Deferred............................... 75 (47) (21)
---------- ---------- ----------
$ 2,077 $ 1,179 $ 1,863
========== =========== ==========
Total Currently payable...................... $ 1,768 $ 1,319 $ 1,834
Deferred............................... 309 (140) 29
---------- ---------- ----------
$ 2,077 $ 1,179 $ 1,863
========== =========== ==========
</TABLE>
-64-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of the Company's
net deferred tax liability as of December 31, 1996 and 1995 are as follows
(amounts in thousands):
<TABLE>
December 31,
Deferred Tax Liabilities: 1996 1995
------ ------
<S> <C> <C>
Unamortized book gain in excess of unamortized tax gain
on sale of SBA loans $ 2,285 $ 2,091
Deferred loan costs 618 342
Loans marked to market 573 339
Other 351 250
-------- ---------
3,827 3,022
Deferred Tax Assets:
Book loan loss allowance in excess of tax loan loss allowance 1,603 1,363
State taxes paid or accrued 153 109
Accrued personal leave 248 234
Deferred compensation 222 159
Unrealized loss on investment securities 21 0
Accrued expenses 582 586
Other 275 157
-------- ---------
3,104 2,608
-------- ---------
Net deferred tax liability $ 723 $ 414
======== =========
</TABLE>
The Company believes that it is more likely than not that it will realize
the above deferred tax assets in future periods; therefore, no valuation
allowance has been provided against its deferred tax assets.
The total tax provision differs from the statutory federal income tax
rates for the reasons shown in the following table:
<TABLE>
December 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at statutory federal rate ............................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit.......................... 5.0 4.4 5.4
Income exempt from federal taxation.......................... (1.7) (0.4) (0.1)
Increase in cash surrender value
of life insurance policies................................. (0.7) (1.3) (0.9)
Other, net................................................... 0.8 0.4 (1.1)
----- ------ ------
Effective tax rate........................................... 38.4% 38.1% 38.3%
==== ===== =====
</TABLE>
8. Commitments and Contingent Liabilities:
Lease Payments. The Company is obligated for rental payments under certain
operating lease, capitalized lease and contract agreements, some of which
contain renewal options. Total rental expense included in net occupancy and
equipment expense amounted to $1,106,000, $1,211,000 and $922,000, for the years
ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996,
future minimum rentals to be received under noncancelable subleases were
approximately $419,000.
-65-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
At December 31, 1996, future minimum payments, by year and in the
aggregate, under the capital leases and noncancellable operating leases with
initial or remaining terms of one year or more consisted of the following (in
thousands):
<TABLE>
Capital Operating
Year Leases Leases
<S> <C> <C>
1997...................................... $ 38 $ 997
1998...................................... 38 828
1999...................................... 38 860
2000...................................... 38 789
2001...................................... 38 556
Thereafter................................ 378 1,789
------- --------
Total minimum lease payments.............. 568 $ 5,819
========
Less amount representing interest......... (295)
-------
Present value of net minimum
lease payments.......................... $ 273
=======
</TABLE>
Commitments to Lend. In the normal course of business, there are
outstanding various commitments and contingent liabilities, such as commitments
to extend credit and letters of credit, which are not reflected in the
consolidated financial statements. As of December 31, 1996 and 1995, the Company
had outstanding $78,053,000 and $46,030,000, respectively, in commitments to
extend credit and $2,024,000 and $1,083,000, respectively, in standby letters of
credit. At December 31, 1996, no losses are anticipated as a result of these
commitments.
Loan commitments are typically contingent upon the borrower meeting
certain financial and other covenants, and such commitments typically have fixed
expiration dates and sometimes require payment of fees. Approximately
$20,639,000 of the commitments at December 31, 1996, relate to SBA loans which
may require a construction phase, generally lasting less than 12 months. The
remainder relate primarily to commercial lines of credit, construction loans,
equity lines of credit, and commercial loans. The Company evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities, or business assets.
Standby letters of credit are conditional commitments written by the
Company to guarantee the performance of a client to a third party. These
guarantees are issued to the Company's commercial clients, and are typically
short-term in nature. Credit risk is similar to that involved in extending loan
commitments to customers, and the Company accordingly uses evaluation and
collateral requirements similar to those for loan commitments. Most such
commitments are collateralized.
Legal Actions. During 1987, the Bank took title, through foreclosure, of a
property located in Placer County which subsequent to the Bank's sale of the
property was determined to be contaminated with a form of hydrocarbons. At the
time it owned the property, the Bank became aware of and investigated the status
of certain underground tanks that had existed on the property. The Bank hired a
consultant to study the tanks and properly seal them. Several years later, and
after resale of the property, contamination was observed in the area of at least
one of the buried tanks and along an adjoining riverbank of the Yuba River. The
Bank, at the time of resale of the property, was not aware of this contamination
adjacent to the tanks but was aware of the existence of the tanks and disclosed
this to its purchaser.
A formal plan of remediation has not been approved by the County of Placer or
the State Regional Water Quality Board but is being finalized by an independent
consultant retained for this purpose. As a result of the discovery of the
contamination, two civil lawsuits were instituted against the Bank and other
prior owners by the current owner of the property, Rainbow Holding Company, who
is also the Bank's borrower. One of the actions, the state court
-66-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
matter, was dismissed by agreement of the parties. The other matter, filed in
the summer of 1995 in the U.S. District Court, Eastern District of California,
is ongoing, with a settlement conference anticipated in the next several months.
The Bank's external and internal counsel on this matter believe that the Bank's
share of the cost of remediation and the costs of defense will not be material
to the Bank's or the Company's performance and will be within existing reserves
established by the Bank for this matter. It is also expected that clean-up of
the property will be undertaken during 1997.
In addition, the Company is subject to some minor pending and threatened legal
actions which arise out of the normal course of business and, in the opinion of
Management and the Company's General Counsel, the disposition of these claims
currently pending will not have a material adverse affect on the Company's
financial position or results of operations.
Reserves. The Company is required to maintain reserves with the Federal
Reserve Bank of San Francisco equal to a percentage of its reservable deposits.
The reserve requirement at December 31, 1996 and 1995 was $5,054,000 and
$2,855,000, respectively.
9. Capital Requirements and Regulatory Restrictions:
The Company is regulated by the Federal Reserve Board and is limited as to
the payment of dividends by California corporate law to the amount of its
retained earnings. SierraWest Bank is regulated by the Federal Deposit Insurance
Corporation (the "FDIC"), whose regulations generally do not limit the payment
of dividends. In addition to the FDIC, SierraWest Bank is also regulated by the
California State Banking Department. California banking laws limit cash
dividends to the lesser of retained earnings or net income for the last three
years, net of the amount of distributions made to shareholders during such
period. At December 31, 1996, in accordance with statutory restrictions,
$11,647,000 of Bancorp's retained earnings were restricted as to the payment of
dividends; however, banking regulations also require that each bank maintain
certain capital ratios. These requirements may further act to limit the payment
of dividends.
The Company and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and, possibly,
additional discretionary - actions by regulators that, if undertaken, could have
a material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and the Bank's prompt corrective action classification are also subject to
qualitative judgements by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notification from the Federal Deposit Insurance
Corporation for the Bank as of December 31, 1996 and 1995 categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Bank's category.
-67-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company's and the Bank's actual capital amounts (in thousands) and ratios
are also presented, respectively, in the following tables.
<TABLE>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets):
Consolidated $ 46,668 13.6% $ 27,452 8.0% N/A N/A
SierraWest Bank 35,866 10.7% 26,816 8.0% 33,520 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 33,846 9.8% 13,815 4.0% N/A N/A
SierraWest Bank 31,670 9.4% 13,477 4.0% 20,215 6.0%
Tier I Capital (to Average Assets):
Consolidated 33,846 7.9% 17,137 4.0% N/A N/A
SierraWest Bank 31,670 7.6% 16,668 4.0% 20,836 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets):
Consolidated $ 42,610 16.6% $ 20,535 8.0% N/A N/A
Truckee River Bank 23,824 12.5% 15,247 8.0% 19,059 10.0%
Sierra Bank of Nevada 6,900 12.0% 4,600 8.0% 5,750 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 29,787 11.6% 10,271 4.0% N/A N/A
Truckee River Bank 21,685 11.3% 7,676 4.0% 11,514 6.0%
Sierra Bank of Nevada 6,216 10.7% 2,324 4.0% 3,486 6.0%
Tier I Capital (to Average Assets):
Consolidated 29,787 9.1% 13,093 4.0% N/A N/A
Truckee River Bank 21,685 9.2% 9,428 4.0% 11,785 5.0%
Sierra Bank of Nevada 6,216 7.7% 3,229 4.0% 4,036 5.0%
</TABLE>
SierraWest Bank's ratios are calculated under regulatory accounting
principles, which differ from generally accepted accounting principles.
10. Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose the
fair value of financial instruments for which it is practicable to estimate that
value. Although Management uses its best judgment in assessing fair value, there
are inherent weaknesses in any estimating technique that may be reflected in the
fair values disclosed. The fair value estimates are made at a discrete point in
time based on relevant market data, information about the financial instruments
and other factors. Estimates of fair value of instruments without quoted market
prices are subjective in nature and involve various assumptions and estimates
that are matters of judgment. Changes in the assumptions used could
significantly affect
-68-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
these estimates. Fair value has not been adjusted to reflect changes in market
condition for the period subsequent to December 31, 1996 and 1995. Therefore,
estimates presented herein are not necessarily indicative of amounts which could
be realized in a current transaction.
The following estimates and assumptions were used at December 31, 1996 and
1995, to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and Cash Equivalents. For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment Securities and Mutual Funds. For investment securities and
mutual funds, fair values are based on quoted market prices or dealer quotes. If
a quoted price is not available, fair value is estimated using quoted market
prices for similar securities.
Loan Receivables. The fair value of non-SBA loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. The fair value of loans held or available for sale is
estimated using quoted market prices for similar loans or the expected gain in
the case of loans being pooled for securitization. SBA loans in process which
will become available for sale after final disbursement are valued at cost plus
the estimated gain on sale but excluding any gain allocable to the undisbursed
portion of the loans. In assigning current market rates, it has been assumed
that these reflect future losses and that no additional provision for loan and
lease losses is required. The unguaranteed portion of SBA loans not being pooled
have been valued at book value, which approximates fair value. Loans on
nonaccrual or work out status have been valued at an estimated average
realization value for the underlying collateral based on past experience in
liquidation of comparable loans.
Excess Servicing. The unsold interest element of portions of SBA loans
that have been sold is valued at the current rate paid by the market for SBA
interest strips at December 31, 1996 and 1995.
Cash Surrender Value of Life Insurance. The carrying amount is estimated
to be the fair value.
Deposit Liabilities. The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Convertible Debentures. Fair value is based on quoted market prices at
December 31, 1996 and 1995.
Commitments to Fund/Sell Loans. The Company's commitments to fund loans
are primarily for adjustable rate loans indexed to the prime rate. For these
commitments, there is no difference between the committed amount and fair value.
At December 31, 1996 and 1995, the Company's commitments to fund fixed rate
loans were at rates which approximated market. The unrealized gain from the
subsequent sale of the commitment portion of SBA loans in process at December
31, 1996 and 1995 is estimated to be $839 thousand and $596 thousand,
respectively.
Derivative Financial Instruments. Based on quoted market prices at
December 31, 1996, the interest rate swap had a negative fair value of $149
thousand.
Letters of Credit. The Company's standby letters of credit have been
valued based on the fees charged for such instruments at December 31, 1996 and
1995. The difference between the letter of credit amounts and the fair value of
such amounts is immaterial.
The Company did not hold any commitments to sell loans at December 31,
1996 or 1995.
-69-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
December 31, 1996
Carrying Fair
Amount Value
Financial Assets:
<S> <C> <C>
Cash and cash equivalents............................................. $ 58,634 $ 58,634
Mutual funds.......................................................... 1,335 1,335
Investment securities................................................. 33,881 33,880
Loans receivable...................................................... 318,820 328,971
Excess servicing...................................................... 14,338 17,242
Cash surrender value of life insurance................................ 2,292 2,292
------------- -------------
$ 429,300 $ 442,354
============= =============
Financial Liabilities:
Deposits.............................................................. $ 399,651 $ 400,471
Convertible debentures................................................ 8,520 13,036
------------- -------------
$ 408,171 $ 413,507
============= =============
</TABLE>
<TABLE>
December 31, 1995
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets:
Cash and cash equivalents............................................. $ 39,189 $ 39,189
Mutual funds.......................................................... 1,391 1,391
Investment securities................................................. 28,343 28,350
Loans receivable...................................................... 236,124 240,099
Excess servicing...................................................... 14,813 16,797
Cash surrender value of life insurance................................ 2,170 2,170
------------- -------------
$ 322,030 $ 327,996
============= ==============
Financial Liabilities:
Deposits.............................................................. $ 293,154 $ 294,046
Convertible debentures................................................ 10,000 11,200
------------- -------------
$ 303,154 $ 305,246
============= ==============
</TABLE>
11. Related Party Transactions:
In the ordinary course of business, the Company makes loans to directors,
senior officers and shareholders on substantially the same terms, including
interest rates and collateral, as comparable transactions with unaffiliated
persons. As of December 31, 1995, loans outstanding to directors, senior
officers, and principal shareholders and their known associates which in
aggregate exceeded $60,000 were approximately $208,000, including loans to a
director who retired in 1996. There were no such loans outstanding at December
31, 1996. During 1996 there were $90,000 in loan disbursements and $234,000 in
loan payments with respect to the loans outstanding at December 31, 1995.
-70-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Employee Stock Option Plan:
Under the Company's 1988 stock option plan, 495,000 shares of stock were
reserved for employee stock options. Options under this plan could be granted to
full-time salaried officers and employees and to directors of Bancorp and its
subsidiaries at the fair market value of the stock on the date of grant. With
the exception of non-employee director options granted after August 16, 1995,
options granted under the 1988 plan are exercisable for a period of five years,
with 20% of the options vesting each year. Options granted to non-employee
directors after August 16, 1995 are fully vested upon grant and have a term and
exercise period of ten years. The 1988 plan was terminated in 1996 and replaced
by a new plan, under which 450,000 shares are available for issuance. Options
under this plan may be granted to full-time salaried officers and employees at
the fair market value of the stock on the date of the grant. The options have a
term of ten years and vesting provisions are determined by a committee of the
Board of Directors, with a minimum of 20% of the options vesting each year.
The following is a summary of stock option activity:
<TABLE>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding, January 1, 1994 ................................... 359,148 $6.86
Granted...................................................... 25,000 8.60
Terminated................................................... (42,604) 7.68
Exercised.................................................... (1,890) 6.40
----------
Outstanding, December 31, 1994 (65,626 exercisable
at a weighted average price of $6.79)........................... 339,654 6.89
Granted ..................................................... 163,288 10.34
Terminated ........................................... . . . (108,763) 6.70
Exercised ................................................... (20,590) 6.91
---------
Outstanding, December 31, 1995 (149,198 exercisable
at a weighted average price of $8.33).......................... 373,589 8.45
Granted...................................................... 75,000 14.31
Terminated................................................... (25,340) 7.80
Exercised.................................................... (30,720) 6.91
----------
Outstanding, December 31, 1996.................................. 392,529 9.74
</TABLE>
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<TABLE>
Options Outstanding Options Exercisable
Weighted Average
Remaining
Range of Number Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (Yrs) Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$ 4.75 - 5.00 13,250 0.9 $4.91 8,950 $4.89
$ 6.50 - 8.00 139,916 1.7 7.03 75,162 7.01
$ 9.25 - 9.75 96,163 7.5 9.67 82,163 9.73
$ 11.25 - 15.50 143,200 6.9 12.87 64,000 13.60
------- --------
$ 4.75 -15.50 392,529 5.0 9.74 230,275 9.73
======= =======
</TABLE>
At December 31, 1996, 375,000 shares were available for future grants under the
1996 plan.
-71-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using a binomial options pricing model with the following assumptions:
For non-employee grants made in 1995: expected life, seven years; risk free
interest rate, 5.93%. For fully vested grants made in 1996: expected life, seven
years; risk free interest rate, 5.97%. For all other employee grants made in
1996 and 1995: expected life, four years; risk free interest rates, 5.76% in
1996 and 5.79% in 1995. For all grants made in 1996 and 1995, stock volatility
was assumed to be 30% and dividends were assumed to be payable at 2.5%. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
1995 and 1996 awards had been amortized to expense over the vesting period of
the awards, pro forma net income would have been $1,722 thousand ($0.60 per
share fully diluted) in 1995 and $3,133 thousand ($0.96 per share fully diluted)
in 1996. However, the impact of outstanding non-vested stock options granted
prior to 1995 has been excluded from the pro forma calculation; accordingly, the
1995 and 1996 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all applicable stock
options.
13. Convertible Debentures:
During 1987, Bancorp sold to the public $250,000 of 9% optional
convertible debentures, convertible at the option of the holder at the end of
seven years from the date of issue at $6.06 per share or redeemable at par.
During 1994, $167,400 of Bancorp's 9% optional convertible debentures were
converted into 27,619 shares of Bancorp common stock. The conversion rate was
$6.06 per share. Of the remaining debentures, $72,600 were redeemed for cash,
and $10,000 were converted into 1,650 shares in 1995.
On February 8, 1994, Bancorp sold to the public $10,000,000 of 8 1/2 %
optional convertible subordinated debentures, convertible at the option of the
holder at $10.00 per share. These debentures mature on February 1, 2004 and are
redeemable on or after February 1, 1997 in whole or in part at the option of
Bancorp. The balance of convertible debentures outstanding at December 31, 1996
and 1995 was $8,520,000 and $10,000,000, respectively.
14. Salary Continuation Plan:
The Company has a Salary Continuation Plan covering certain of its senior
officers and directors. Under this plan, the officers and directors or their
beneficiaries will receive monthly payments after retirement or if earlier,
death. The Company has accrued $104,820, $66,818 and $77,708 as compensation
expense in 1996, 1995 and 1994, respectively, under this plan. To protect the
Company in the event of death prior to retirement, the Company has secured life
insurance on the lives of the covered officers and directors.
15. Employee Stock Ownership Plan:
Officers and other employees of Bancorp and its subsidiary are eligible
for participation in the "SierraWest Bancorp KSOP Plan" (the "KSOP") which
provides for a qualified cash or deferred arrangement and discretionary employer
matching and profit sharing contributions. The Company contributes to the plan
at the discretion of the Board of Directors. Contributions can take the form of
cash contributions or Bancorp common stock. $238,000, $198,000, and $167,000 was
contributed to the KSOP in 1996, 1995 and 1994, respectively.
-72-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
16. Preferred Stock
On December 21, 1995, the Company designated 200,000 shares of its
10,000,000 authorized preferred shares as Series A Junior Participating
Preferred Stock (Series A stock). One share of Series A stock has the same
voting and participation rights as one hundred shares of common stock. On this
same date, the Company's Board of Directors adopted a shareholder rights
protection plan (the Plan) and declared a dividend of one stock right for each
share of common stock outstanding on January 16, 1996. Upon the occurrence of
certain events, the right is convertible into one one-hundredth of a share of
Series A stock for an exercise price of $40. As the rights are not convertible
at the option of the holder and there is no assurance that they will become
convertible, the Company has not assigned a value to the rights. The Plan became
effective March 3, 1996.
-73-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
17. Other Expense:
Other expense for the years ended December 31, 1996, 1995 and 1994 include
the following (amounts in thousands):
<TABLE>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Advertising................................. $ 600 $ 715 $ 298
Directors' fees and expenses................ 429 909 349
FDIC assessments............................ 4 284 575
Insurance(1)................................ 242 277 286
Legal fees.................................. 484 470 149
Postage..................................... 337 304 249
Stationery and supplies..................... 416 334 252
Telephone................................... 374 350 262
Sundry losses............................... 808 1,370 351
Other....................................... 2,431 1,903 1,674
---------- ---------- ----------
$ 6,125 $ 6,916 $ 4,445
========== ========== ==========
</TABLE>
(1) Excludes medical insurance and workers' compensation premiums which are
included in salaries and related benefits.
-74-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
18. Condensed Parent Company Only Financial Statements:
SIERRAWEST BANCORP STATEMENTS OF FINANCIAL CONDITION
December 31, (in thousands except for share amounts)
<TABLE>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents......................................................... $ 3,655 $ 5,166
Investment in subsidiaries........................................................ 37,106 33,568
Due from subsidiary............................................................... 29 13
Other .......................................................................... 2,705 2,133
----------- -----------
TOTAL ASSETS................................................................ $ 43,495 $ 40,880
=========== ===========
LIABILITIES
Accrued expenses.................................................................. $ 1,007 $ 1,047
Due to subsidiary................................................................. 51 0
Accounts payable.................................................................. 1 0
Convertible debentures............................................................ 8,520 10,000
----------- -----------
Total Liabilities........................................................... 9,579 11,047
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 9,800,000 shares
authorized; none issued..................................................... 0 0
Preferred stock series A, no par value; 200,000
shares authorized; none issued.............................................. 0 0
Common stock, no par value; 10,000,000 shares authorized;
2,771,139 and 2,592,419 shares issued and outstanding ..................... 12,291 10,709
Retained earnings................................................................. 21,654 19,131
Unrealized loss on investment securities available for sale, net of
tax of $21 and $6............................................................... (29) (7)
----------- -----------
Total Shareholders' Equity.................................................. 33,916 29,833
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.................................... $ 43,495 $ 40,880
=========== ===========
</TABLE>
-75-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
STATEMENTS OF INCOME
For the Years Ended December 31, (in thousands):
1996 1995 1994
---- ---- ----
Income
<S> <C> <C> <C>
Service fees................................................. $ 1,185 $ 1,389 $ 1,339
Dividends from subsidiary.................................... 1,000 300 0
Interest income.............................................. 166 464 355
Other income................................................. 283 430 382
----------- ----------- -----------
Total Income......................................... 2,634 2,583 2,076
----------- ----------- -----------
Expense
Salaries and related benefits................................ 1,553 1,820 1,693
Interest expense............................................. 728 861 792
Other expense................................................ 1,362 1,291 967
----------- ----------- -----------
Total Expense........................................ 3,643 3,972 3,452
----------- ----------- -----------
Loss Before Income Tax Benefit
and Equity in Undistributed Income
of Subsidiary.......................................... (1,009) (1,389) (1,376)
Applicable income tax benefit................................ 777 665 572
----------- ----------- -----------
Income (Loss) Before Equity in Undistributed
Income of Subsidiary................................... (232) (724) (804)
Equity in Undistributed Income of
Subsidiary............................................. 3,560 2,640 3,807
----------- ----------- -----------
NET INCOME........................................... $ 3,328 $ 1,916 $ 3,003
=========== =========== ===========
</TABLE>
-76-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, (in thousands):
1996 1995 1994
---- ---- ----
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
<S> <C> <C> <C>
Cash flows from operating activities:
Service fees received.................................. $ 1,163 $ 1,389 $ 1,359
Interest received...................................... 172 477 329
Other income received.................................. 283 325 434
Interest paid.......................................... (780) (861) (443)
Cash paid to suppliers and employees................... (2,723) (2,767) (3,330)
Income tax refund...................................... 1,098 564 536
----------- ----------- -----------
Net cash used in operating activities........................ (787) (873) (1,115)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................... (1,131) (164) (99)
Loans purchased........................................ 0 0 (1,750)
Loans sold............................................. 0 1,813 0
Principal payments collected on loans.................. 0 42 0
Dividend received...................................... 1,000 300 0
Increase in investment in subsidiary................... 0 (2,000) (300)
----------- ----------- ------------
Net cash used in investing activities........................ (131) (9) (2,149)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock............. 212 142 12
Dividend paid.......................................... (805) (624) 0
Proceeds from issuance of debentures................... 0 0 10,000
Cash paid to redeem debentures......................... 0 0 (73)
Repurchase of common stock............................. 0 (445) 0
----------- ----------- -----------
Net cash (used in) provided by financing activities.......... (593) (927) 9,939
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents....................................... (1,511) (1,809) 6,675
Cash and cash equivalents beginning of year.................. 5,166 6,975 300
----------- ----------- -----------
Cash and cash equivalents end of year ....................... $ 3,655 $ 5,166 $ 6,975
=========== =========== ===========
</TABLE>
-77-
<PAGE>
<TABLE>
SIERRAWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
TO NET CASH USED IN
OPERATING ACTIVITIES
Net income................................................... $ 3,328 $ 1,916 $ 3,003
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization expense.................. 241 228 217
(Increase) decrease in due from subsidiary............. (22) 0 28
Increase (decrease) in due to subsidiary............... 51 0 (1)
(Increase) decrease in prepaid expenses................ 13 (16) (3)
Decrease (increase) in other assets.................... 111 108 (717)
(Decrease) increase in accrued expenses................ (270) 37 201
Increase (decrease) in taxes payable................... 321 (101) (36)
Gain on loan sales..................................... 0 (105) 0
Dividend from subsidiary............................... (1,000) (300) 0
Equity in undistributed income of
subsidiaries......................................... (3,560) (2,640) (3,807)
----------- ----------- -----------
Total Adjustments.................................... (4,115) (2,789) (4,118)
----------- ----------- -----------
Net cash used in operating
activities............................................. $ (787) $ (873) $ (1,115)
=========== =========== ===========
</TABLE>
19. Subsequent Event:
In January 1997, Bancorp signed a definitive agreement to acquire
Mercantile Bank, based in Sacramento, California. Mercantile shareholders
will receive total compensation of $6.6 million, subject to certain
adjustments primarily based upon the level of deposits and capital,
consisting of 50% cash and 50% stock. Mercantile has total assets of
approximately $46 million, and the transaction is expected to close in
June, 1997, subject to the approval of Mercantile's shareholders and
federal and state regulators.
-78-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements on accounting disclosures with
accountants.
-79-
<PAGE>
<TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<S> <C> <C> <C>
Year
First
Appointed Principal Occupation
Name and Title Age Director During the Past Five Years
Current Directors
David W. Clark 59 1990 Chairman/CEO of Clark and Sullivan
Constructors, Inc. since January 1977.
Ralph J. Coppola 62 1996 Self-employed physician and auto dealer.
William T. Fike 49 1992 President/CEO and Director of Bancorp since July
1992. President/CEO of SierraWest Bank since
October 1996. Executive Vice President and
Chief Operating Officer of the Company from May
1991 to July 1992.
Richard S. Gaston 63 1995 President and director of GAC Corporation and
Gaston & Wilkerson Management Group, real estate
management companies.
Jerrold T. Henley 58 1986 Chairman of the Company since July 1992. President/CEO
of the Company from its inception to June 1992.
Holds directorship in Community Assets Management,
a registered investment company.
John J. Johnson 63 1996 Retired. Owner, Johnson's Sporting World, Reno,
Nevada until April 1992.
Ronald A. Johnson 56 1996 Self-employed CPA and financial consultant.
A. Morgan Jones 64 1986 Attorney. President and director of Truckee River
Associates (commercial real estate management,
development and sales).
Jack V. Leonesio 53 1986 Owner of a restaurant/bar in Truckee, California
since 1973 and co-owner of a bar in Reno, Nevada
since April 1994.
William W. McClintock 51 1986 Self-employed CPA and financial consultant.
Thomas M. Watson 53 1986 Managing Officer, Truckee River Associates.
Executive Officers
William T. Fike 49 President/CEO and Director of Bancorp since July
1992. President/CEO of SierraWest Bank since
October 1996. Executive Vice President and
Chief Operating Officer of the Company from
May 1991 to July 1992.
</TABLE>
-80-
<PAGE>
<TABLE>
<S> <C> <C>
Principal Occupation
Name Age During the Past Five Years
David C. Broadley 53 Executive Vice President and Chief Financial
Officer of Bancorp since February 1994.
Executive Vice President and Chief Financial
Officer of SierraWest Bank since February 1995.
Senior Vice President and Chief Financial Officer
of Bancorp, from 1985 to 1994.
Martin R. Sorensen 53 Executive Vice President and Chief Banking
Officer of SierraWest Bank since October, 1996.
President, CEO and Chief Banking Officer of
SierraWest Bank from May 1994 to October 1996.
Executive Vice President of Bancorp from
November 1995 to October 1996. President and
CEO of Codding Bank from March 1992 through
April 1994.
Patrick S. Day 47 Executive Vice President and Chief Credit Officer
of the Company since July 1995. Executive Vice
President and Chief Operating Officer of Business
& Professional Bank from January through June
1995. Principal of PSD Associates, a bank
consulting company, from 1993 to 1995.
Executive Vice President and Chief Credit Officer
of Bank of San Francisco from 1991 to 1993.
Vice President of First Interstate Bank of
California from 1988 to 1991.
Mary Jane Posnien 53 Senior Vice President of Operations for
SierraWest Bank since November 1995. Senior
Vice President of Operations for Sierra Bank of
Nevada from March 1995 to November 1995.
Vice President of Operations for Sierra Bank of
Nevada from December 1993 to March 1995.
Manager of Gotcha Covered, a carpet/window
covering store from 1991 through 1993.
</TABLE>
None of the directors or executive officers were selected pursuant to any
arrangement or understanding other than with the directors and executive
officers of the Company acting within their capacities as such. There are no
family relationships between any of the directors and executive officers of
Bancorp. The directors have been elected to serve until the 1997 Annual Meeting
of Shareholders and until their successors have qualified. The executive
officers are appointed until the 1997 Annual Meeting of Shareholders and are
subject to at-will termination by the Company, except as provided in any
applicable employment contract. There are no legal proceedings involving
directors or executive officers.
Section 16(a) Beneficial Ownership and Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain officers and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and Nasdaq. Directors, certain officers and greater than ten-percent
shareholders ("Reporting Persons") are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
-81-
<PAGE>
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that from January 1, 1996, to
December 31, 1996, all filing requirements applicable to its Reporting Persons
were complied with, except that Mr. McClintock and Mr. Peter Raffetto were each
late in filing a Form 4 covering one transaction, Mr. A. Milton Seymour was late
in filing a Form 4 covering three transactions and Mr. Watson reported on Form 5
a sale that should have been reported earlier on Form 4.
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
(# of
Shares) # of
Name and Other Restricted Shares LTIP All
Principal Annual Stock Options/ Pay- Other
Position Year Salary Bonus Comp. Awards SARS Outs Comp.
- -------- ---- ------ ----- ------ ---------- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William T. Fike 1996 $ 230,384(1) $ 0 $ 4,643 0 50,000 0 $ 17,371
President/CEO of 1995 $ 200,000 $ 0 $ 3,451 0 10,000 0 $ 16,444
the Company 1994 $ 197,083 $ 62,601 $ 3,360 0 10,000 0 $ 15,296
David C. Broadley 1996 $ 131,256 $ 0 $ 106 0 0 0 $ 19,787
Executive Vice 1995 $ 130,214 $ 0 $ 0 0 6,000 0 $ 18,634
President/CFO 1994 $ 122,170 $ 31,045 $ 0 0 0 0 $ 17,289
of the Company
Martin R. Sorensen 1996 $ 147,565 $ 0 $ 1,530 0 0 0 $ 22,233
Executive Vice 1995 $ 145,834 $ 0 $ 2,808 0 6,000 0 $ 32,032
President of the Bank 1994 $ 93,333 $ 30,047 $ 3,617 0 15,000 0 $ 5,552
Patrick S. Day(2) 1996 $ 126,519 $ 0 $ 3,858 0 0 0 $ 1,891
Executive Vice 1995 $ 57,293 $ 0 $ 1,005 0 14,000 0 $ 123
President of the
Company
</TABLE>
Notes:
(1) Includes payment of accrued vacation pay of $30,384.
(2) Hired in 1995.
Bonus - Bonuses are paid in the year after they are earned. For purposes of this
table, bonuses have been reflected in the year earned, not the year paid. No
bonuses were earned by the executives listed above in 1995 or 1996.
Other Annual Compensation - Includes value of personal use of Company provided
automobiles and reimbursements for the personal portion of club dues and spousal
travel expenses.
-82-
<PAGE>
All Other Compensation - Includes the following:
<TABLE>
1996 1995 1994
---- ---- ----
Company Contribution to 401(k) Plan For:
<S> <C> <C> <C>
Mr. Fike $ 4,652 $ 4,750 $ 4,264
Mr. Broadley $ 3,896 $ 3,742 $ 3,485
Mr. Sorensen $ 4,427 $ 4,375 $ 0
Mr. Day $ 938 $ 0 $ 0
Company Contributions to ESOP Plan For:
Mr. Fike $ 1,260(1) $ 1,169 $ 1,353
Mr. Broadley $ 718(1) $ 1,015 $ 1,102
Mr. Sorensen $ 807(1) $ 1,159 $ 0
Mr. Day $ 692(1) $ 0 $ 0
(1) Amount estimated for 1996, pending final plan accounting for the 1996 plan year.
Moving Expense Reimbursement Paid To:
Mr. Sorensen $ 0 $ 2,229 $ 4,846
Allocations to Salary Continuation Plan For:
Mr. Fike $ 9,858 $ 8,924 $ 8,078
Mr. Broadley $ 13,675 $ 12,379 $ 11,204
Mr. Sorensen $ 15,789 $ 23,059 $ 0
Cost of life insurance provided by Company of which the benefit exceeded $50,000
For:
Mr. Fike $ 1,601 $ 1,601 $ 1,601
Mr. Broadley $ 1,498 $ 1,498 $ 1,498
Mr. Sorensen $ 1,210 $ 1,210 $ 706
Mr. Day $ 261 $ 123 $ 0
</TABLE>
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<PAGE>
The following table shows the options issued during 1996 for those individuals
listed in the summary table:
<TABLE>
Option/SAR Grants During 1996 Fiscal Year
Percent of
total
options/SARs Potential realizable value
granted to at assumed annual rates of
Options/SARs employees in Exercise or stock price appreciation for
granted fiscal year base price Expiration option term
Name (#) (%) (/Sh) date 5% 10%
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William T. Fike 50,000 66.7 $ 14.25 June 30, 2006 $448,087 $1,135,542
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the number of unexercised options at year-end and the
value of the unexercised In- the-Money options at year-end for those individuals
listed in the summary table:
<TABLE>
Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR Value
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options/SARS at Options/SARS At
Acquired FY-End-#Shares FY End-$
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ------------------ -------------
<S> <C> <C> <C> <C>
Mr. Fike 0 $0 70,850 / 23,900 $231,125 /160,750
Mr. Broadley 0 $0 16,050 / 14,700 $133,800 /106,200
Mr. Sorensen 0 $0 7,200 / 13,800 $ 50,100 / 87,900
Mr. Day 0 $0 2,800 / 11,200 $ 15,900 / 63,600
</TABLE>
The value of unexercised In-the-Money options is calculated by subtracting the
exercise price from the fair market value at December 31, 1996 of the securities
underlying the options.
Salary Continuation Plan
The Company has entered into agreements with certain directors of the Company,
the Bank and the Bank's former subsidiary, Sierra Tahoe Mortgage Company, and
certain executive officers of the Company, to provide for salary continuation
benefits upon the retirement or earlier death of the directors and executive
officers. The benefits pursuant to this plan are: $50,000 per year for Messrs.
Fike and Sorensen and $40,000 per year for Mr. Broadley payable for a period of
20 years following retirement at age 65 or earlier death. Benefits for the
participating directors are $4,000 per year for 15 years, beginning 15 years
after their respective plan commencement dates.
In the event of earlier death, the benefits are payable to the officer's or
director's designated beneficiary. The Company has secured life insurance
policies for the purpose of protecting it from loss in the event of earlier
death. In the event of earlier retirement or early termination of office or
employment of the officer or director, a reduced benefit is payable. At the
option of the officer or director the benefit may be received in a lump sum
based on a discounted formula. Accrued benefits for both officers and directors
vest 20% per year over a five-year period from the date of association with the
Company. Additionally, there are restrictions on the covered individual from
engaging in any competing occupation upon retirement and provisions requiring
the covered individual to perform advisory services, for compensation, for a
period of five (5) years following retirement or early termination of office or
employment.
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<PAGE>
During 1996 the agreements of Messrs. Fike, Broadley and Sorensen and certain
directors of SWB were modified to provide for an acceleration of benefits such
that the full amount due under the agreement would become payable in the case of
a change of control of the Company. For the Directors' plans this would be in
the form of a lump sum payment based on a discounted formula. The plans for
Messrs. Fike, Broadley and Sorensen provide for this payment in the form of 240
equal monthly installments. The agreements were further modified to eliminate
the restrictions described above related to engaging in a competing occupation
and the performance of advisory services upon a change in control.
As of December 31, 1996, executive officers were credited with the following
accrued benefits under this Plan:
David C. Broadley $ 94,163
William T. Fike 44,851
Martin R. Sorensen 38,848
Employment Agreements
Effective October 1, 1994, the Company entered into an employment agreement with
Mr. Fike covering the terms of his employment, compensation, and conditions of
termination. Unless employment is terminated or the agreement is extended, Mr.
Fike's employment will continue until December 31, 1999. His base salary was set
initially at $200,000 per year and he is eligible for bonuses and participation
in all employee benefit programs. He will be considered for periodic increases
in base salary at the discretion of the Board of Directors. He will continue to
participate in the Salary Continuation Plan, be provided with a Company car and
a country club membership. In the event of termination without cause, Mr. Fike
will receive all amounts owing to him at the date of termination and a lump-sum
severance payment equal to eighteen months' base salary. During the month of
February 1997, Mr. Fike's base salary was increased to $250,000 per year.
In 1996, Messrs. Broadley, Sorensen, and Day entered into Senior Manager
Separation Benefits Agreements. Under the terms of these agreements, certain
benefits would become payable to the manager in the event of the termination of
employment for any reason, other than a material violation of the Company's
personnel policies and procedures. The benefit includes one year's base salary
(as to Messrs. Broadley and Sorensen) or nine months' base salary (as to Mr.
Day) paid as a lump sum or in 24 equal semi-monthly payments (as to Messrs.
Broadley and Sorensen) or 18 equal semi-monthly payments (as to Mr. Day), at the
election of the executive officer. If the semi-monthly payments are chosen,
health benefits continue to be provided on the same terms as during active
employment. For Messrs. Broadley and Sorensen, in the event of a change in
control or reorganization of the Company, the executive officer may, within a
nine month period, resign from the Company and receive the same benefits as
would be payable upon involuntary termination.
Compensation of Directors
Directors' fees for board and committee meetings are as follows:
<TABLE>
Board Meetings Committee Meetings
Retainer Attendance Retainer Attendance
<S> <C> <C> <C> <C>
Chairman of the Board $3,383/month $0 $0 $0
Director $1,500 - 1,600/month $0 (1) $0 $150/meeting(2)
Committee Chairman N/A N/A $100/month $150/meeting(2)
</TABLE>
(1) Compensation for attendance at special board meetings is $100 per director
per meeting.
(2) Attendance at Directors' Loan Committee is $250 per meeting.
In addition to the above fees, an educational allowance is determined annually
by the Board. The Chairman of the Board allocates funds for educational expenses
pursuant to requests submitted by each director until the allowance is
exhausted.
The Company's Deferred Compensation and Stock Award plan is provided to members
of the Board of Directors who are not employees of SWB ("Outside Directors") or
of its subsidiary. Under this plan Outside Directors are
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<PAGE>
required to defer one-third of their fees for regular board meetings in the form
of a promise by SWB to deliver common stock and the remaining amount of director
fees may also be deferred and paid in common stock at the election of the
director. The purpose of this plan is to enable Outside Directors to defer
receipt of compensation for their services to later years and to provide part of
the compensation for their services in a promise to deliver shares of SWB common
stock in order to better align the interests of Outside Directors with those of
the Company's shareholders.
Expenses for the directors and their spouses related to attendance at the
Company's Annual weekend directors' retreat are paid for by the Company.
Directors are eligible for coverage under the Company's group health insurance
plan. Premiums for health insurance coverage are shared between the director and
the Company on the same basis as that for Company employees. Additionally, the
Company pays for premiums covering the first $25,000 of accidental death
benefits and the administration of KEOGH plans for directors, if they elect to
participate.
The Company maintains a salary continuation plan (see "Salary Continuation Plan"
herein) for its executive officers, certain senior officers and its directors.
As of December 31, 1996, the Company's non-employee directors were credited with
$72,184 in accrued benefits under the directors' salary continuation plan. The
Company allocated $14,691 to the Salary Continuation Plan in 1996 on behalf of
its non-employee directors.
Personnel/Compensation Committee Interlocks and Insider Participation
With the exception of Jerrold Henley and William Fike, no member of the
Personnel/Compensation Committee is a former or current officer or employee of
the Company. Mr. Henley retired as President and CEO of the Company in June
1992. Mr. Fike succeeded Mr. Henley as President and CEO of the Company. There
are no compensation committee interlocks between the Company and other entities
involving Company executive officers and Company directors.
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<PAGE>
ITEM 12. SHARE HOLDINGS OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management of Bancorp knows of no person who owns, beneficially or of record,
either individually or together with associates, five percent (5%) or more of
the outstanding shares of Bancorp's common stock, except as set forth in the
table below. This table also sets forth, as of March 1, 1997, the number and
percentage of shares of Bancorp's outstanding common stock beneficially owned,
directly or indirectly, by each of Bancorp's directors, named executive officers
and principal shareholders, and by the directors and executive officers of the
Company as a group. The shares "beneficially owned" are determined under
Securities and Exchange Commission Rules, and do not necessarily indicate
ownership for any other purpose. In general, beneficial ownership includes
shares over which a director, principal shareholder, or executive officer has
sole or shared voting or investment power and shares which such person has the
right to acquire within sixty (60) days of March 1, 1997. Management is not
aware of any arrangements which may, at a subsequent date, result in a change of
control of Bancorp.
<TABLE>
Shares Shares
Owned with Owned with
Sole Voting Shared Shares
and Voting and Acquirable Percent
Investment Investment within of
Beneficial Owner Power Power 60 days(1) Total Shares Class
- ---------------- ------------ ------------ ---------- ------------- -----
Directors and Named
Executive Officers
<S> <C> <C> <C> <C> <C>
David W. Clark 981 19,064 6,316 26,361 *
William T. Fike 4,594 726 72,500 77,820 2.6%
Ralph J. Coppola 2,941 1,148 1,124 5,213 *
Jerrold T. Henley 49,452 11,964 61,416 2.1%
John J. Johnson 1,217 2,157 1,829 5,203 *
Ronald A. Johnson 2,788 773 3,561 *
A. Morgan Jones 1,164 619 8,449 10,232 *
Jack V. Leonesio 14,181 199 14,380 *
William W. McClintock 12,650 10,449 23,099 *
Richard Gaston 110 3,429 1,784 5,323 *
Thomas M. Watson 7,202 344 8,893 16,439 *
David C. Broadley 9,067 1,431 16,050 26,548 *
Patrick S. Day 1,500 800 2,300 *
Martin R. Sorensen 38 38 *
Total for Directors
and Executive Officers
(numbering 15) 58,501 78,370 141,730 278,601 9.1%
Principal Shareholders
Investors of America, L.P.
39 Glen Eagles Drive
St. Louis, MO 63124 282,900 282,900 8.8%
- ------------
* less than one percent
</TABLE>
(1) Includes shares that can be purchased through Bancorp's stock option plan.
Also includes 3,500 and 2,000 shares acquirable through debenture conversion for
Mr. Henley and Mr. McClintock, respectively. For non-employee directors,
includes 199 shares earned under the Directors Deferred Compensation and Stock
Award Plan for all but Mr. Clark and Mr. Henley (214 shares), Mr. Watson (643
shares), and Mr. Coppola (596 shares).
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors of Bancorp and the companies with which they are
associated are customers of, or have had banking transactions with, SierraWest
Bank in the ordinary course of their business and SierraWest Bank expects to
have banking transactions with these persons in the future. In Management's
opinion, since January 1, 1996, all loans and commitments to lend included in
such transactions were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar creditworthiness and, in
the opinion of Management, did not involve more than a normal risk of
collectibility or present other unfavorable features.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 44 through 78:
(i) Consolidated Statements of Financial Condi-
tion as of December 31, 1996, and 1995.
(ii) Consolidated Statements of Income for the
years ended December 31, 1996, 1995 and 1994.
(iii) Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
(iv) Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994.
(v) Notes to Consolidated Financial Statements
for the years ended December 31, 1996, 1995
and 1994.
(vi) Report of Independent Auditor.
2. Financial Schedules:
None required.
Reports on Form 8-K:
The Bancorp filed one Form 8-K since the filing of the
last Form 10-Q. Dated January 24, 1997, it reported the
signing of a definitive agreement by Bancorp to acquire
Mercantile Bank.
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<PAGE>
Exhibits
Exhibit
Number Description
2.1 Plan of Acquisition and Merger by and between SierraWest Bancorp,
SierraWest Bank and Mercantile Bank, filed as Exhibit 2 to
Registrant's Form 8-K dated January 24, 1997, and by this
reference incorporated herein.
3.1 Articles of Incorporation and by-laws, filed as Exhibit 3.1 to
Registrant's 1993 Annual Report on Form 10-K, and by this
reference incorporated herein.
3.2 Amendment to Articles of Incorporation and by-laws, filed as
Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and by this reference incorporated
herein.
4.1 Form of Indenture between the Registrant and American Stock
Transfer & Trust Company, as Trustee, relating to the issuance of
the 8.5% Subordinated Convertible Debentures due 2004, filed as
Exhibit 4.1 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO. 33-72498), and by this
reference incorporated herein.
4.2 Form of Debenture (included in Exhibit 4.1).
4.3 Rights Agreement between Sierra Tahoe Bancorp and American Stock
Transfer & Trust Co., dated January 16, 1996, filed as Exhibit 4
to Registrant's Form 8-A dated January 3, 1996, and by this
reference incorporated herein.
10.1 Form of Financial Advisory and Sales Agency Agreement, filed as
Exhibit 10.1 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO. 33-72498), and by this
reference incorporated herein.
10.2 Sierra Tahoe Bancorp KSOP Plan, filed as Exhibit 10(m) to the
Registrant's 1992 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.3 Interest Rate Swap Agreement between Truckee River Bank and Sanwa
Bank California, dated March 1, 1996, filed as Exhibit 10.3 to
Registrant's 1995 Annual Report on Form 10-K and by this reference
incorporated herein.
10.4 Sublease Agreement between Truckee River Bank and Pacific
Pawnbrokers, effective February 1, 1996, filed as Exhibit 10.4 to
Registrant's 1995 Annual Report on Form 10-K and by this reference
incorporated herein.
10.5 License and Service Agreement between Registrant and Essieh &
Associates, Inc., dated October 6, 1992, filed as Exhibit 10(r) to
Registrant's 1992 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.6 Rental lease between Truckee River Bank and Haciett Management
Corporation (SBA Reno office), dated January 28, 1993, filed as
Exhibit 10(t) to Registrant's 1992 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.7 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Mary Jane Posnien, dated January 10, 1996.
10.8 Purchase and Sale Agreement between Rubin-Sadd Development Company
and Sierra Bank of Nevada dated December 15, 1995, filed as
Exhibit 10.8 to Registrant's 1995 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.9 Agreement between Registrant and American Institute of
Banking/California, filed as Exhibit 10(v) to Registrant's 1992
Annual Report on Form 10-K, and by this reference incorporated
herein.
10.10 Amendments to Sierra Tahoe Bancorp KSOP Plan, dated June 24, 1993
and September 14, 1994, filed as Exhibit 10.10 to Registrant's
1994 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.11 Three Agreements re Deferred Compensation for Executives, filed as
Exhibit 10(d) to the Registrant's 1986 Annual Report on Form 10-K,
and by this reference incorporated herein.
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<PAGE>
10.12 Stock Plan Agreement, Incentive Stock Option Agreement and a Non-
Qualified Stock Option Agreement for the Registrant, filed as
Exhibit 10(b) to Registrant's 1988 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.13 Equipment Sale Agreement between Sierra Tahoe Service Company and
Information Technology Inc., dated November 22, 1991, filed as
Exhibit 10(g) to Registrant's 1991 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.14 Employment Agreement between Registrant and William T. Fike, dated
December 22, 1994, filed as Exhibit 10.14 to Registrant's 1994
Annual Report on Form 10-K, and by this reference incorporated
herein.
10.15 Stock Option Agreement between Sierra Tahoe Bancorp and Richard S.
Gaston dated August 17, 1995, filed as Exhibit 10.15 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.16 Contract between Registrant and Federal Home Loan Mortgage
Corporation, dated March 31, 1992, and Attachment to Master
Commitment Agreement, dated April 9, 1992, filed as Exhibit 28(5)
to Registrant's March 31, 1992 Quarterly Report on Form 10-Q, and
by this reference incorporated herein.
10.17 Stock Option Agreement between Sierra Tahoe Bancorp and David W.
Clark dated August 17, 1995, filed as Exhibit 10.17 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.18 Stock Option Agreement between Sierra Tahoe Bancorp and William W.
McClintock dated August 17, 1995, filed as Exhibit 10.18 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.19 Sierra Tahoe Bancorp 1996 Stock Appreciation Rights Plan, filed as
Exhibit C to Registrant's Proxy Statement for its July 23, 1996
annual meeting of shareholders, and by this reference incorporated
herein.
10.20 Employee Stock Ownership Plan, filed as Exhibit 9 to Registrant's
Registration Statement on Form S-4, (Registration No. 33-3915),
and by this reference incorporated herein.
10.21 Cafeteria Plan Agreement, filed as Exhibit 10(f) to Registrant's
1986 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.22 Form of Trust Indenture, filed as Exhibit 4 to Registrant's
Registration Statement on Form S-2, dated June 25, 1991
(Registration No. 33-41398), and by this reference incorporated
herein.
10.23 Directors' Agreement, filed as Exhibit 2.3 to Registrant's
Registration Statement on Form S-4, (Registration No. 33-34954),
and by this reference incorporated herein.
10.24 Sierra Tahoe Bancorp 1988 Stock Option Plan, filed as Exhibit 28
to Registrant's Registration Statement on Form S-8, dated April
10, 1989 (Registration No. 33-28004), and by this reference
incorporated herein.
10.25 Lease Agreement "Gateway at Donner Pass Limited" between Truckee
River Bank (Tenants) and Gateway at Donner Pass Limited
(Landlords), dated May 21, 1991, filed as Exhibit 28(G) to
Registrant's September 30, 1991 Quarterly Report on Form 10-Q, and
by this reference incorporated herein.
10.26 Grass Valley Lease Agreement between Ray Stone Incorporated and
Truckee River Bank, filed as Exhibit 28(G) to Registrant's
September 30, 1990 Quarterly Report on Form 10-Q, and by this
reference incorporated herein.
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<PAGE>
10.27 Lease and Memorandum of Lease between Walter Neal Olson and
Patricia Olson (Lessors) and Wells Fargo Bank, a California
banking corporation (Lessee), dated November 5, 1962, as amended
on March 8, 1973, filed as Exhibit 10.29 to Registrant's
Registration Statement on Form S-2, dated February 5, 1994
(Registration NO. 33-72498), and by this reference incorporated
herein.
10.28 Sublease between Wells Fargo Bank, N.A., a national banking
association (Sublessor), and Truckee River Bank, a California
Statement Bank (Sublessee), dated December 1, 1984, filed as
Exhibit 10.30 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO.
33-72498), and by this reference incorporated herein.
10.29 Lease between Jerome Bunch, for himself and his assigns (Lessor),
and Truckee River Bank (Lessee), dated July 10, 1984, filed as
Exhibit 10.31 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO. 33-72498), and by this
reference incorporated herein.
10.30 Lease between Charles E. Nagy and Martha Nagy (Lessor) and Truckee
River Bank (Lessee), dated June 10, 1989, filed as Exhibit 10.32
to Registrant's Registration Statement on Form S-2, dated February
5, 1994 (Registration NO. 33-72498), and by this reference
incorporated herein.
10.31 Lease between Truckee River Bank (Sublessor) and Tran-Sierra
Investment, Inc. (Sublessee), dated February 27, 1991, filed as
Exhibit 10.33 to Registrant's Registration Statement on Form S-2,
dated February 5, 1994 (Registration NO. 33-72498), and by this
reference incorporated herein.
10.32 Credit Agreement between Sanwa Bank California and Truckee River
Bank dated October 10, 1995, filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and by this reference incorporated herein.
10.33 Equipment Sale Agreement between Information Technology, Inc., and
Truckee River Bank, filed as Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and by this reference incorporated herein.
10.34 Lease between Midby-Rancho Partnership (Lessor) and Truckee River
Bank (Lessee), dated November 23, 1993, filed as Exhibit 10.34 to
Registrant's 1993 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.35 Stock Option Agreement between Sierra Tahoe Bancorp and Thomas M.
Watson dated August 17, 1995, filed as Exhibit 10.35 to
Registrant's 1995 Annual Report on Form 10-K , and by this
reference incorporated herein.
10.36 Stock Option Agreement between Sierra Tahoe Bancorp and Jerrold T.
Henley dated August 17, 1995, filed as Exhibit 10.36 to
Registrant's 1995 Annual Report on Form 10-K , and by this
reference incorporated herein.
10.37 Stock Option Agreement between Sierra Tahoe Bancorp and A. Morgan
Jones dated August 17, 1995, filed as Exhibit 10.37 to
Registrant's 1995 Annual Report on Form 10-K , and by this
reference incorporated herein.
10.38 Sierra Tahoe Bancorp 1996 Stock Option Plan, filed as Exhibit A to
Registrant's Proxy Statement for its July 23, 1996 annual meeting
of shareholders, and by this reference incorporated herein.
10.39 Director's remuneration continuation agreement between Sierra
Tahoe Bancorp and David Clark, dated October 1, 1993, filed as
Exhibit 10.39 to Registrant's 1993 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.40 Settlement Agreement and Mutual Release of All Claims re:
American River Bank, et al. v. Mutual Fund, Inc., et al. dated
March 22, 1996, filed as Exhibit 10.40 to Registrant's 1995 Annual
Report on Form 10-K , and by this reference incorporated herein.
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<PAGE>
10.41 Federal funds facility agreement between Union Bank of California
and Truckee River Bank dated April 8, 1996, filed as Exhibit 10.4
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, and by this reference incorporated herein.
10.42 First Amendment to Senior Management Benefits Agreement between
Sierra Tahoe Bancorp and David C. Broadley, dated April 2, 1996,
filed as Exhibit 10.6 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and by this reference
incorporated herein.
10.43 Incentive Stock Option Agreement between Registrant and Martin R.
Sorensen, dated May 18, 1994, filed as Exhibit 10.44 to
Registrant's 1994 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.44 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Patrick S. Day, dated January 10, 1996, including
First Amendment dated April 2, 1996, filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.45 Deferred Fee Agreement between Sierra Tahoe Bancorp and Thomas M.
Watson, dated June 19, 1996, filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.46 Federal Funds Agreement between Bank of California and Truckee
River Bank, dated March 31, 1994, filed as Exhibit 10.47 to
Registrant's 1995 Annual Report on Form 10-K , and by this
reference incorporated herein.
10.47 Agreement between American Financial Skylink and Sierra Tahoe
Bancorp, dated August 1, 1994, filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, and by this reference incorporated herein.
10.48 Deferred Fee Agreement between Sierra Tahoe Bancorp and R.
Coppola, dated June 12, 1996, filed as Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.49 Revolving Line of Credit Agreement between First Security Bank of
Idaho and Truckee River Bank, dated September 23, 1994, filed as
Exhibit 10.50 to Registrant's 1994 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.50 Credit Agreement between Sanwa Bank California and Truckee River
Bank, dated July 29, 1994, filed as Exhibit 10.51 to Registrant's
1994 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.51 Modification to sublease dated September 24, 1994 between First
Commercial Title, Inc. and Sierra Tahoe Mortgage Company, dated
January 31, 1995, filed as Exhibit 10.52 to Registrant's 1994
Annual Report on Form 10-K, and by this reference incorporated
herein.
10.52 Lease Agreement between Hulse-Kinsey Trust and Truckee River Bank,
dated February 10, 1995, filed as Exhibit 10.53 to Registrant's
1994 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.53 Assignment of License Agreements between Information Technology,
Inc., Sierra Tahoe Servicing Corporation and Truckee River Bank,
dated March 3, 1993, filed as Exhibit 10.54 to Registrant's 1994
Annual Report on Form 10-K, and by this reference incorporated
herein.
10.54 Deferred Fee Agreement between Sierra Tahoe Bancorp and Ronald A.
Johnson, dated May 23, 1996, filed as Exhibit 10.4 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
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<PAGE>
10.55 Fourth Addendum to Lease Agreement between Edwin Holt and Sierra
Bank of Nevada, dated February 17, 1995, filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, and by this reference incorporated herein.
10.56 Credit Agreement between Sierra Bank of Nevada and Bank of
California, dated March 21, 1995, filed as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, and by this reference incorporated herein.
10.57 Lease Agreement between Truckee River Bank and Realty Advisors,
Inc., filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and by this
reference incorporated herein.
10.58 Lease Agreement Between Truckee River Bank and Western Investment
Real Estate Trust and Pinecreek Shopping Center Associates, filed
as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995, and by this reference
incorporated herein.
10.59 Construction agreement between Sierra Bank of Nevada and Shaver
Construction, Inc., filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995, and by this reference incorporated herein.
10.60 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and Martin R. Sorensen dated January 17, 1996, filed as
Exhibit 10.61 to Registrant's 1995 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.61 Executive Salary Continuation Agreement between Sierra Tahoe
Bancorp and Martin R. Sorensen, dated March 31, 1995, filed as
Exhibit 10.63 to Registrant's 1995 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.62 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
Martin R. Sorensen dated December 20, 1995, filed as Exhibit 10.64
to Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.63 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
William T. Fike dated December 20, 1995, filed as Exhibit 10.67 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.64 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
Pat Day dated December 20, 1995, filed as Exhibit 10.68 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.65 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
David Broadley dated December 20, 1995, filed as Exhibit 10.69 to
Registrant's 1995 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.66 Incentive Stock Option Agreement between SierraWest Bancorp and
Mary Jane Posnien, dated December 23, 1996.
10.67 Senior Manager Separation Benefits Agreement between Sierra Tahoe
Bancorp and David C. Broadley dated January 17, 1996, filed as
Exhibit 10.71 to Registrant's 1995 Annual Report on Form 10-K, and
by this reference incorporated herein.
10.68 Deferred Fee Agreement between Sierra Tahoe Bancorp and David W.
Clark, dated May 28, 1996, filed as Exhibit 10.5 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
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10.69 Deferred Fee Agreement between Sierra Tahoe Bancorp and Richard S.
Gaston, dated June 19, 1996, filed as Exhibit 10.6 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.70 Deferred Fee Agreement between Sierra Tahoe Bancorp and A. Morgan
Jones, dated June 7, 1996, filed as Exhibit 10.7 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.71 Deferred Fee Agreement between Sierra Tahoe Bancorp and John J.
Johnson, dated June 20, 1996, filed as Exhibit 10.8 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.72 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jack V.
Leonesio, dated June 19, 1996, filed as Exhibit 10.9 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.73 Deferred Fee Agreement between Sierra Tahoe Bancorp and William
McClintock, dated June 13, 1996, filed as Exhibit 10.10 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.74 Deferred Fee Agreement between Sierra Tahoe Bancorp and Jerrold T.
Henley, dated May 29, 1996, filed as Exhibit 10.11 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and by this reference incorporated herein.
10.75 Incentive Stock Option Agreement between Sierra Tahoe Bancorp and
William T. Fike, dated July 1, 1996, filed as Exhibit 10.12 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.76 Nonqualified Stock Option Agreement between Sierra Tahoe Bancorp
and William T. Fike, dated July 1, 1996, filed as Exhibit 10.13 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and by this reference incorporated herein.
10.77 Fixed Price Construction Agreement between SierraWest Bank and
Shaver Construction, dated June 12, 1996, filed as Exhibit 10.14
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and by this reference incorporated herein.
10.78 Amendment No. 1 to Employment Agreement between SierraWest Bancorp
and William T. Fike, dated June 27, 1996, filed as Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and by this reference incorporated herein.
10.79 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and William T. Fike, dated June 27, 1996, filed
as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and by this reference
incorporated herein.
10.80 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and David C. Broadley, dated June 27, 1996,
filed as Exhibit 10.4 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996 and by this
reference incorporated herein.
10.81 Amendment No. 1 to Executive Salary Continuation Agreement between
SierraWest Bancorp and Martin R. Sorensen, dated June 27, 1996,
filed as Exhibit 10.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.82 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and William W. McClintock, dated June
27, 1996, filed as Exhibit 10.6 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
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10.83 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Jerrold T. Henley, dated June 27,
1996, filed as Exhibit 10.7 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.84 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and A. Morgan Jones, dated June 27,
1996, filed as Exhibit 10.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.85 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Jack V. Leonesio, dated June 27,
1996, filed as Exhibit 10.9 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and by this
reference incorporated herein.
10.86 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Thomas M. Watson, dated June 27,
1996, filed as Exhibit 10.10 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.87 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and David W. Clark, dated June 27,
1996, filed as Exhibit 10.11 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.88 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Richard S. Gaston, dated June 27,
1996, filed as Exhibit 10.12 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.89 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and John J. Johnson, dated June 27,
1996, filed as Exhibit 10.13 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.90 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Ralph J. Coppola, dated June 27,
1996, filed as Exhibit 10.14 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.91 Director's Amended and Restated Payment Continuation Agreement
between SierraWest Bancorp and Ronald A. Johnson, dated June 27,
1996, filed as Exhibit 10.15 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, and by this
reference incorporated herein.
10.92 Sierra Tahoe Bancorp Board of Directors Deferred Compensation and
Stock Award Plan, filed as Exhibit B to Registrant's Proxy
Statement for its July 23, 1996 annual meeting of shareholders,
and by this reference incorporated herein.
11.1 Statement re Computation of Per Share Earnings.
12.1 Statement re Ratio of Earnings to Fixed Charges.
21.1 Significant Subsidiaries of the Registrant
SierraWest Bank - Incorporated in California
23.1 Consent of Deloitte & Touche LLP, independent auditors
27.1 Financial Data Schedule
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 10, 1997 By: /s/ William T. Fike
-----------------------
William T. Fike
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the date indicated.
<TABLE>
<S> <C> <C>
/s/ William T. Fike President and Chief Executive Officer March 10, 1997
- -------------------
William T. Fike Director
/s/ David C. Broadley Executive Vice President/ March 10, 1997
- ---------------------
David C. Broadley Principal Financial Officer
and Principal Accounting Officer
/s/ Jerrold T. Henley Chairman of the Board March 10, 1997
- ---------------------
Jerrold T. Henley
/s/ David W. Clark Director March 10, 1997
- ------------------
David W. Clark
/s/ A. Morgan Jones Director and Corporate Secretary March 10, 1997
- -------------------
A. Morgan Jones
/s/ Jack V. Leonesio Director March 10, 1997
- --------------------
Jack V. Leonesio
/s/ William W. McClintock Director March 10, 1997
- -------------------------
William W. McClintock
/s/ Richard Gaston Director March 10, 1997
- ------------------
Richard Gaston
/s/ Thomas M. Watson Director March 10, 1997
- --------------------
Thomas M. Watson
/s/ Ralph J. Coppola Director March 10, 1997
- --------------------
Ralph J. Coppola
/s/ John J. Johnson Director March 10, 1997
- -------------------
John J. Johnson
/s/ Ronald A. Johnson Director March 10, 1997
- ---------------------
Ronald A. Johnson
</TABLE>
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Exhibit 10.7
SENIOR MANAGER SEPARATION BENEFITS AGREEMENT
THIS SENIOR MANAGER SEPARATION BENEFITS AGREEMENT (the "Agreement") is made
and entered into as of January 10, 1996, by and between SIERRA TAHOE BANCORP, a
California Corporation and its banking subsidiaries TRUCKEE RIVER BANK and
SIERRA BANK OF NEVADA (hereinafter "STB"), with its principal offices located at
10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee, California 96161 and
MARY JANE POSNIEN, an individual ("MJP").
WITNESSETH
WHEREAS, MJP is currently designated a senior officer and 'at will' employee
of Truckee River Bank and Sierra Bank fo Nevada and expects to remain a senior
officer and employee subject to the policies and conditions contained within
the STB Personnel Policies and Procedures;
WHEREAS, both STB and MJP feel it is in their respective and mutual best
interests to preagree upon appropriate and reasonable separation compensation
that will be paid to MJP should STB ever determine that MJP should, for
whatever reason, be terminated from her position and leave the company;
WHEREAS, STB and MJP agree that the benefits described herein constitute full
payment of and shall completely supersede and constitute full satisfaction of
any and all other monetary or nonmonetary benefits paid as a result of the
termination of MJP for any reason by STB except as may be additionally
required beyond the sums and benefits paid hereunder by law.
WHEREAS, nothing in this Agreement is intended to change the current at will
employment of MJP or create a contract of employment. Further, this Agreement
shall only cover situations wherein STB requests the termination of MJP and
shall not apply if MJP elects to voluntarily leave STB.
NOW, THEREFORE, in consideration of the promises set forth below and for other
good and valuable consideration, including the mutual covenants and agreements
herein contained, the receipt and sufficiency of which is hereby acknowledged,
STB and MJP hereby agree as follows:
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1. Applicability of Agreement; Definition of Termination: This Agreement
coveys additional benefits not otherwise due to employees generally and shall
become operative upon MJP's termination of employment for any reason by STB, its
affiliates and, their respective officers or directors, so long as that
termination did not result from a final determination of the Human Resources
Director and the Personnel Committee of the Board of Directors of STB that MJP's
termination resulted from a material violation of the STB Personnel policies and
procedures (i.e. termination for cause) (hereinafter referred to as the
"Termination"). This Agreement shall not apply as to any event not covered under
the definition of the term 'Termination'. Following the defined Termination, and
the payment of benefits under this Agreement, it is expressly agreed and
understood that STB shall not be precluded from rehiring MJP's position either
now or in the future and such rehiring shall not be deemed to nullify or change
this Agreement if it is otherwise applicable.
2. Conditions For Payment of Separation Benefits. STB shall pay the separa-
tion benefitsset forth in Paragraph 3 to MJP after each of the following
requirements have been satisfied in the reasonable discretion of STB:
A. A defined Termination as set forth in Paragraph 1 has occurred and
MJP has left (or will promptly thereafter leave) the employment of STB;
and
B. MJP consent to and does expressly waive, release, indemnify and
fully hold STB, its subsidiary companies and each of their employees,
officers and directors harmless with regard to his employment at STB;
the manner of his Termination; and any other matters reasonably related
to his employment. MJP agrees to initiate no action, of any type or
kind, regarding his employment or Termination and if such an action is
initiated he agrees that such action may be promptly closed, dismissed
or summarily disallowed, or, if it shall continue, that MJP will
indemnify STB for the legal fees, costs and expenses resulting from
their defense of that action; and
C. MJP agrees to and shall maintain the confidentiality of any and all
proprietary secrets, processes and plans of STB and its subsidiaries
made known to MJP during his employment.
STB may elect to advance the separation benefits set forth in Paragraph 2 prior
to the satisfaction of each of the above requirements in this Paragraph 3, or in
anticipation of full performance by MJP, and should any requirement not be
satisfied within a reasonable period thereafter or continuously performed, MJP,
upon request of STB and presentation of proof of nonperformance and a reasonable
period to cure the continuing nonperformance, shall promptly return the
separation benefit(s) paid or granted to him and this Agreement shall terminate.
3. Separation Benefits. STB shall, in addition to any final salary, vacation,
personal leave, retirement plan and other monetary or nonmonetary benefit(s)
covered under one or more separate agreement(s) and otherwise due or applicable
to MJP upon Termination (except benefits due under an agreement or policy
concerning office closure or reduction in force laws
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<PAGE>
so long as less than the sums being paid hereunder), pay to MJP upon Termination
one of the following benefits, at the election and option of MJP:
A. A lump sum payment equal to SIX (6) months of monthly salary, less
any and all applicable taxes, deductions arising from benefit elections
or any other sums required to be deducted by law, rule or regulation.
If this option is elected, and MJP elects continued health coverage
under COBRA, STB will require MJP to pay the full rate allowed by COBRA
for any continued health insurance coverage elected at the time of
Termination; or
B. Continuation of monthly salary for SIX (6) months, less any and all
applicable taxes, deductions arising from benefit elections or other
sums required to be deducted by law, rule or regulation. If this option
is elected, and if MJP elects to continue health insurance coverage
under COBRA, STB will continue to charge MJP's the applicable employee
coverage rate for Six (6) months if said applicable employee rate may
be properly granted to MJP without violating any existing policy or law
and if said rate is lower than the COBRA rate that may be assessed.
The payment option elected shall be deemed the "Separation Benefit". Said
Separation Benefit shall result in a waiver of any other separation benefits due
to MJP following the Termination as more fully set forth in Paragraph 4.
4. Express Waiver and Release of Other Separation Benefits. By executing this
Agreement, MJP agrees that the Separation Benefit paid pursuant to this
Agreement, provided the payments or benefits at least equal those payments or
benefits that must be paid to terminated employees by law, shall be deemed to be
the equivalent and substitute for any legally or customarily required separation
payments due to MJP and STB shall be given full credit for sums paid hereunder
as to any legal or customarily requirements to pay separation and payments
hereunder shall be deemed to have fully satisfied STB's obligations with regard
to any legally or customarily mandated separation payments due to MJP upon his
termination, including, but not limited to, any laws or customs regarding
reduction in force or job-site closing. If additional sums are legally required,
or are adjudicated as required, this Agreement shall be deemed to be
automatically amended to credit against the sums due the amount paid hereunder
and this Agreement shall be deemed to include any additionally required benefits
or payments.
5. Reserved.
6. Binding Effect of Agreement. This Agreement shall inure to the benefit of
and be binding upon the heirs, administrators, personal representatives,
successors and assigns of MJP and STB, as the case may be.
7. No Contest; Reimbursement of Benefits: The parties hereby mutually agree
that in the event that MJP contests this Agreement, or any of the provisions
hereunder, by the filing or commencement of any action or proceeding relating
to his employment or Termination of any kind or nature whatsoever against STB,
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<PAGE>
its parent company or affiliate companies or is re-employed by STB involuntarily
by court order, or an enforceable judgment is obtained against STB, then STB
shall have the absolute right: (i) to enforce repayment in full on the date of
such re-employment of all sums paid to MJP hereunder, which sums shall include
the payment or value of any benefits received by MJP hereunder, as a credit
in offset, reduction and satisfaction of all or any portion of such judgment,
or, (ii) if there is no judgment, against wages due to MJP.
8. Captions: The captions set forth herein are included solely for ease and
convenience of reference and are not to be considered or construed in the
interpretation of this Agreement.
9. Entire Agreement: This Agreement constitutes and contains the entire
agreement between the parties and no statement or representation of either party
hereto, their agents, officers, directors or employees made outside of this
Agreement and not contained herein shall form a part of this Agreement or be
binding upon the other party. This Agreement shall not be changed, modified,
altered or amended, except by written instrument signed by the parties hereto.
10.Governing Law: This Agreement shall be construed and governed in
accordance with the laws of the State wherein MJP is predominantly employed,
with venue appropriate in the County wherein MJP is predominantly employed. Any
provision of this Agreement prohibited by law shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement. In the event of
any litigation or action being commenced with regard to this Agreement, the
prevailing party shall be awarded their reasonable attorneys fees, costs and
expenses.
11. Informed Consent and Waiver: MJP has executed this Agreement on a fully
informed, voluntary basis. MJP understands and agrees that the separation
benefit provided for herein will preclude MJP's right to seek other separation
benefits, except as allowed by law, and that MJP has been given the right and
opportunity to consult with an advisor or attorney prior to the execution of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have made, executed and delivered this
Agreement as of the day and year first above written.
/s/ Mary Jane Posnien
MARY JANE POSNIEN
SIERRA TAHOE BANCORP,
a California Corporation
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<PAGE>
By: /s/ W. T. Fike
William T. Fike
Its: President/CEO
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<PAGE>
STATE OF CALIFORNIA )
) SS.
COUNTY OF NEVADA )
On 30 day of January, 1996, personally appeared before me, a Notary Public, in
and for said County and State, MARY JANE POSNIEN, known to me to be the person
described in and who executed the foregoing instrument, who acknowledged to me
that she executed the same freely and voluntarily and for the uses and purposes
therein mentioned.
(Seal) /s/ Cynthia Perry
Notary Public
STATE OF CALIFORNIA )
) SS.
COUNTY OF NEVADA )
On this 13 day of February, 1996, personally appeared before me, a Notary
Public, in and for said County and State, WILLIAM T. FIKE, in his capacity as
President and CEO of SIERRA TAHOE BANCORP, known to me to be the person
described in and who executed the foregoing instrument, who acknowledge to me
that he executed the same freely and voluntarily and for the uses and purposes
therein mentioned.
(Seal) /s/ Julie Roberts
Notary Public
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<PAGE>
Exhibit 10.66
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO SHARES OF SIERRAWEST
BANCORP'S COMMON STOCK SHALL BE ISSUED PURSUANT HERETO UNLESS THE SIERRAWEST
BANCORP 1996 STOCK OPTION PLAN SHALL HAVE FIRST BEEN APPROVED BY THE
SHAREHOLDERS OF SIERRAWEST BANCORP.
SIERRAWEST BANCORP
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement (the "Agreement") is made and entered
into as of the 23rd day of December, 1996, by and between SierraWest Bancorp, a
California corporation (the "Bancorp"), and MaryJane Posnien ("Optionee");
WHEREAS, pursuant to the SierraWest Bancorp 1996 Stock Option Plan (the
"Plan"), a copy of which is attached hereto, the Stock Option Committee has
authorized granting to Optionee an incentive stock option to purchase all or any
part of seven thousand five hundred (7,500) authorized but unissued shares of
the Bancorp's common stock for cash at the price of fifteen dollars and thirteen
cents ($15.13) per share, such option to be for the term and upon the terms and
conditions hereinafter stated;
NOW, THEREFORE, it is hereby agreed:
1. Grant of Option. Pursuant to said action of the Stock Option Committee, the
Bancorp hereby grants to Optionee the option to purchase, upon and subject to
the terms and conditions of the Plan which is incorporated in full herein by
this reference, all or any part of seven thousand five hundred (7,500) shares of
the Bancorp's common stock (hereinafter called "stock") at the price of fifteen
dollars and thirteen cents ($15.13) per share, which price is not less than one
hundred percent (100%) of the fair market value of the stock (or not less than
110% of the fair market value of the stock for Optionee- shareholders who own
securities possessing more than ten percent (10%) of the total combined voting
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power of all classes of securities of the Bancorp) as of the date of action of
the Stock Option Committee granting this option.
2. Exercisability. This option shall be exercisable as to fifteen hundred
(1,500) shares on or after 12 months, an additional fifteen hundred (1,500)
shares on or after 24 months, an additional fifteen hundred (1,500) shares on or
after 36 months, an additional fifteen hundred (1,500) shares on or after 48
months, and an additional fifteen hundred (1,500) shares on or after 60 months.
This option shall remain exercisable as to all of such shares until December 23,
2006 (but not later than ten (10) years from the date this option is granted)
unless this option has expired or terminated earlier in accordance with the
provisions hereof. Shares as to which this option becomes exercisable pursuant
to the foregoing provision may be purchased at any time prior to expiration of
this option.
3. Exercise of Option. This option may be exercised by written notice
delivered to the Bancorp stating the number of shares with respect to which this
option is being exercised, together with cash or shares of the Bancorp's stock,
as applicable, in the amount of the purchase price of such shares. Not less than
ten (10) shares may be purchased at any one time unless the number purchased is
the total number which may be purchased under this option and in no event may
the option be exercised with respect to fractional shares. Upon exercise,
Optionee shall make appropriate arrangements and shall be responsible for the
withholding of any federal and state taxes then due.
4. Cessation of Employment. Except as provided in Paragraphs 2 and 5 hereof,
if Optionee shall cease to be an employee of the Bancorp or a subsidiary
corporation for any reason other than Optionee's death or disability, [as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
from time to time (the "Code")], this option shall expire three (3) months
thereafter. During the three (3) month period this option shall be exercisable
only as to those installments, if any, which had accrued as of the date when
Optionee ceased to be an employee of the Bancorp or the subsidiary corporation.
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5. Termination of Employment for Cause. If Optionee's employment with the
Bancorp or a subsidiary corporation is terminated for cause, this option shall
expire thirty (30) days from the date of such termination. Termination for cause
shall include, but not be limited to, termination for malfeasance or gross
misfeasance in the performance of duties or conviction of a crime involving
moral turpitude, and, in any event, the determination of the Board of Directors
with respect thereto shall be final and conclusive.
6. Nontransferability; Death or Disability of Optionee. This option shall not
be transferable except by will or by the laws of descent and distribution and
shall be exercisable during Optionee's lifetime only by Optionee. If Optionee
dies while an employee of the Bancorp or a subsidiary corporation, or during the
three (3) month period referred to in Paragraph 4 hereof, this option shall
expire one (1) year after the date of Optionee's death or on the day specified
in Paragraph 2 hereof, whichever is earlier. After Optionee's death but before
such expiration, the persons to whom Optionee's rights under this option shall
have passed by will or by the applicable laws of descent and distribution or the
executor or administrator of Optionee's estate shall have the right to exercise
this option as to those shares for which installments had accrued under
Paragraph 2 hereof as of the date on which Optionee ceased to be an employee of
the Bancorp or a subsidiary corporation.
If Optionee terminates his or her employment because of disability, (as
defined in Section 22(e)(3) of the Code), Optionee may exercise this option to
the extent he or she is entitled to do so at the date of termination, at any
time within one (1) year of the date of termination, or before the expiration
date specified in Paragraph 2 hereof, whichever is earlier.
7. Employment. This Agreement shall not obligate the Bancorp or a subsidiary
corporation to employ Optionee for any period, nor shall it interfere in any way
with the right of the Bancorp or a subsidiary corporation to reduce Optionee's
compensation.
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8. Privileges of Stock Ownership. Optionee shall have no rights as a
shareholder with respect to the Bancorp's stock subject to this option until the
date of issuance of stock certificates to Optionee. Except as provided in the
Plan, no adjustment will be made for dividends or other rights for which the
record date is prior to the date such stock certificates are issued.
9. Modification and Termination. The rights of Optionee are subject to modi-
fication and termination upon the occurrence of certain events as provided in
Sections 13 and 14 of the Plan.
10. Notification of Sale. Optionee agrees that Optionee, or any person
acquiring shares upon exercise of this option, will notify the Bancorp not more
than five (5) days after any sale or other disposition of such shares.
11. Representations of Optionee. No shares issuable upon the exercise of this
option shall be issued and delivered unless and until the Bancorp has complied
with all applicable requirements of California and federal law and of the
Securities and Exchange Commission and the California Department of Corporations
pertaining to the issuance and sale of such shares, and all applicable listing
requirements of the securities exchanges, if any, on which shares of the Bancorp
of the same class are then listed. Optionee agrees to ascertain that such
requirements shall have been complied with at the time of any exercise of this
option. In addition, if the Optionee is an "affiliate" for purposes of the
Securities Act of 1933, there may be additional restrictions on the resale of
stock, and Optionee therefore agrees to ascertain what those restrictions are
and to abide by the restrictions and other applicable federal and state
securities laws.
Furthermore, the Bancorp may, if it deems appropriate, issue stop transfer
instructions against any shares of stock purchased upon the exercise of this
option and affix to any certificate representing such shares the legends which
the Bancorp deems appropriate.
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Optionee represents that the Bancorp, its directors, officers, employees and
agents have not and will not provide tax advice with respect to the option, and
Optionee agrees to consult with his or her own tax advisor as to the specific
tax consequences of the option, including the application and effect of federal,
state, local and other tax laws.
12. Notices. Any notice to the Bancorp provided for in this Agreement shall be
addressed to it in care of its President or Chief Financial Officer at its main
office and any notice to Optionee shall be addressed to Optionee's address on
file with the Bancorp or a subsidiary corporation, or to such other address as
either may designate to the other in writing. Any notice shall be deemed to be
duly given if and when enclosed in a properly sealed envelope and addressed as
stated above and deposited, postage prepaid, with the United States Postal
Service. In lieu of giving notice by mail as aforesaid, any written notice under
this Agreement may be given to Optionee in person, and to the Bancorp by
personal delivery to its President or Chief Financial Officer.
13. Incentive Stock Option. This Agreement is intended to be an incentive
stock option agreement as defined in Section 422 of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
OPTIONEE
SIERRAWEST BANCORP
By /s/ Mary Jane Posnien By /s/ W. T. Fike
MaryJane Posnien William T. Fike
By /s/ Robert C. Silver
Robert C. Silver
-109-
<PAGE>
EXHIBIT 11.1
<TABLE>
SierraWest Bancorp and Subsidiary Computation of
Earnings Per Common Share (in thousands,
except per share amounts)
Year Ended December 31,
1996 1995 1994
------ ---- ----
Primary
<S> <C> <C> <C>
Net income............................................ $ 3,328 $ 1,916 $ 3,003
========= ========= =========
Shares
Weighted average number of common shares
outstanding......................................... 2,675 2,599 2,598
Assuming exercise of options reduced by the number of
shares which could have been purchased with the
the proceeds from exercise of such options 127 79 80
----------- ---------- ---------
Weighted average number of common shares
outstanding as adjusted . . . . . . . . . . . . . . . . . 2,802 2,678 2,678
=========== ========== =========
Net income per share . . . . . . . . . . . . . . . . . . . $ 1.19 $ 0.72 $ 1.12
=========== ========== =========
Assuming full dilution
Earnings $ 3,328 $ 1,916 $ 3,003
Add after tax interest expense applicable to
convertible debentures . . . . . . . . . . . . . . . . . 449 499 460
---------- ---------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,777 $ 2,415 $ 3,463
=========== ========== ===========
Shares
Weighted average number of common shares
outstanding.......................... 2,675 2,599 2,592
Assuming conversion of convertible
debentures............................ 930 1,000 926
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise of
such options......................... 142 88 88
------------ ---------- ---------
Weighted average number of common shares
outstanding as adjusted............... 3,747 3,687 3,606
=========== ========== =========
Net income per share assuming
full dilution......................... $ 1.01 $ 0.66 $ 0.96
=========== ========== =========
</TABLE>
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<PAGE>
EXHIBIT 12.1
<TABLE>
SierraWest Bancorp and Subsidiary Ratio of Earnings to Fixed Charges
(in thousands)
Year Ended December 31,
1996 1995 1994 1993 1992
Fixed Charges
<S> <C> <C> <C> <C> <C>
Interest on debt $ 760 $ 858 $ 827 $ 79 $ 105
Amortization of debt expense 93 97 86 0 7
Interest element of rentals 369 404 307 283 247
Capitalized interest 104 41 0 0 0
----- ----- ----- ------ -----
Total fixed charges excluding interest on deposits 1,326 1,400 1,220 362 359
Interest on deposits 11,735 7,633 4,770 4,424 6,771
-------- ------ ------ ------- ------
Total fixed charges including interest on deposits $13,061 $9,033 $ 5,990 $ 4,786 $7,130
======== ======= ======== ======= ======
Earnings
Consolidated net income $ 3,328 1,916 3,003 $ 2,704 $1,833
Add back:
Provision for income taxes 2,077 1,179 1,863 1,670 763
Total fixed charges excluding interest on deposits 1,222 1,359 1,220 362 359
-------- ------- ------- -------- -----
Total earnings excluding interest on deposits 6,627 4,454 6,086 4,736 2,955
Add back:
Interest on deposits 11,735 7,633 4,770 4,424 6,771
-------- ------- ------- -------- -------
Total earnings including interest on deposits $18,362 12,087 10,856 $ 9,160 $9,726
======== ======= ======== ======== =======
Ratio of earnings to fixed charges
excluding interest on deposits 5.0 3.2 5.0 13.1 8.2
Ratio of earnings to fixed charges including
interest on deposits 1.4 1.3 1.8 1.9 1.4
</TABLE>
-111-
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-28004 on Form S-8, Registration Statement No. 33-13031 on Form S-8 and
Registration Statement No. 33-15013 on Form S-8 of SierraWest Bancorp of our
report dated January 24, 1997, appearing in the Annual Report on Form 10-K of
SierraWest Bancorp for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Sacramento, California
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 26,434
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 32,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,215
<INVESTMENTS-CARRYING> 2,001
<INVESTMENTS-MARKET> 2,000
<LOANS> 323,366
<ALLOWANCE> 4,546
<TOTAL-ASSETS> 447,889
<DEPOSITS> 399,651
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,802
<LONG-TERM> 8,520
0
0
<COMMON> 12,291
<OTHER-SE> 21,625
<TOTAL-LIABILITIES-AND-EQUITY> 447,889
<INTEREST-LOAN> 30,506
<INTEREST-INVEST> 1,712
<INTEREST-OTHER> 1,051
<INTEREST-TOTAL> 33,269
<INTEREST-DEPOSIT> 11,735
<INTEREST-EXPENSE> 12,495
<INTEREST-INCOME-NET> 20,774
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 21,697
<INCOME-PRETAX> 5,405
<INCOME-PRE-EXTRAORDINARY> 3,328
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,328
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 6.21
<LOANS-NON> 5,363
<LOANS-PAST> 2,132
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,845
<CHARGE-OFFS> 593
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 4,546
<ALLOWANCE-DOMESTIC> 4,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
