SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------------------
For the Quarter Ended March 31, 1997, 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 Identification No.)
of Incorporation or Reorganization)
10181 Truckee Tahoe Airport Rd., P.O. Box 61000, Truckee, California 96160-9010
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (916) 582-3000
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 ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 2, 1997: Common Stock - Authorized 10,000,000 shares of no par value;
issued and outstanding - 3,304,864
-1-
<PAGE>
10-Q Filing
March 31, 1997
Part I. Financial Information
Item 1. Financial Statements
Following are condensed consolidated financial statements for SierraWest Bancorp
("Bancorp", or together with its subsidiary, the "Company") for the reportable
period ended March 31, 1997. These condensed consolidated financial statements
are unaudited; however, in the opinion of management, all adjustments have been
made for a fair presentation of the financial condition and earnings of the
Company in conformity with generally accepted accounting principles. The
accompanying notes are an integral part of these condensed consolidated
financial statements.
-2-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CONDITION
(Unaudited)
<TABLE>
March 31, 1997 and December 31, 1996
(Amounts in thousands of dollars)
ASSETS 03/31/97 12/31/96
- ------ -------- --------
<S> <C> <C>
Cash and due from banks $ 20,568 $ 26,434
Federal funds sold 26,000 32,200
Investment securities 48,360 35,216
Loans held for sale 47,790 29,489
Loans and leases, net of allowance
for possible loan and lease losses of
$4,807 in 1997 and $4,546 in 1996 294,883 289,331
Other assets 36,441 35,219
---------- ----------
TOTAL ASSETS $ 474,042 $ 447,889
========== ==========
LIABILITIES
Deposits $ 423,577 $ 399,651
Convertible debentures 3,917 8,520
Other liabilities 6,696 5,802
---------- ----------
TOTAL LIABILITIES 434,190 413,973
---------- ----------
SHAREHOLDERS' EQUITY
Common stock 16,944 12,291
Retained earnings 22,297 21,654
Unrealized gain/(loss) on available for sale
investment securities and interest only strips
receivable, net of tax 611 (29)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 39,852 33,916
---------- ----------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 474,042 $ 447,889
========== ==========
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Condition.
-3-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
For the Three Months Ended March 31, 1997 and 1996
(Amounts in thousands except per share amounts)
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Interest Income:
Interest and fees on loans and leases $ 8,690 $ 6,782
Interest on federal funds sold 403 254
Interest on investment securities and other assets 599 390
--------- ---------
Total Interest Income 9,692 7,426
--------- ---------
Interest Expense:
Interest on deposits 3,612 2,566
Interest on convertible debentures 116 206
Other interest expense 39 (24)
--------- ---------
Total Interest Expense 3,767 2,748
--------- ---------
Net Interest Income 5,925 4,678
Provision for Possible Loan and Lease Losses 450 510
--------- ---------
Net Interest Income After Provision for
Possible Loan and Lease Losses 5,475 4,168
Non-interest Income 1,880 1,666
Non-interest Expense 5,475 4,910
--------- ---------
Income Before Provision for Income Taxes 1,880 924
Provision for Income Taxes 713 357
--------- --------
NET INCOME $ 1,167 $ 567
========= =========
EARNINGS PER SHARE
Primary $ .38 $ .21
Weighted Average Shares Outstanding 3,089 2,737
Fully diluted .32 $ .18
Weighted Average Shares Outstanding 3,822 3,750
</TABLE>
The accompanying notes are an integral part of these Condensed
Consolidated Statements of Income.
-4-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 1997 and 1996
(Amounts in thousands of dollars)
<TABLE>
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Cash Flow From Operating Activities:
Interest and fees received $ 9,166 $ 7,286
Service charges and commissions received 539 391
Servicing income and interest only strip receivables income received 1,320 1,443
Interest paid (3,976) (2,911)
Cash paid to suppliers and employees (4,937) (4,668)
Income taxes paid (175) (75)
Government guaranteed loans originated for sale (6,370) (2,548)
Government guaranteed loans sold 2,838 134
Other items 299 184
---------- ----------
Net Cash Used in Operating Activities $ (1,296) $ (764)
Cash Flow From Investing Activities:
Proceeds from:
Maturities of investment securities - held to maturity 1,012 15
Maturities of investment securities - available for sale 2,505 5,322
Sales of investment securities - available for sale 0 7,242
Purchase of investment securities - available for sale (17,079) (11,049)
Loans and leases made net of principal collections (20,781) (17,686)
Capital expenditures (414) (1,858)
Decrease in other assets 220 127
---------- ----------
Net Cash Used In Investing Activities $ (34,537) $ (17,887)
Cash Flow From Financing Activities:
Net increase in demand, interest bearing
and savings accounts 18,954 2,759
Net increase in time deposits 4,972 12,267
Dividend paid (524) 0
Proceeds from issuance of common stock 365 22
---------- ----------
Net Cash Provided by Financing Activities 23,767 15,048
---------- ----------
Net Decrease in Cash and Cash Equivalents (12,066) (3,603)
Cash and Cash Equivalents at Beginning of Year 58,634 39,189
---------- ----------
Cash and Cash Equivalents at March 31 $ 46,568 $ 35,586
========== ==========
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Cash Flows.
-5-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For The Three Months Ended March 31, 1997 and 1996 (Continued)
(Amounts in thousands of dollars)
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Net Income: $ 1,167 $ 567
Adjustments to Reconcile Net Income to Net Cash Provided:
Depreciation and amortization 361 282
Provision for possible loan and lease losses 450 510
Provision for income taxes 713 357
Amortization of servicing asset and interest only strip receivables 399 0
Amortization of excess servicing on SBA loans 0 326
Amortization of purchased mortgage servicing rights 0 43
Decrease in interest payable (209) (162)
Increase in accrued expenses 115 5
Amortization of premiums/discounts on loans (131) (119)
Decrease in taxes payable (175) ( 75)
Increase in loans originated for sale (3,532) (2,414)
Decrease/(increase) in prepaid expenses 12 ( 45)
Other items (466) ( 39)
--------- ---------
Total Adjustments (2,463) (1,331)
--------- ---------
Net Cash Used in Operating Activities $ (1,296) $ (764)
========= =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
In the first quarter of 1997, $21.0 million of unguaranteed portions of
government guaranteed loans were transferred to held for sale status. Also, $4.6
million of convertible debentures were converted to common stock, net of a $315
thousand discount.
During the first quarter of 1996, $15.7 million of unguaranteed SBA loans were
transferred to held for sale status. Also, in 1996, $535 thousand of convertible
debentures were converted to common stock, net of a $41 thousand discount.
The accompanying notes are an integral part of these Condensed Consolidated
Statements of Cash Flows.
-6-
<PAGE>
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements
March 31, 1997 and December 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in a condensed format and, therefore, do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion
of management, all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation have been
reflected in the financial statements. The results of operations for
the three months ended March 31, 1997, are not necessarily indicative
of the results to be expected for the full year. Certain
reclassifications have been made to prior period amounts to present
them on a basis consistent with classifications for the three months
ended March 31, 1997.
2. COMMITMENTS & CONTINGENT LIABILITIES
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 financial
statements. Management does not anticipate any material loss as a
result of these transactions.
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). The Company is required to adopt SFAS 128 in the
fourth quarter of 1997 and will restate at that time earnings per share
(EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a
dual presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net income by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $0.40 and $0.22 for the quarters
ended March 31, 1997 and 1996, respectively. Diluted EPS under SFAS 128
would not have been significantly different than fully diluted EPS
currently reported for the periods.
4. SERVICING ASSETS
Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. In accordance with the accounting standards provided by
this statement, 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.
During the first quarter of 1997, under provisions of SFAS 125, the
Company recognized a servicing asset of $14 thousand. In addition
excess servicing assets of $11.9 million recognized on SBA loan sales
made before January 1,
-7-
<PAGE>
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements
March 31, 1997 and December 31, 1996
1997 and mortgage servicing rights of $558 thousand were reclassified
to interest only strip receivables. Interest only strip receivables are
classified as other assets available for sale and are carried at fair
value. The servicing asset is carried at cost, less any required
valuation allowance and is classified as an other asset. The servicing
asset is amortized over the expected remaining life. The Company's
amortization of the servicing asset during the first quarter was $51
thousand. The fair value of the Company's servicing asset at March 31,
1997 based on the current quoted market prices for similar instruments
was estimated at $2.3 million, which exceeded the carrying value of
$2.1 million.
-8-
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
Total assets increased by $26.1 million from $447.9 million at December 31,
1996, to $474.0 million at March 31, 1997. This increase included increases of
$23.9 million in loans and loans held for sale, net of the allowance for
possible loan and lease losses, $13.1 million in investment securities, and $1.2
million in other assets. These increases were offset by decreases of $6.2
million in federal funds sold and $5.9 million in cash and due from banks.
Mutual funds, federal funds sold and unpledged investment securities classified
as available for sale are all sources of short-term liquidity and can be used
somewhat interchangeably to provide liquidity. Of the Company's total investment
securities, $17.1 million were pledged at March 31, 1997.
The following table summarizes the Company's deposit and loan portfolios as of
March 31, 1997, and December 31, 1996.
<TABLE>
Deposits: 03/31/97 12/31/96 Change
-------- -------- --------
<S> <C> <C> <C>
Non-interest bearing demand.................................................... $ 86,777 $ 80,525 $ 6,252
Savings........................................................................ 13,541 13,289 252
Interest bearing transaction accounts.......................................... 132,867 120,417 12,450
Time........................................................................... 190,392 185,420 4,972
------- -------- --------
TOTAL DEPOSITS............................................................... $423,577 $399,651 $ 23,926
======== ======== ========
Loans: 03/31/97 12/31/96 Change
-------- -------- --------
SBA............................................................................ $151,713 $146,266 $ 5,447
Other Commercial............................................................... 51,693 57,668 (5,975)
Real Estate.................................................................... 127,471 104,323 23,148
Individual and Other........................................................... 5,862 6,824 (962)
Lease Receivables.............................................................. 12,784 9,994 2,790
------ -------- --------
SUBTOTAL..................................................................... 349,523 325,075 24,448
Net deferred loan fees/costs and unearned income on leases..................... (2,043) (1,709) (334)
-------- -------- -------
TOTAL GROSS LOANS AND LEASES................................................. $347,480 $323,366 $ 24,114
======== ======== ========
</TABLE>
Included in SBA loans at March 31, 1997 are loans held for sale totaling
$47.8 million.
Loans held for sale increased $18.3 million, primarily as a result of a change
in SBA regulations. In April of 1997, the SBA indicated that it would not object
if loans were sold down to 5% of the principal balance, and loans held for sale
at March 31,
-9-
<PAGE>
1997 reflect this intention. At December 31, 1996, loans held for sale reflected
the previous regulation allowing sale down to 10%. Pending approval from the
SBA, the Company intends to securitize these loans and sell the resulting
securities to investors. Completion of the Company's first securitization is
currently anticipated during the second or third quarter of 1997.
Total loans at the Company's Sacramento branch increased by $10.5 million during
the first quarter of 1997 and deposits at this branch increased by $6.8 million
during this period. Loans and deposits at the Company's Northern Nevada branches
increased by $5.1 million and $21.2 million, respectively, during the first
quarter of 1997.
Unearned income on leases totaled $2.1 million at March 31, 1997 and $1.7
million at December 31, 1996.
Out-of-area certificates of deposits declined from $45.8 million at December 31,
1996 to $42.3 million at March 31, 1997.
Effective January 1, 1997 upon implementation of SFAS 125 the Company's excess
servicing receivable and purchased servicing rights were reclassified as a
servicing asset for that portion of the receivables that did not exceed
contractually specified servicing fees and interest only strip receivables for
the portion which exceeds contractually specified servicing fees. The amortized
book value of the servicing asset was $2.1 million at March 31, 1997. The
interest only strip receivables are measured like available-for-sale investments
in debt securities under SFAS 115. Included in other assets at March 31, 1997
are interest only strip receivables with an estimated market value of $14.0
million. This includes an unrealized gain of $1.5 million.
At March 31, 1997, the unrealized gain on interest only strip receivables and
investment securities available for sale, net of the related tax effect,
included $859 thousand related to the market value adjustment of the interest
only strip receivables. In addition, this balance included an unrealized loss of
$110 thousand related to mutual fund investments and an unrealized loss of $138
thousand related to other investment securities.
During April, the SBA announced that, effective May 5, it would temporarily
limit the size of loans made under its 7(a) program to $500 thousand. The change
is not expected to have a significant impact on SierraWest's earnings for 1997.
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 had total assets of $47 million at March 31, 1997. 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.
Bancorp paid dividends of sixteen cents per share in March 1997 compared to
fifteen cents per share in April 1996. During the three months ended March 31,
1997, $4.6 million of the Bancorp's 8 1/2% convertible debentures were converted
into 460 thousand shares of common stock. At April 30, 1997, a total of $3.7
million debentures were outstanding. On May 5, 1997, the Company announced it
would redeem the remaining debentures effective June 30, 1997. The debentures
may be converted at the option of the holders into a total of approximately 370
thousand shares of common stock.
-10-
<PAGE>
RESULTS OF OPERATIONS (Three Months Ended March 31, 1997 and 1996)
Net income for the three months ended March 31, 1997 increased by 106% from $567
thousand for the three months ended March 31, 1996 to $1,167 thousand during the
current three month period. Increases of $1,247 thousand in net interest income
and $214 thousand in non-interest income and a decrease of $60 thousand in the
loan loss provision were partially offset by an increase of $565 thousand in
non-interest expense and a $356 thousand increase in the provision for income
taxes.
Net Interest Income
The yield on average interest earning assets for the three months ended March
31, 1997 was 5.87%. This compares to 6.29% for the first three months of 1996.
The decrease reflects the decrease in the average prime rate during the
comparison periods, an increase in the cost of Now and Money Market accounts,
and a decrease in the percentage of average loans to average interest earning
assets. Offsetting the effect of the decrease in yield was an increase in
average earning assets from $299 million during the first quarter of 1996 to
$409 million in the current quarter.
Yields and interest earned, including loan fees for the three months ended March
31, 1997 and 1996, were as follows (in thousands except percent amounts):
<TABLE>
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Average loans outstanding (1) $ 332,967 $ 250,076
Average yields 10.6% 10.9%
Amount of interest and origination fees earned $ 8,690 $ 6,782
</TABLE>
(1) Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $306 thousand and $262 thousand for the three months
ended March 31, 1997 and 1996, yields on average loans outstanding were 10.2%
and 10.5%, respectively. The prime rate (upon which a large portion of the
Company's loan portfolio is based), averaged 8.27% for the 1997 period and 8.34%
for the 1996 period.
The Company's variable rate SBA loans reprice monthly or in some cases quarterly
with changes in prime. Prime declined from 8.5% to 8.25% on February 2, 1996 and
increased to 8.5% on March 26, 1997. Because of the timing of these changes in
prime, the effect of these changes was greater than would be anticipated given
the change in the average prime rate during the comparison periods.
The Company has experienced an increase in its overall cost of deposits from
3.5% during the 1996 quarter to 3.6% during the current quarter. This increase
reflects an increase in the rate paid on interest bearing transaction accounts,
from 2.5% during the first quarter of 1996 to 2.8% during the current quarter.
-11-
<PAGE>
Rates and amounts paid on average deposits including non-interest bearing
deposits for the three months ended March 31, 1997 and 1996 were as follows (in
thousands except percent amount):
<TABLE>
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Average deposits outstanding (1) $ 409,608 $ 297,787
Average rates paid 3.6% 3.5%
Amount of interest paid or accrued $ 3,612 $ 2,566
</TABLE>
The effective interest rate paid on NOW accounts, Money Market accounts and Time
Certificates of Deposits during the first three months of 1997 and 1996 were as
follows:
<TABLE>
1997 1996
MONEY MONEY
NOW MARKET TIME NOW MARKET TIME
<S> <C> <C> <C> <C> <C> <C>
Average Balance (in thousands) (1) $50,099 $78,686 $188,910 $39,361 $54,047 $135,014
Rate Paid 1.3% 3.8% 5.7% 1.2% 3.3% 5.7%
</TABLE>
(1) Amount outstanding is the average of daily balances for the period.
The increase in Money Market rates is reflective of market conditions in the
Company's service area.
Average loans represented 81.4% of average earning assets during the 1997
quarter and 83.7% during the first quarter of 1996. Other earning assets, which
primarily consist of investment securities and federal funds sold, had an
average yield of 5.3% during both quarters.
Provision for Possible Loan Losses
In evaluating the Company's loan loss reserve, management considers 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 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. Net losses
in 1995 for these loans were $575 thousand. During 1996, net losses in the SBA
loan portfolio decreased to $27 thousand. For the first quarter of 1997, net
losses were $60 thousand.
Most of the Company's other commercial loan losses have been for loans to
businesses within the Tahoe basin area, and in its Nevada operations. 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.
-12-
<PAGE>
The provision for loan losses was $450 thousand and $510 thousand for the first
three months of 1997 and 1996, respectively. The provision in 1996 and 1997
includes the effect of growth in the loan portfolio.
The allowance for possible loan and lease losses as a percentage of loans was
1.38% at March 31, 1997, 1.41% at December 31, 1996, and 1.68% at March 31,
1996. Net charge-offs were $189 thousand for the first three months of 1997.
This compares to net recoveries of $13 thousand during the three months ended
March 31, 1996. The decrease in the allowance for possible loan and lease
losses as a percentage of loans reflects both the higher level of guaranteed
loans in the portfolio resulting from the Company's decision to retain the
guaranteed portion of loans it originates as well as the overall addition of new
loans to the portfolio. Unguaranteed loans increased $23.3 million and $16.1
million in the first quarter of 1997 and 1996, respectively. Guaranteed
portions of loans at March 31, 1997 totaled $38.6 million and at March 31, 1996
they totaled $34.0 million. The Company will monitor its exposure to loan
losses each quarter and adjust its level of provision in the future to reflect
changing circumstances. The Company expects that its existing loan loss reserve
will be adequate to provide for losses inherent in the portfolio.
Of total gross loans and leases at March 31, 1997, $5.5 million were considered
to be impaired. The allowance for possible loan and lease losses included $558
thousand related to these loans. The average recorded investment in impaired
loans during the three months ended March 31, 1997 was $5.7 million.
The following table sets forth the ratio of nonperforming loans to total loans,
the allowance for possible loan and lease losses to nonperforming loans and the
ratio of the allowance for possible loan and lease losses to total loans, as of
the dates indicated.
<TABLE>
March 31, December 31,
-------------------------- --------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans to total loans 1.6% 2.3% 1.7% 2.3% 1.4%
Allowance for possible loan and lease
losses to nonaccrual loans 87.9% 71.8% 84.8% 70.2% 142.9%
Allowance for possible loan and lease
losses to total loans 1.4% 1.7% 1.4% 1.6% 2.1%
</TABLE>
If the guaranteed portions of loans on nonaccrual status, which total $1.5
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans at March 31, 1997 declines to 1.2% and the allowance for possible
loan and lease losses to nonaccrual loans increases to 120.3%. At March 31,
1996, excluding guaranteed portions of loans on nonaccrual, these same
percentages are 1.4% and 119.4%.
-13-
<PAGE>
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
<TABLE>
March 31 December 31
---------------------------- --------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
SBA................................................. $4,490 $5,928 $4,985 $5,351 $2,423
Other............................................... 976 152 378 125 59
Accruing loans past due 90 days or more:
SBA................................................. 897 1,208 1,071 816 1,754
Other............................................... 1,053 262 1,061 207 9
Restructured loans (in compliance with
modified terms)...................................... 267 75 275 78 194
</TABLE>
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.
Although the level of nonperforming assets will depend on the future economic
environment, as of April 30, 1997, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $277
thousand in potential problem loans about 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.
Interest income on nonaccrual loans which would have been recognized if all such
loans had been current in accordance with their original terms totaled $154
thousand for the three months ended March 31, 1997. Interest income actually
recognized on nonaccrual loans for the three months ended March 31, 1997 was $43
thousand based on cash collections.
-14-
<PAGE>
The following table shows the loans outstanding, actual charge-offs, recoveries
on loans previously charged off, the allowance for possible loan and lease
losses and net loans charged off to average loans outstanding during the periods
and as of the dates indicated (amounts in thousands except percentage amounts):
<TABLE>
March 31 December 31
-------------------------------- --------------------------------------------------
1997 1996 1996 1995 1994
-------------- -------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Average gross loans......................... $332,967 $250,076 $284,487 $203,231 $ 166,366
Total gross loans at end of period.......... 347,480 260,200 323,366 239,969 172,939
Allowance for possible loan and lease losses:
Balance beginning of period................. $ 4,546 $ 3,845 $ 3,845 $ 3,546 $ 3,472
------ ------ -------- -------- -------
Actual charge-offs:
SBA....................................... 76 35 114 595 447
Commercial and industrial................. 124 0 337 350 467
Leases.................................... 0 0 84 0 0
Real estate............................... 0 0 0 40 60
Installment............................... 36 13 58 40 101
------ ------ --------- -------- -------
Total.................................... 236 48 593 1,025 1,075
------ ------ --------- -------- -------
Less recoveries:
SBA....................................... 16 37 87 20 74
Commercial and industrial................. 20 18 182 26 187
Real estate............................... 0 0 0 0 0
Installment............................... 11 6 15 8 3
------ ------ -------- -------- --------
Total................................... 47 61 284 54 264
------ ------ -------- -------- --------
Net charge-offs............................. 189 (13) 309 971 811
Provision for possible loan and lease
losses...................................... 450 510 1,010 1,270 885
------- ------ -------- -------- --------
Balance-end of period....................... $ 4,807 $ 4,368 $ 4,546 $ 3,845 $ 3,546
====== ====== ======= ======== ========
Net loans charged off to average loans
outstanding (1)............................. 0.23% (0.02%) 0.11% 0.48% 0.49%
</TABLE>
-15-
<PAGE>
(1) Percentages for the three months are based on annualized net charge-offs.
The following table sets forth management's historical allocation of the
allowance for possible loan and lease 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 1994
----------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Percent- Percent- Percent-
Amount age Amount age Amount age
-------- ---------- -------- -------- ------- --------
SBA loans.................... $ 1,561 45% $ 1,468 49% $ 2,372 56%
Commercial and
industrial loans(2)......... 1,720 21 1,592 24 627 18
Real estate loans............ 1,010 30 564 23 366 21
Consumer loans to
individuals (1).............. 255 4 221 4 181 5
------- --- -------- ---- ------- ---
Total...................... $ 4,546 100% $ 3,845 100% $ 3,546 100%
======= === ======== === ======= ===
</TABLE>
<TABLE>
March 31,
------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Percent- Percent-
Amount age Amount age
----------- ----------- --------- --------
SBA loans.................... $ 1,653 44% $ 1,608 47%
Commercial and
industrial loans (2)........ 1,703 18 1,931 28
Real estate loans............ 1,216 35 609 21
Consumer loans to
individuals (1)............. 235 3 220 4
-------- --- ------ ---
Total...................... $ 4,807 100% $ 4,368 100%
======== === ======= ===
</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. 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.
-16-
<PAGE>
Non-interest Income
Non-interest income increased by $214 thousand during the first three months of
1997 compared to the three months ended March 31, 1996. The gain on sale of SBA
loans for the current three month period increased from $4 thousand to $75
thousand. Sales of SBA loans for the three months ended March 31, 1997 totaled
$1.5 million compared to $134 thousand in the 1996 period. These sales were made
primarily to reduce loans held related 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.
Income related to the Company's servicing assets and interest only strip
receivables as defined under SFAS 125, net of the amortization of these assets,
( "Net Servicing Income") declined from $1,074 thousand for the three months
ended March 31, 1996 to $921 thousand during the current quarter. This decline
includes payments on existing loans including normal amortization and
prepayments.
Offsetting the decline in Net Servicing Income was an increase in service charge
income of $148 thousand. This resulted from an increase in demand deposits and
additionally, a change in service charge structure effective February 1, 1997.
Other increases in non-interest income include $55 thousand in revenue on the
sale of mutual funds and annuities through a third party marketer. Additionally,
during the first quarter of 1996, the Company took a loss of $44 thousand on the
sale of equipment.
Non-interest Expense
The following table compares the various elements of non-interest expense as an
annualized percentage of total assets for the first three months of 1997 and
1996 (in thousands except percentage amounts):
<TABLE>
Three Months Salaries & Occupancy & Other
Ended Average Related Equipment Operating
March 31 Assets (1) Benefits (2) Expenses Expenses
<S> <C> <C> <C> <C>
1997 $ 460,827 2.7% 0.8% 1.2%
1996 $ 342,917 3.3% 1.0% 1.3%
</TABLE>
(1) Based on average daily balances.
(2) Excludes provision for payment of bonuses and contribution to KSOP plan.
Including these items, percentages are 2.8% and 3.5% for 1997 and 1996,
respectively.
-17-
<PAGE>
The following table summarizes the principal elements of operating expenses and
discloses the increases (decreases) and percent of increases (decreases) for the
three months ended March 31, 1997 and 1996 (amounts in thousands except
percentage amounts):
<TABLE>
Increase (Decrease)
Three Months Ended March 31, 1997 over 1996
1997 1996 Amount Percentage
<S> <C> <C> <C> <C>
Salaries and related benefits.............. $ 3,192 $ 2,958 $ 234 7.9%
Occupancy and equipment.................... 945 833 112 13.4
Insurance.................................. 55 56 (1) (1.8)
Postage.................................... 77 61 16 26.2
Stationery and supplies.................... 107 78 29 37.2
Telephone.................................. 103 73 30 41.1
Advertising................................ 219 134 85 63.4
Legal...................................... 51 94 (43) (45.7)
Consulting................................. 137 61 76 124.6
Audit and accounting fees.................. 47 35 12 34.3
Director's fees and expenses............... 87 117 (30) (25.6)
Other...................................... 455 410 45 11.0
--------- -------- -------
$ 5,475 $ 4,910 $ 565 11.5%
========= ======== =======
</TABLE>
The increase in salaries and benefits includes an increase in commission expense
of $131 thousand. Excluding this item, salaries and related benefits increased
by 3.6% over the 1996 level. The increase in occupancy and equipment cost
primarily relates to maintenance and repair costs on an expanded computer
hardware and data communications network. Telephone costs include the upgrading
and expanding of the Company's data communication network. Included in
advertising expense is the cost of printing new product brochures totaling
approximately $50 thousand. Legal expense during 1996 included costs related to
a litigation matter that was resolved in the Company's favor. Directors fees and
expenses benefitted from a reduction in the number of directors serving on the
Company's boards of directors.
During the first quarter of 1997 the Company engaged an outside consulting firm
to assist in identifying opportunities to reduce operating expenses and to
recommend more efficient methods of operating. The increase in consulting costs
is primarily related to this engagement. Total cost of this engagement is
expected to be approximately $600 thousand, most of which will be incurred in
the second quarter of 1997.
Provision for Income Taxes
Provision for income taxes has been made at the prevailing statutory rates and
includes the effect of items which are classified as permanent differences for
federal and state income tax. The provision for income taxes was $713 thousand
and $357 thousand for the three months ended March 31, 1997 and 1996,
respectively, representing 37.9% and 38.6% of income before taxation for the
respective periods.
-18-
<PAGE>
SierraWest Bancorp
10-Q Filing
March 31, 1997
Part II.
Item 1. 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 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. 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 in mediation, with an initial meeting scheduled for
May 13, 1997.
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 2. Change in Securities. No changes.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders. - None
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
-19-
<PAGE>
10.1 Loan commitment agreement between Union Bank of
California and SierraWest Bancorp dated February
25, 1997.
11 Statement regarding computation of per share
earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K.
Bancorp filed Form 8-K dated January 24, 1997, reporting
the signing of a definitive agreement to acquire
Mercantile Bank.
-20-
<PAGE>
10-Q Filing
March 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1997 /s/ William T. Fike
William T. Fike
President, Chief Executive Officer
Date: May 13, 1997 /s/ David C. Broadley
David C. Broadley
Executive Vice President/
Chief Financial Officer
-21-
<PAGE>
Exhibit 10.1
(Letterhead of Union Bank of California) Risk Management Department
Institutional & Deposit Markets Group
February 25, 1997
Mr. David Broadley
Executive Vice President/Chief Financial Officer
SierraWest Bancorp
P.O. Box 61000
Truckee, California 96160
Subject: Loan Commitment
Dear David:
In response to your request, Union Bank of California (Bank) is pleased to
advise its loan commitment, as set out following:
Borrower: SierraWest Bancorp (Bancorp)
Purpose: To provide cash resources, if needed, to Bancorp in conjunction
with the redemption of convertible subordinated debentures.
Amount: $4,000,000 (non-revolving)
Repayment: In full on or before maturity.
Interest Rate: Bank's Reference Rate plus 1%
Maturity: July 1, 1997
Fees: Commitment fee of $10,000 payable $5,000 at commitment
acceptance and $5,000 upon documentation execution. Non-
refundable.
Collateral: None
Guarantors: None
Covenants/
Provisions: Standard covenants and provisions, to include without limitation
- Bancorp will not sell, pledge or otherwise encumber the
common shares of its wholly-owned subsidiary, SierraWest
Bank at any time so long as any principal and/or interest
remains outstanding under this commitment.
445 South Figueroa Street, Los Angeles, California 90071-1601
P.O. Box 3100, Los Angeles, California 90051-1100
213 236 6178
<PAGE>
Mr. David Broadley
Loan Commitment
February 25, 1997
Page 2
Documentation: Satisfactory to Bank
Other Provisions:Loan documentation may include conditions, representations and
warranties, reporting requirements, negative and affirmative
covenants, events of default and other provisions which, in the
opinion of Bank and its counsel, are customary, and/or appro-
priate in transactions of this nature.
Material
Adverse Change: This commitment shall be deemed to have been revoked and shall
be null and void in the event that Bank reasonably believes that
Bancorp has incurred a material change in its financial condi-
tion, operations or business prospects. In furtherance thereof,
Bancorp is requested to advise Bank of the occurrence of any
such material adverse change which is discovered prior to the
expiration of this commitment as noted below.
Confidentiality:This letter shall be deemed to constitute confidential informa-
tion and no portion of its contents shall be divulged to any
person or entity not a party hereof, without the written consent
of Bank. Notwithstanding the foregoing, Bancorp may divulge the
contents of this letter to its attorney, accountants, investment
bankers and regulators, provided that it instructs same to keep
information confidential.
The commitment set out hereinabove shall expire and terminate if not accepted by
Bancorp before 5:00pm, Pacific Standard Time, on March 14, 1997. Acceptance
shall be constituted by the return to Bank of an originally executed copy of
this letter together with the payment of $5,000, both to occur on or before the
date and time indicated above.
We appreciate this opportunity to assist you with your financing needs and look
forward to an expanded and mutually satisfactory relationship.
Sincerely,
/s/ James L. Chappel /s/ William J. McGill, Jr.
James L. Chappel William J. McGill, Jr.,
Vice President Vice President and Manager
Acknowledged, Agreed and Accepted
SIERRAWEST BANCORP
By: /s/ David Broadley By: /s/ Alan B. Rabkin Title:General Counsel/SVP
Title: Date: 3/17/97
cc: John Hendricks UNION
John Mulhner BANK OF
CALIFORNIA
<PAGE>
Exhibit 11
SierraWest Bancorp and Subsidiary
Computation of Earnings Per Common Share
(Amounts in thousands except per share amounts)
<TABLE>
Three Three
Months Months
Ended Ended
03/31/97 03/31/96
<S> <C> <C>
Primary
Net Income $ 1,167 $ 567
========= ========
Shares
Weighted average number of common
shares outstanding 2,927 2,629
Assuming exercise of options reduced by
the number of shares which could have
been purchased with the proceeds from
exercise of such option 162 108
--------- -------
Weighted average number of common
shares outstanding as adjusted 3,089 2,737
========= ========
Net income per share $ 0.38 $ 0.21
========= =========
Assuming full dilution
Earnings $ 1,167 $ 567
Add after tax interest expense
applicable to convertible debentures 68 121
--------- --------
Net income $ 1,235 $ 688
========== ========
Shares
Weighted average number of common
shares outstanding 2,927 2,629
Assuming conversion of
convertible debentures 723 994
Assuming exercise of options reduced by the number of shares which could have
been purchased with the proceeds
from exercise of such options 172 127
---------- ---------
Weighted average number of common
shares outstanding as adjusted 3,822 3,750
========== =========
Net income per share assuming full dilution $ 0.32 $ 0.18
========== =========
</TABLE>
-22-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,568
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,360
<INVESTMENTS-CARRYING> 1,000
<INVESTMENTS-MARKET> 996
<LOANS> 347,480
<ALLOWANCE> 4,807
<TOTAL-ASSETS> 474,042
<DEPOSITS> 423,577
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,696
<LONG-TERM> 3,917
0
0
<COMMON> 16,944
<OTHER-SE> 22,908
<TOTAL-LIABILITIES-AND-EQUITY> 474,042
<INTEREST-LOAN> 8,690
<INTEREST-INVEST> 570
<INTEREST-OTHER> 432
<INTEREST-TOTAL> 9,692
<INTEREST-DEPOSIT> 3,612
<INTEREST-EXPENSE> 3,767
<INTEREST-INCOME-NET> 5,925
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,475
<INCOME-PRETAX> 1,880
<INCOME-PRE-EXTRAORDINARY> 1,167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,167
<EPS-PRIMARY> .38
<EPS-DILUTED> .32
<YIELD-ACTUAL> 5.87
<LOANS-NON> 5,466
<LOANS-PAST> 1,950
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,546
<CHARGE-OFFS> 236
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 4,807
<ALLOWANCE-DOMESTIC> 4,807
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
