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 September 30, 1998 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, 96160-9010
Truckee, California
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (530) 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 November 1, 1998: Common Stock - Authorized 10,000,000 shares of no par;
issued and outstanding - 5,280,267
<PAGE>
10-Q Filing
September 30, 1998
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 ending September 30, 1998. 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 position, results of
operations and cash flows 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 STATEMENTS OF CONDITION
(Unaudited)
September 30, 1998 and December 31, 1997
(Amounts in thousands of dollars)
<TABLE>
ASSETS 09/30/98 12/31/97*
- ------ -------- --------
<S> <C> <C>
Cash and due from banks $ 43,467 $ 58,345
Federal funds sold 85,200 22,275
Investment securities and
investments in mutual funds 128,106 108,309
Loans and leases, net of unearned income,
deferred loan fees/costs and
allowance for possible loan
and lease losses of $8,324
in 1998 and $7,891* in 1997 543,973 545,822
Other assets 63,719 51,995
------------- ------------
TOTAL ASSETS $ 864,465 $ 786,746
============= ============
LIABILITIES
- -----------
Deposits $ 769,420 $ 701,001
Other liabilities 19,838 16,362
------------- ------------
TOTAL LIABILITIES 789,258 717,363
------------- ------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock 45,374 42,148
Retained earnings 29,312 26,598
Accumulated other
comprehensive income 521 637
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 75,207 69,383
------------- ------------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 864,465 $ 786,746
============= ============
</TABLE>
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
(Amounts in thousands except per share amounts)
<TABLE>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
09/30/98 09/30/97* 09/30/98 09/30/97*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans and leases $ 13,398 $ 13,067 $ 40,757 $ 36,682
Interest on federal funds sold 1,595 796 3,206 1,528
Interest on investment securities and other assets 1,550 1,645 4,669 4,521
--------- --------- --------- ---------
Total Interest Income 16,543 15,508 48,632 42,731
--------- --------- --------- ---------
Interest Expense:
Interest on deposits 6,495 5,999 18,923 16,495
Interest on convertible debentures 2 45 51 233
Other interest expense 188 116 475 325
--------- --------- --------- ---------
Total Interest Expense 6,685 6,160 19,449 17,053
--------- --------- --------- ---------
Net Interest Income 9,858 9,348 29,183 25,678
Provision for Possible Loan and Lease Losses 440 615 1,870 2,184
--------- --------- --------- ---------
Net Interest Income After Provision for
Possible Loan and Lease Losses 9,418 8,733 27,313 23,494
Non-interest Income 3,944 3,073 10,864 10,529
Non-interest Expense 8,621 7,852 29,694 23,353
--------- --------- --------- ---------
Income Before Provision for Income Taxes 4,741 3,954 8,483 10,670
Provision for Income Taxes 1,921 1,509 3,723 4,077
--------- --------- --------- ---------
NET INCOME $ 2,820 $ 2,445 $ 4,760 $ 6,593
========= ========= ========= =========
Basic earnings per share $ 0.54 $ 0.49 $ 0.93 $ 1.49
Weighted average shares used to calculate
basic earnings per share 5,205 4,976 5,105 4,436
Diluted earnings per share $ 0.51 $ 0.46 $ 0.87 $ 1.29
Weighted average shares used to calculate
diluted earnings per share 5,472 5,361 5,479 5,214
</TABLE>
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September, 1998 and 1997
(Amounts in thousands of dollars)
<TABLE>
Nine Nine
Months Months
Ended Ended
09/30/98 09/30/97*
-------- --------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 34,590 $ 40,149
Cash Flow From Investing Activities:
Proceeds from:
Maturities of investment securities held to maturity 1,000 1,012
Maturities of investment securities available for sale 23,225 14,191
Sales of investment securities -
available for sale 7,025 6,624
Purchase of mutual funds available for sale (2,000) 0
Purchase of investment securities available for sale (48,623) (40,629)
Loans and leases made net of principal collections (33,521) (96,775)
Change in fixed assets (1,547) 829
Net cash received in acquisition 0 8,570
Other 1,370 (36)
--------- --------
Net Cash Used in Investing Activities (53,071) (106,214)
--------- --------
Cash Flow From Financing Activities:
Net increase in demand, interest
bearing and savings accounts 39,093 52,936
Net increase in time deposits 29,326 22,821
Dividend paid (2,045) (1,657)
Proceeds from issuance of common stock 743 878
Other (589) (668)
--------- --------
Net Cash Provided by Financing Activities 66,528 74,310
--------- --------
Net Increase in Cash and Cash Equivalents 48,047 8,245
Cash and Cash Equivalents at Beginning of Year 80,620 75,574
--------- --------
Cash and Cash Equivalents at September 30 $ 128,667 $ 83,819
========= ========
Interest paid $ 19,579 $ 17,113
Income tax payments $ 4,932 $ 3,253
</TABLE>
- -------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
On June 30, 1997, the Company purchased all the capital stock of Mercantile Bank
for $6.6 million. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair Value of assets acquired $44,609,000
Cash paid for capital stock 3,301,000
Common stock issued for capital stock 3,317,000
-----------
Liabilities assumed $37,991,000
===========
Common stock was issued in conversion of $2,394 thousand and $9,707 thousand in
convertible debentures in 1998 and 1997, respectively. Common stock issued is
net of debenture offering costs of $143 thousand and $655 thousand in 1998 and
1997.
For the nine months ended September 30, 1998 and 1997, $588 thousand and $1,230
thousand of loans, respectively, were transferred to other real estate owned.
In 1998 and 1997, $17.8 million and $21.0 million of unguaranteed SBA loans were
transferred to held for sale status. In addition, $20.3 million in 1998 and $5.8
million in 1997 of government guaranteed SBA loans were transferred to held for
sale status and subsequently sold and included in the Condensed Consolidated
Statements of Cash Flows.
In 1998 $1.7 million in debt was issued in exchange for $1.7 million in lease
receivables.
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Period ended September 30, 1998
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
nine months ended September 30, 1998, 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 nine months ended September 30,
1998. In addition certain historical information has been restated to
reflect the acquisition of California Community Bancshares Corporation
on April 15, 1998, under the pooling-of-interests method of accounting.
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 commitments and contingent liabilities.
3. COMPREHENSIVE INCOME
--------------------
Effective January 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement requires that all items recognized under accounting standards
as components of comprehensive income be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity
classify items of other comprehensive income by their nature in an
annual financial statement. Annual financial statements for prior
periods will be reclassified, as required. SierraWest Bancorp's total
comprehensive income (loss) was as follows:
Three Months Ended September 30
-------------------------------
1998 1997
------------ ------------
(In thousands of dollars)
Net income $ 2,820 $ 2,445
Other comprehensive income,
net of tax 67 152
----------- -----------
Total comprehensive income $ 2,887 $ 2,597
=========== ===========
Nine Months Ended September 30
-------------------------------
1998 1997
----------- ------------
(In thousands of dollars)
Net income $ 4,760 $ 6,593
Other comprehensive (loss) income,
net of tax (116) 1,144
----------- -----------
Total comprehensive income $ 4,644 $ 7,737
=========== ===========
6
<PAGE>
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Period ended September 30, 1998
4. EARNINGS PER SHARE
------------------
The following reconciles the numerator and denominator used in the
calculation of both the basic earnings per share and diluted earnings per
share for each of the three months and nine months ended September 30:
<TABLE>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
9/30/98 9/30/97* 9/30/98 9/30/97*
------- -------- ------- --------
<S> <C> <C> <C> <C>
(in thousands except per share amounts)
Calculation of Basic Earnings Per Share
Numerator - Net Income $ 2,820 $2,445 $4,760 $6,593
Denominator - weighted average
common shares outstanding 5,205 4,976 5,105 4,436
------- ------ ------ ------
Basic Earnings Per Share $ 0.54 $ 0.49 $ 0.93 $ 1.49
======= ====== ====== ======
Calculation of Diluted Earnings Per Share
Numerator:
Net Income $ 2,820 $2,445 $4,760 $6,593
Effect of convertible debentures 1 32 30 137
------- ------ ------ ------
Net Income and effect of
assumed conversions $ 2,821 $2,477 $4,790 $6,730
------- ------ ------ ------
Denominator:
Weighted average common shares outstanding 5,205 4,976 5,105 4,436
Dilutive effect of options 210 223 255 221
Dilutive effect of convertible debentures 57 162 119 557
------- ------ ------ ------
5,472 5,361 5,479 5,214
------- ------ ------ ------
Diluted Earnings Per Share $ 0.51 $ 0.46 $ 0.87 $ 1.29
======= ====== ====== ======
</TABLE>
*Restated on a historical basis to reflect the acquisition of California
Community Bancshares Corporation on April 15, 1998, under the
pooling-of-interests method of accounting.
5. POOLING OF INTERESTS
--------------------
On April 15, 1998, the Company completed the acquisition of California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB), utilizing the pooling-of-interests method of accounting and
accordingly, the Company's historical consolidated results have been restated.
Under the terms of the Plan of Acquisition and Merger dated November 13, 1997,
shareholders of CCBC received shares of Bancorp's common stock at an exchange
ratio of 0.8283 which was based upon a price of $37.94 which was the average of
the closing price for Bancorp's stock from March 11, 1998 to April 7, 1998. No
gain or loss for tax purposes was recognized by CCBC shareholders, except with
respect to cash received in lieu of fractional shares. The value of the
acquisition, based upon an average price of $37.94 per share totaled
approximately $44.7 million.
7
<PAGE>
SierraWest Bancorp
Notes to Condensed Consolidated Financial Statements (Unaudited)
Period ended September 30, 1998
The following summarizes the separate results of the combined entities for the
periods shown prior to the combination.
<TABLE>
Pro-Forma
Three months ended September 30, 1997 SWB CCBC Combined
--- ---- ---------
<S> <C> <C> <C>
Net interest income $ 7,242 $ 2,106 $ 9,348
Non-interest income 2,581 492 3,073
Net income 1,996 449 2,445
Basic Earnings Per Share 0.49 0.41 0.49
Diluted Earnings Per Share 0.47 0.35 0.46
Nine months ended September 30, 1997
Net interest income $ 19,661 $ 6,017 $ 25,678
Non-interest income 9,105 1,424 10,529
Net income 5,339 1,254 6,593
Basic Earnings Per Share 1.50 1.19 1.49
Diluted Earnings Per Share 1.31 1.01 1.29
At December 31, 1997
Total assets $589,755 $196,991 $ 786,746
Total Deposits 526,269 174,732 701,001
Total Shareholder's Equity 53,630 15,753 69,383
</TABLE>
6. CHANGE IN ACCOUNTING ESTIMATE
-----------------------------
The Company has experienced an increase in the prepayment speed of its SBA loan
portfolio during the fourth quarter of 1997 and continuing into the current
year. As a result the Company reevaluated the useful lives of the loans included
in the SBA portfolio, and increased the speed at which it amortizes its
servicing assets and interest-only strips receivable. The increase in
amortization resulted in a decrease in net income of $41 thousand ($0.01 per
diluted share) for the first quarter of 1998 and $187 thousand ($0.04 and $0.03
per diluted share) for the second and third quarters of 1998, respectively.
7. NEW ACCOUNTING PRONOUNCEMENT
----------------------------
In June, 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company has not determined the impact of adopting SFAS No.
133 on the Company's financial statements.
8
<PAGE>
SIERRAWEST BANCORP AND SUBSIDIARY
Item 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
FINANCIAL CONDITION
- -------------------
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 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;
prepayment risks; operational risks including data processing system failures or
fraud; asset/liability matching risks and liquidity risks; and changes in the
securities markets.
On April 15, 1998, the Company completed the acquisition of California Community
Bancshares Corporation (CCBC) and its wholly owned subsidiary Continental
Pacific Bank (CPB), utilizing the pooling-of-interests method of accounting and
accordingly, the Company's historical consolidated results have been restated.
See Footnote 5 for additional information.
Total assets increased by $77.7 million from $786.7 million at December 31,
1997, to $864.4 at September 30, 1998. An increase of $62.9 million in federal
funds sold, $19.8 million in investment securities and investments in mutual
funds and $11.7 million in other assets were partially offset by decreases of
$14.9 million in cash and due from banks, and $1.8 million in loans, net of the
allowance for possible loan and lease losses.
During May, 1998, the Company completed a securitization of approximately $85
million of SBA 504 and similar loans. This resulted in a reduction in loans of
approximately $68 million during the second quarter and $15.5 million in the
third quarter of 1998.
The increase in federal funds sold and investment securities and the reduction
in loans reflects the effect of this securitization. Currently the Company has
liquid assets in excess of that which it requires to meet its liquidity needs;
however it is anticipated that federal funds sold will decline in future months
as the available funds are utilized for loan growth. During the third quarter of
1998 net loans grew by $20.4 million. Excluding sales of guaranteed loans and
the 1998 securitization, this represents $47 million in loan growth during the
quarter.
Other assets at September 30, 1998, included interest-only strips receivable
with a fair value of $9.1 million related to the 1998 securitization. The
securitization included an initial cash reserve fund of $2.1 million that was
increased to $3.3 million at September 30, 1998. This reserve fund is expected
to be recovered by the Company over time. The present value of the cash reserve
fund is included in the balance of the interest-only strips receivable.
9
<PAGE>
The following table summarizes the change in deposits between December 31, 1997
and September 30, 1998.
<TABLE>
09/30/98 12/31/97 Change
-------- -------- --------
<S> <C> <C> <C>
Non-interest bearing ......................................... $170,946 $162,242 $ 8,704
Savings....................................................... 25,013 24,259 754
Interest-bearing transaction accounts(1)...................... 261,059 231,424 29,635
Time.......................................................... 312,402 283,076 29,326
-------- -------- --------
TOTAL DEPOSITS................................................ $769,420 $701,001 $ 68,419
======== ======== ========
</TABLE>
(1) Balance includes money market savings deposit accounts.
The Company experienced strong deposit growth throughout its markets. Growth in
the Sacramento area totaled $21 million, Northern Nevada grew by $31 million and
growth from the branches acquired through the acquisition of CCBC grew by $11
million.
Other liabilities increased by $3.5 million from December 31, 1997. This
increase includes a $2.3 million recourse obligation from the 1998
securitization. Additionally, other liabilities included $2.1 million in
deferred compensation payable to four former senior officers of Continental
Pacific Bank (a subsidiary of CCBC).
At September 30, 1998, accumulated other comprehensive income included $118
thousand related to the downward adjustment in fair value of the interest-only
strips receivable and an unrealized gain of $639 thousand from other investment
securities.
Interest-only strips receivable totaled $23 million at September 30, 1998 net of
a valuation allowance of $201 thousand. The balance of interest-only strips
receivable related to 1998's securitization totaled $9.1 million at September
30, 1998 including a positive market value adjustment of $764 thousand. The
Company's remaining interest-only strips receivable totaled $13.9 million,
including a negative market value adjustment of $965 thousand.
The value of the Company's interest-only strips receivable, exclusive of 1998's
activity, decreased during 1998 related to an increase in prepayments on the
underlying loans associated with these assets. In response, the Company has
increased its amortization of its interest-only strips receivable and servicing
assets. Please see the non-interest income discussion contained within "Results
of Operations" elsewhere herein.
The amortized book value of servicing assets, net of a valuation allowance of
$275 thousand, was $2 million at September 30, 1998.
The Company has completed negotiations for the sale of its Truckee, California
headquarters building. This sale is expected to be completed during the fourth
quarter of 1998. Terms of the sale require that the Company leases back
approximately 17,000 square feet at a rate of $1.30 per square foot per month
plus utilities and common area maintenance costs for a period of 10 years. Sales
proceeds are expected to be approximately $4.5 million. Additionally, the
Company is currently negotiating for the sale and leaseback of its Reno, Nevada
branch.
Effective August 31, 1998, the Company redeemed the convertible subordinated
debentures acquired in its acquisition of CCBC. $54 thousand of these debentures
were redeemed for cash with the remaining debentures converted into common stock
at a conversion rate of $15.39 per share.
10
<PAGE>
RESULTS OF OPERATIONS (Nine Months Ended September 30, 1998 and 1997)
- ---------------------
Net income for the nine months ended September 30, 1998 decreased by $1,833
thousand or 28% from $6,593 thousand for the nine months ended September 30,
1997 to $4,760 thousand for the current nine month period. Net interest income
increased by $3,505 thousand, the provision for possible loan and lease losses
decreased by $314 thousand, non-interest income increased by $335 thousand and
the provision for income taxes decreased by $354 thousand. The positive effect
of these items on net income was offset by a $6,341 thousand increase in
non-interest expense.
Non-interest expense included non-recurring merger related costs of $4.0
million. The effect on net income of these costs was to decrease net income by
$2.8 million.
Net Interest Income
- -------------------
The yield on average interest-earning assets for the nine months ended September
30, 1998 was 5.31%. This compares to 5.51% for the first nine months of 1997.
The decrease reflects a decrease in the percentage of average loans to average
interest-earning assets and a decrease in loan yields. The decrease in the
percentage of loans to average earning assets includes the effect of the
Company's $85 million securitization of SBA 504 and similar loans and the sale
of $20.3 million in guaranteed portions of SBA loans as well as increased
competition for loans. Offsetting the effect of the decrease in yield was an
increase in average interest-earning assets from $623 million during the first
nine months of 1997 to $735 million during the nine months ended September 30,
1998.
Loan yields and interest earned, including loan fees for the nine months ended
September 30, 1998 and 1997, were as follows (in thousands except percent
amounts):
<TABLE>
Nine Nine
Months Months
Ended Ended
09/30/98 09/30/97
-------- --------
<S> <C> <C>
Average loans outstanding (1) $545,545 $481,153
Average yields 10.0% 10.2%
Amount of interest and origination fees earned $ 40,757 $ 36,682
</TABLE>
(1)Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $981 thousand and $1,151 thousand for the nine months
ended September 30, 1998 and 1997, yields on average loans outstanding were 9.7%
and 9.9%, respectively. The prime rate (upon which a large portion of the
Company's loan portfolio is based), averaged 8.5% for the 1998 period and 8.4%
for the 1997 period. The Company has been aggressive in growing its loan
portfolio and has encountered price competition for larger, higher quality
loans, and the decrease in loan yields reflects this. In addition to the effect
of competition on loan yield, the Company's 1997 securitization had the effect
of reducing the Company's overall loan yield. Loans included in this
securitization generally earned interest at a higher rate than the weighted
average rate of the Company's remaining loan portfolio.
Other interest-earning assets, which consist primarily of investments in debt
securities and federal funds sold, totaled an average balance of $189.9 million
during the first nine months of 1998 with an average yield of 5.5%. This
compares to an average balance of $142.0 million with an average yield of 5.7%
during the nine months ended September 30, 1997. The decline in yield during
1998 includes the effect of market conditions and an increase in average federal
funds sold as a percentage of average interest-earning assets from 27.1% during
the 1997 period to 41.8% in the current nine month period.
Consistent with the decrease in yields on interest earning assets, the Company
has experienced a decrease in its overall cost of deposits from 3.55% for the
nine months ended September 30, 1997 to 3.46% in the current period. This
relates to a decrease in average interest-bearing deposits to average total
deposits from 81.1% during the 1997 period to 79.0% in the current period and a
decline in rate paid on time deposits.
11
<PAGE>
Rates and amounts paid on average deposits including non-interest bearing
deposits for the nine months ended September 30, 1998 and 1997 were as follows
(in thousands except percent amount):
<TABLE>
Nine Nine
Months Months
Ended Ended
09/30/98 09/30/97
-------- --------
<S> <C> <C>
Average deposits outstanding (1) $732,279 $621,925
Average rate paid 3.46% 3.55%
Amount of interest paid or accrued $ 18,923 $ 16,495
</TABLE>
(1) Amounts outstanding are the average of daily balances for the periods.
The effective interest rate paid on interest-bearing transaction accounts,
savings accounts and time certificates of deposit during the first nine months
of 1998 and 1997 were as follows:
<TABLE>
1998 1997
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST- INTEREST-
BEARING BEARING
TRANSACTION(2) SAVINGS TIME TRANSACTION(2) SAVINGS TIME
Average balance
(in thousands)(1) $247,426 $24,868 $306,112 $212,383 $23,366 $268,785
Average rate paid 3.1% 2.1% 5.6% 3.0% 2.1% 5.7%
</TABLE>
(1) Amounts outstanding are the average of daily balances for the periods.
(2) Includes money market savings accounts.
Provision for Possible Loan and Lease 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 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 1997, SBA net loan losses totaled
$763 thousand and during the nine months ended September 30 1998, net losses on
SBA loans were $684 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 provision for possible loan and lease losses was $1,870 thousand and $2,184
thousand for the first nine months of 1998 and 1997, respectively. The provision
in 1997 reflects the growth in the loan portfolio, additional amounts to provide
for certain charged off amounts and revised estimates of potential losses on two
large loans. 1998's provision includes amounts to replenish the allowance for
1998 charge-offs and the integration of CCBC's loans and reserves into the
Company's loan loss methodology.
The allowance for possible loan and lease losses as a percentage of loans was
1.51% at September 30, 1998, 1.43% at December 31, 1997, and 1.48% at September
30, 1997. Net charge-offs were $1,437 thousand for the first nine months of
1998. This compares to net charge-offs of $841 thousand during the nine months
ended September 30, 1997.
12
<PAGE>
Guaranteed portions of SBA loans at September 30, 1998 totaled $74.9 million and
at September 30, 1997 they totaled $53.8 million. The Company monitors its
exposure to loan losses each quarter and adjusts its level of provision 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 September 30, 1998, $9.1 million were
considered to be impaired. The allowance for possible loan and lease losses
included $852 thousand related to these loans. The average recorded investment
in impaired loans during the nine months ended September 30, 1998 was $6.8
million.
Of total gross loans and leases at December 31, 1997, $8.5 million were
considered to be impaired. The allowance for possible loan and lease losses
included $1,161 thousand related to these loans. The average recorded investment
in impaired loans during the year ended December 31, 1997 was $8.3 million.
The following table sets forth the ratio of nonaccrual loans to total loans, the
allowance for possible loan and lease losses to nonaccrual loans and the ratio
of the allowance for possible loan and lease losses to total loans, as of the
dates indicated.
<TABLE>
September 30 December 31,
--------------------- ----------------------
1998 1997 1997 1996 1995
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans to total loans 1.7% 1.3% 1.1% 1.2% 1.9%
Allowance for possible loan and lease
losses to nonaccrual loans 91.0% 110.7% 126.3% 103.9% 76.7%
Allowance for possible loan and lease
losses to total loans 1.5% 1.5% 1.4% 1.3% 1.4%
</TABLE>
During the third quarter of 1998 the Company modified its definition of
nonaccrual loans to include loans 90 days past due or more that may be well
secured and for which the ultimate collection of principal and interest is
expected but which are not in the process of collection. Excluding this
modification the ratio of nonaccrual loans to total loans at September 30, 1998
would have been 1.4%.
If the guaranteed portions of SBA loans on nonaccrual status, which total $2.2
million, are excluded from the calculations, the ratio of nonaccrual loans to
total loans at September 30, 1998, declines to 1.3% and the allowance for
possible loan and lease losses to nonaccrual loans increases to 120%. At
September 1997, excluding guaranteed portions of loans on nonaccrual, these same
ratios are 1.0% and 144%.
The following table sets forth the amount of the Company's nonperforming loans
as of the dates indicated (amounts in thousands).
<TABLE>
September 30 December 31
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
SBA............................. $ 5,418 $ 4,998 $5,307 $4,985 $5,351
Other........................... 3,731 2,097 1,836 448 1,174
Accruing loans past due 90 days or more:
SBA............................. 217 342 1,127 1,071 816
Other........................... 745 589 449 1,128 285
Restructured loans (in compliance
with modified terms)............. 2,084 2,072 1,922 1,249 548
</TABLE>
13
<PAGE>
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, in the process of collection and the
collection of principal and interest is probable. A loan is placed on nonaccrual
status even if principal or interest is less than 90 days past due if management
determines the ultimate collection of principal or interest on the loan to be
unlikely. When a loan is placed on nonaccrual status, the Company's 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 October 31, 1998, in addition to the assets disclosed in the
above chart, management of the Company has identified approximately $356
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.
Interest income on nonaccrual loans which would have been recognized if all such
loans had been current in accordance with their original terms totaled $745
thousand for the nine months ended September 30, 1998. Interest income actually
recognized on nonaccrual loans for the nine months ended September 30, 1998 was
$328 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>
September 30 December 31
------------------------------ ------------------------------------------------
1998 1997 1997 1996 1995
-------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Average gross loans.............. $ 545,545 $ 481,153 $ 496,632 $ 396,669 $ 313,736
Total gross loans at end of
period .......................... 552,297 529,362 553,713 436,392 350,361
Allowance for possible loan and lease losses:
Balance beginning of period...... $ 7,891 $ 5,647 $ 5,647 $ 5,003 $ 4,654
--------- --------- --------- --------- ---------
Actual charge-offs:
SBA.............................. 741 561 820 114 595
Commercial and industrial........ 638 348 681 554 454
Leases........................... 133 14 14 84 0
Real estate...................... 0 24 30 264 143
Installment...................... 256 148 169 73 115
--------- --------- --------- --------- ---------
Total............................ 1,768 1,095 1,714 1,089 1,307
--------- --------- --------- --------- ---------
Less recoveries:
SBA.............................. 57 53 57 87 20
Commercial and industrial........ 239 129 159 183 28
Leases........................... 0 6 6 0 0
Real estate...................... 1 12 13 26 0
Installment...................... 34 54 60 16 14
--------- --------- --------- --------- ---------
Total............................ 331 254 295 312 62
--------- --------- --------- --------- ---------
Net charge-offs.................. 1,437 841 1,419 777 1,245
Provision for possible loan and
lease losses..................... 1,870 2,184 2,799 1,421 1,594
--------- --------- -------- --------- ---------
Subtotal 8,324 6,990 7,027 5,647 5,003
Acquisition of Mercantile Bank... 0 864 864 0 0
-------- --------- -------- --------- --------
Balance-end of period............ $ 8,324 $ 7,854 $ 7,891 $ 5,647 $ 5,003
======== ========= ======== ========= ========
Net loans charged off to average
loans outstanding (1)............ 0.35% 0.23% 0.29% 0.20% 0.40%
</TABLE>
(1) Percentages for the nine months are based on annualized net charge-offs.
15
<PAGE>
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,
--------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ---------------------------------- ----------------------------
Percent- Percent- Percent-
Amount age Amount age Amount age
----------- ------------- -------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
SBA loans............. $ 2,227 30% $ 1,561 33% $ 1,468 34%
Commercial and
industrial loans(2).. 2,682 18 1,934 18 1,808 19
Real estate loans..... 2,480 49 1,845 42 1,439 40
Consumer loans to
individuals (1).... 502 3 307 7 288 7
------- --- ------- --- ------- ---
Total............... $ 7,891 100% $ 5,647 100% $ 5,003 100%
======= === ======= === ======= ===
</TABLE>
<TABLE>
September 30,
------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Percent- Percent-
Amount age Amount age
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
SBA loans............. $2,000 29% $1,985 28%
Commercial and
industrial loans(2).. 2,595 19 2,839 20
Real estate loans..... 3,423 50 2,525 49
Consumer loans to
individuals (1)...... 306 2 505 3
------ --- ------ ---
Total................. $8,324 100% $7,854 100%
====== === ====== ===
</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 $335 thousand during the first nine months of
1998 compared to the previous year's first nine months.
During June 1997 the Company recorded a gain of approximately $2.6 million from
the sale and securitization of unguaranteed portions of SBA loans. The Company
completed a securitization of $85 million in SBA 504 and similar loans during
1998 and recorded a gain of $890 thousand on this transaction.
The gain on the sale of government guaranteed loans increased from $386 thousand
during the first nine months of 1997 to $1,397 thousand for the nine months
ended September 30, 1998. Sales of government guaranteed loans were $14,936
thousand in 1997 and $20,282 thousand during 1998. Sales during 1997 included
$9,176 thousand of Business & Industry ("B & I") loans and $5,760 thousand of
SBA 7(a) loans. Because B&I loans tend to have a lower yield than SBA loans, the
Company intends to sell the government guaranteed portion of the B&I loans it
originates. SBA loan sales were made in 1997 primarily to facilitate the
securitization.
All government guaranteed loan sales in 1998 were SBA 7(a) loans. Gains in 1997,
as a percentage of loans sold, were lower than 1998 because B&I loan sales tend
to produce lower gains than SBA 7(a) sales. B&I loans, in general, are larger
than SBA 7(a) loans but have a lower yield. For SBA 7(a) loan sales, gains on
sale of guaranteed portions of loans as a percentage of loans sold were 6.7%
during the 1997 period and 6.9% during 1998.
The Company intends to continue to hold a significant percentage of the
guaranteed portions of SBA loans in its portfolio; however with the increase in
prepayments, management believes it is prudent to sell selected SBA loans into
the secondary market. During June and September, 1998 a total of $9.1 million
and $11.1 million, respectively, of guaranteed portions of SBA loans was sold.
Similar sales are expected during the fourth quarter of 1998.
Income related to the Company's servicing assets and interest-only strips
receivable as defined under SFAS 125, net of the amortization of these assets,
decreased by $119 thousand from $3,330 thousand for the first nine months of
1997 to $3,211 thousand during the current period. This decrease is related to
an increase in amortization of these assets. Servicing and interest-only strip
income totaled $5.6 million during the nine months ended September 30, 1998 and
$4.6 million during the same period in 1997. Included in 1998's income is $0.9
million related to the 1998 securitization. Amortization, including a $275
thousand valuation allowance on the Company's servicing assets, totaled $2.4
million in 1998 and $1.2 million during 1997.
During 1997 and continuing into 1998, the Company has experienced an increase in
the prepayment speed of its SBA loan portfolio. In response to this increase in
prepayments, the Company has increased the speed at which it amortizes its
servicing and interest-only strip assets. This had the effect of increasing
amortization by $70 thousand during the first quarter of 1998, $318 thousand
during the second quarter and $318 thousand during the third quarter. In
addition, it is expected that amortization will increase by a minimum of $318
thousand during the remainder of 1998. During the first nine months of 1998 the
Company has recorded a valuation allowance on its servicing assets totaling $275
thousand. The offset to this valuation allowance is a reduction in service fee
income.
Other significant increases in non-interest income include $131 thousand in
merchant credit card fees, $356 thousand in gain on sale of investment
securities, $144 thousand in gains on sale of assets and $225 thousand related
to a decrease in the recourse obligation recorded on the June 1997
securitization.
17
<PAGE>
Non-interest Expense
- --------------------
The following table compares the various elements of non-interest expense as an
annualized percentage of total assets for the first nine months of 1998 and 1997
(in thousands except percentage amounts):
<TABLE>
Nine Months Salaries & Occupancy & Other
Ended Average Related Equipment Operating
September 30 Assets (1) Benefits Expenses Expenses
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
1998 $ 822,416 2.6% 0.8% 1.4%
1998 (2) $ 822,416 2.2% 0.8% 1.1%
1997 (3) $ 698,168 2.4% 0.8% 1.2%
</TABLE>
(1)Based on average daily balances.
(2)Excluding merger costs
(3)Other operating expenses exclude merger costs of $53 thousand.
The Company incurred non-recurring charges related to its acquisition of CCBC
totaling $4.0 million during the first nine months of 1998. Included in salaries
and related benefits are merger costs of $2.4 million. Consulting expense
included $629 thousand of merger costs which are primarily related to investment
banking fees.
The following table summarizes the principal elements of operating expenses and
discloses the changes and percent of changes for the nine months ended September
30, 1998 and 1997 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
-----------------------
Nine Months Ended Sept. 30, Adjusted 1998 over 1997
------------------------------- -----------------------
Merger Amount Percentage
Cost Adjusted ------ ----------
1998 1998(1) 1998 1997(2)
------ ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Salaries and related benefits...... $16,210 $2,445 $13,765 $12,605 $1,160 9.2%
Occupancy and equipment............ 5,108 164 4,944 4,408 536 12.2
Insurance.......................... 293 42 251 254 (3) (1.2)
Postage............................ 441 441 341 100 29.3
Stationery and supplies............ 539 17 522 465 57 12.3
Telephone.......................... 427 427 405 22 5.4
Advertising........................ 868 50 818 569 249 43.8
Legal.............................. 404 220 184 166 18 10.8
Consulting......................... 1,150 629 521 663 (142) (21.4)
Audit and accounting fees.......... 374 131 243 192 51 26.6
Directors' fees and expenses....... 302 302 403 (101) (25.1)
Other real estate owned............ 98 98 54 44 81.5
Sundry losses...................... 566 139 427 721 (294) (40.8)
Other.............................. 2,914 135 2,779 2,054 725 35.3
------- ------ ------- ------- ------
$29,694 $3,972 $25,722 $23,300 $2,422 10.4%
======= ====== ======= ======= ======
</TABLE>
(1) Nonrecurring costs related to the Company's acquisition of CCBC.
(2) Excludes merger costs totaling $53 thousand.
The increase in salaries and related benefits includes $746 thousand in
commission expense. This primarily relates to commissions earned on the
origination of SBA and similar loans. The increase in occupancy and equipment
includes the upgrading of the Company's PC network and growth in the Company
including the addition of a downtown Sacramento branch and various SBA loan
offices. Advertising expense reflects an expanded advertising budget to support
the Company's growth.
18
<PAGE>
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. Consulting expense during 1997
includes $430 related to this engagement. As a result of this engagement, sundry
losses in 1997 reflect an accrual of $452 thousand for the estimated salaries
and benefits payable related to a reduction in staffing. Sundry losses in 1998
include approximately $170 thousand in writedowns in the value of OREO
properties. The decrease in Directors' fees and expenses includes $118 thousand
related to a decrease in value of the phantom stock shares allocated to the
Company's Directors Deferred Compensation and Stock Award Plan.
Provision for Income Taxes
- --------------------------
Provision for income taxes have been made at the prevailing statutory rates and
include the effect of items which are classified as permanent differences for
federal and state income tax. The provision for income taxes was $3,723 thousand
and $4,077 thousand for the nine months ended September 30, 1998 and 1997,
respectively, representing 43.9% and 38.2% of income before taxation for the
respective periods. The increase in the 1998 percentage primarily relates to
certain merger expenses which are not deductible for federal and state taxes.
19
<PAGE>
Results of Operations (Three months ended September 30, 1998 and 1997)
- ---------------------
Net income for the third quarter of 1998 totaled $2,820 thousand, an increase of
$375 thousand from the third quarter of 1997. Net interest income increased by
$510 thousand during the comparison period, the provision for possible loan and
lease losses decreased by $175 thousand and non-interest income increased by
$871 thousand. These positive variances were offset by an increase in
non-interest expense of $769 thousand and an increase in income tax expense of
$412 thousand.
Net Interest Income
- -------------------
The yield on net interest-earning assets decreased from 5.47% during the third
quarter of 1997 to 5.10% during the third quarter of 1998. Consistent with the
nine month comparison, yield was negatively affected by a decrease in the
percentage of loans to interest-earning assets and a decrease in loan yields.
This decline in yield was offset by an increase in average interest-earning
assets from $679 million for the three months ended September 30, 1997 to $767
million for the current period.
Loan yields and interest earned, including loan fees for the three months ended
September 30, 1998 and 1997 were as follows (in thousands except percent
amounts):
<TABLE>
Three Three
Months Months
Ended Ended
09/30/98 09/30/97
-------- --------
<S> <C> <C>
Average loans outstanding (1) $538,967 $509,668
Average yields 9.9% 10.2%
Amount of interest and origination fees earned $ 13,398 $ 13,067
</TABLE>
(1) Amounts outstanding are the average of daily balances for the periods.
Excluding loan fees of $233 thousand and $462 thousand for the three months
ended September 30, 1998 and 1997, respectively, yields on average loans
outstanding were 9.7% and 9.8%. The prime rate (upon which a large portion of
the Company's loan portfolio is based) was 8.5% during both periods.
The decline in loan yield reflects market conditions in the Company's service
areas. There is strong price competition both from banks and from non bank
lenders in the Company's service area. Additionally, the Company has been
increasing the amount of loans in its portfolio with fixed rates that may reset
after approximately five years that are priced based on a spread over the five
year Treasury rates. These loans generally have a lower rate than the current
rate earned on the Company's variable rate loans.
Average other interest-earning assets, consisting primarily of federal funds
sold and investments in debt securities, totaled $228 million during the 1998
quarter and $169 million during the 1997 quarter. The average yield on these
investments for the quarters ended September 30, 1998 and 1997 were 5.5% and
5.7%. The decline in yield primarily reflects market conditions and an increase
in the percentage of average federal funds sold to average other
interest-earning assets from 27.1% during the 1997 period to 51.3% during the
third quarter of 1998.
20
<PAGE>
Rates and amounts paid on average deposits, including non-interest bearing
deposits for the three months ended September 30, 1998 and 1997, were as follows
(in thousands except percent amounts):
<TABLE>
Three Three
Months Months
Ended Ended
09/30/98 09/30/97
-------- --------
<S> <C> <C>
Average deposits outstanding (1) $761,544 $677,294
Average rate paid 3.4% 3.6%
Amount of interest paid or accrued $ 6,495 $ 6,160
</TABLE>
Average interest-bearing deposits represented 78.5% of average total deposits
during the 1998 quarter and 79.8% during the 1997 quarter.
The effective interest rates paid on interest-bearing transactions, savings
accounts and time certificates of deposit during the third quarter of 1998 and
1997 were as follows (in thousands except percent amounts):
<TABLE>
1998 1997
-------------------------------- --------------------------------
INTEREST- INTEREST-
BEARING BEARING
TRANSACTION(2) SAVINGS TIME TRANSACTION(2) SAVINGS TIME
----------- ------- -------- ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Average balance (1) $261,496 $25,068 $310,875 $230,225 $23,813 $286,566
Average rate paid 3.1% 2.1% 5.5% 3.0% 2.1% 5.7%
</TABLE>
(1) Amount outstanding is the average of daily balances for the periods.
(2) Includes money market savings accounts.
Provision for Possible Loan and Lease Losses
- --------------------------------------------
The provision of $440 thousand during the third quarter of 1998 includes the
effect of replenishing the allowance for third quarter charge-offs of $93
thousand and growth in the Company's loan portfolio.
The provision of $615 thousand in the third quarter of 1997 includes the effect
of replenishing the allowance for loan and lease losses for third quarter
charge-offs of $194 thousand and growth in the Company's loan portfolio.
For a more complete discussion of the change in provision, refer to the nine
month comparison.
Non-interest Income
- -------------------
During the third quarter of 1998, a total of $11.1 million of guaranteed
portions of SBA loans were sold, resulting in a gain of $742 thousand. No sales
were made during the third quarter of 1997.
As previously discussed, the Company has increased its amortization of its
servicing assets and interest-only strips receivable in response to an increase
in prepayments of the underlying loans associated with these assets. Servicing
and interest-only strip income, net of amortization and other adjustments,
totaled $1,035 thousand during the 1998 quarter and $1,407 thousand during the
third quarter of 1997. This decline of $372 thousand resulted from an increase
in amortization of $581 thousand, partially offset by an increase of $209
thousand in servicing and interest-only strip income. Included in servicing and
interest-only strip income is $657 thousand related to the 1998 securitization.
21
<PAGE>
During September 1998 the Company sold $7.1 million of investment securities and
recorded a gain of $314 thousand on sale. This sale was made to take advantage
of market conditions. U. S. Treasury securities were sold and replaced with U.
S. agency securities having a similar remaining life.
Non-interest Expense
- --------------------
The following table compares the various elements of non-interest expense as an
annualized percentage of total assets for the third quarter of 1998 and 1997 (in
thousands except percentage amounts):
<TABLE>
Salaries & Occupancy & Other
Three Months Average Related Equipment Operating
Ended Sept. 30 Assets(1) Benefits Expenses Expenses
- -------------- ------ -------- -------- --------
<S> <C> <C> <C> <C>
1998 $856,047 2.2% 0.8% 1.1%
1997 $762,665 2.2% 0.8% 1.1%
</TABLE>
(1) Based on average daily balances.
The following table summarizes the principal elements of operating expenses and
discloses the changes and percent of changes for the three months ended
September 30, 1998 and 1997 (amounts in thousands except percentage amounts):
<TABLE>
Increase (Decrease)
------------------------
Three Months Ended Sept. 30, Adjusted 1998 over 1997
---------------------------- -------------------------
Amount Percentage
--------- -------------
1998 1997
-------- ------
<S> <C> <C> <C> <C>
Salaries and related benefits...... $ 4,698 $4,241 $ 457 10.8%
Occupancy and equipment............ 1,625 1,507 118 7.8
Insurance.......................... 90 95 (5) (5.3)
Postage............................ 182 97 85 87.6
Stationery and supplies............ 154 141 13 9.2
Telephone.......................... 148 130 18 13.8
Advertising........................ 281 178 103 57.9
Legal.............................. 58 80 (22) (27.5)
Consulting......................... 203 287 (84) (29.3)
Audit and accounting fees.......... 86 52 34 65.4
Directors' fees and expenses....... 47 190 (143) (75.3)
Other real estate owned............ 45 18 27 150.0
Sundry losses...................... 45 107 (62) (57.9)
Other.............................. 959 729 230 31.6
------- ------ ------
$ 8,621 $7,852 $ 769 9.8%
======= ====== ======
</TABLE>
Variances during the quarter related to salaries and related benefits,
consulting, advertising and directors' fees and expenses are consistent with
those previously discussed in the nine month review.
The increase in occupancy and equipment costs is consistent with the growth in
the Company. The increase in postage includes both an increase in the size of
the Company and the timing of larger mailings such as customer statements.
Provision for Income Taxes
- --------------------------
The provision for income taxes was $1,921 thousand and $1,509 thousand for the
three months ended September 30, 1998 and 1997, respectively, representing 40.5%
and 38.2% of income before taxation for the respective periods.
22
<PAGE>
Year 2000
- ---------
Many existing computer programs use only two digits to identify a year in the
date datum field (e.g., "98" for "1998"). As a result, the Company, like most
other companies, faces a potentially serious information systems (computer)
problem because many software applications and operational programs written in
the past may not properly recognize calendar dates beginning in the year 2000.
If not corrected, many computer applications could fail or create erroneous
results by or at the year 2000.
In June of 1996, the Federal Financial Institutions Examination Council(FFIEC)
released its first alert to the financial services industry concerning Year 2000
risks. This council is comprised of (1) the Board of Governors of the Federal
Reserve System(FRB); (2) the Federal Deposit Insurance Corporation; (3) the
Office of the Comptroller of the Currency; (4) the National Credit Union
Administration and (5) the Office of Thrift Supervision. On May 5, 1997, the
FFIEC issued Interagency Guidelines outlining Year 2000 Project Management Goals
and called for every financial institution to have a Year 2000 plan. This plan
required an inclusion of an assessment of the Year 2000 risk posed by "mission
critical" systems and required plans which ensured that testing was
substantially complete for mission critical systems by December 31, 1998. A
third set of guidelines were issued on December 22, 1997, further elaborating
regulatory expectations regarding the Year 2000 or "millennium bug" problem.
This release specifically included the requirement that each institution
determine the level of "portfolio risk", posed by borrowers with potential Year
2000 problems, which could lead to impaired performance on the part of the
borrower and, by implication, the financial institution as creditor. Since
December, 1997, there have been additional Interagency Statements released on
the topics of Impact on Customers, Vendor Readiness, Testing Guidance, Customer
Awareness Programs, Contingency Planning Guidance and Fiduciary Services
Guidance. All financial institutions regulated by any of the regulatory bodies
of the FFIEC are required to follow the guidelines outlined in each of the
Interagency Statements. Examiners from the FFIEC member agencies conducted first
round supervisory reviews of all financial institutions' Year 2000 conversion
efforts during the first half of 1998. Ongoing examinations will continue until
all phases from planning to final contingency plans are completed. Since the
testing phase is considered to be a critical phase, the FDIC will complete a
second Year 2000 on-site review in the near future. Examiners will categorize
the organization's efforts as "Satisfactory", "Needs Improvement" or
"Unsatisfactory". The FDIC intends to mandate supervisory action for virtually
all institutions assessed less than satisfactory. In addition, the FDIC will
consider a change in a component or composite rating if identified deficiencies
so warrant. Focusing on financial institutions alone will not prevent Year 2000
disruptions. Consequently, examiners will also be conducting supervisory reviews
on data processing service providers and third-party software vendors who
provide services to federally insured financial institutions.
THE COMPANY'S STATE OF READINESS
- --------------------------------
In 1997, the Company identified five steps to be accomplished for formulation of
an action plan:
(1) Awareness - Awareness of Year 2000 problems. The Company set up a Year 2000
Steering committee to oversee the progress in solving the problems associated
with Year 2000 issues. Progress is reported monthly at the Company's Board and
Committee meetings and documented in the committee and board minutes.
(2) Assessment - An inventory of affected systems has been performed, the
problem assessed, risks measured and an action plan formalized.
(3) Renovation - In this phase, modifications will be made and vendors will be
managed according to the action plan. Detailed test plans and schedules are
developed. The entire project is monitored and results are documented.
(4) Validation - Tests will be conducted and results analyzed to confirm that
the changes made bring the affected system into compliance and no new problems
have surfaced as a result of the changes.
23
<PAGE>
(5) Implementation - Replacement of the non-compliant systems occur. The systems
are put into production and appropriately interfaced with one another. Training
also occurs and contingency plans are activated if necessary. A review is
conducted to assure that the system works as desired.
The Company with the help of consultants began identifying 260 systems in use
throughout the Bank and performed preliminary assessment of the risk of
non-compliance associated with each one. Each system was given an overall risk
assessment of "high", "moderate", "low", "no risk" or "unknown" risk. In
deriving the overall risk rating, three separate components were considered:
A.) Criticality: How critical is the system to the organization?
B.) Confidence: How confident are we that the vendor will make their system
compliant?
C.) Control: How much control do we have in the process?
The Company has identified eleven(11) Mission Critical A-Priority Systems
considered to be most critical regardless of the risk of non-compliance and the
degree of control the Company has over the renovation of these systems. They are
listed below:
(1) Core Application Software
(2) Customer Information System & Data Warehouse
(3) Operating System
(4) PC Server Based Application & Operating System
(5) Network Hardware
(6) Loan Document Processing
(7) ACH Processing
(8) Wire Transfer & Settlement
(9) ATM Processing
(10)Telephone Banking
(11)Disaster Recovery & Back-up
The Company has established a test plan for its mission critical applications.
Testing of these items commenced in September 1998 and should be substantially
complete by December 31, 1998. Monthly status reports are presented to the Board
of Directors.
Core Application Software and Customer Information System & Data Warehouse
- --------------------------------------------------------------------------
The major information technology system which includes the core applications,
customer information system, data warehouse and on-line system posting has
received the FDIC's assessment of its current Year 2000 efforts. The assessment
indicates that the new software release which the Company installed in October
1998 is Year 2000 compliant. The Company's testing will consist of key dates
identified by the Company. An independent test environment will be used whenever
possible. The Company will be using its disaster recovery vendor to test most of
the core applications and operating system so that no contamination of current
data will occur.
Operating System
- ----------------
The upgrade to the operating system software was installed on September 19, 1998
and is designed to work hand-in-hand with the major information technology
system. Testing of the system occurred with installation in September and was
found to have no Year 2000 compliance issues.
PC Server Based Application & Operating System and Network Hardware
- -------------------------------------------------------------------
Most of the PC hardware and software is Year 2000 compliant and data processing
personnel are currently providing documentation of certification. Hardware
identified as non- compliant has been scheduled for replacement.
24
<PAGE>
Loan Document Processing
- ------------------------
Loan document processing software has been tested. The current version is
certified and is Year 2000 compliant with documentation on file with the Year
2000 Project Manager.
ACH Processing and Wire Transfer & Settlement
- ---------------------------------------------
Testing on the current version of Fedline (the FRB's software)has begun and will
continue according to the schedule provided by the FRB.
ATM Processing
- --------------
The Company's third party vendor recently installed the upgrades to their ATM
drivers. The Company has scheduled testing for the fourth quarter of 1998.
Telephone Banking
- -----------------
The telephone banking system may require purchasing both hardware and software
upgrades to become Year 2000 compliant. The Company is currently testing
existing systems to determine the need to modify or replace the existing
products.
Disaster Recovery & Back-up
- ---------------------------
The Company's disaster recovery vendor is capable of testing core applications
and the operating system. Test tapes will be created and offsite testing is
scheduled for the first quarter of 1999.
Non-Information Technology
- --------------------------
The Company is in the process of identifying, evaluating and testing
non-information technology systems such as the telephone systems, the security
systems , utility sources, and other facility related issues. These systems have
been identified as B-Priority systems and testing, implementation and
contingency phases are expected to be completed by October 1999.
Year 2000 Plan Management
- -------------------------
In order to effectively manage the Year 2000 Plan, the Company has grouped all
phases of the project into one of six categories as defined in the FFIEC
guidelines:
(1)Business Risk
(2)Due Diligence on Service Providers and Software Vendors Readiness
(3)Impact on Customers
(4)Testing
(5)Customer Awareness Programs
(6)Contingency Planning
With the identification of our A-Priority Mission Critical Systems, business
risk was measured for each application, process and vendor/customer
relationship. In general, the Company believes the business risk associated with
A-Priority Mission Critical systems to be low. As testing progresses, any
significant modifications to the business risk assumptions will be noted,
reported to the Board of Directors, and addressed in continency plans if
required.
The Company's progress on due diligence and testing was previously discussed in
the section describing it's eleven mission critical systems.
Guidance for Customer Awareness and Impact on customers was provided in FFIEC
Interagency Statements. In May of 1998, the Company created and distributed to
all employees a handout for answering customers questions. Additionally, a
brochure was included in each customer(s) statement with a toll-free telephone
number for customer inquiries. A written customer awareness plan was completed
in August 1998. During October 1998, an updated handout for employees was
completed. To address the impact on customers, in April 1998 the Company created
a credit policy regarding Year 2000 issues. In May 1998, all lending officers,
underwriting staff and credit services staff received training on the impact of
25
<PAGE>
Year 2000 issues. A report on the assessment on risk from borrowers is scheduled
for completion during the fourth quarter of 1998. The review to date has not
identified any significant Year 2000 risk associated with the Company's loan
portfolio.
Costs to Address the Year 2000 Issues
- -------------------------------------
Costs directly related to Year 2000 issues totaling $63,000 were incurred
through September 30, 1998. Incurred costs consist of the salary of a full-time
Year 2000 Manager, travel and seminars for staff, consultant costs of $22,000,
and additional software purchases of $12,000. These costs are being funded
through operating cash flows. Additional estimated costs relating to Year 2000
issues have been identified to be approximately $270,000. As the project
continues the costs may prove to be significantly higher. Of the estimated
additional costs, $97,000 has been identified for additional hardware and
software purchases, $22,000 has been estimated for the Company's telephone
system, and an additional $151,000 has been estimated for staff salaries and
travel and seminar expenses.
The Year 2000 issue is pervasive and complex as virtually every computer system
will be affected in some way by the Year 2000 date change. Consequently, no
assurance can be given that Year 2000 compliance can be achieved without costs
and uncertainties that might have a material adverse effect on future financial
results or cause reported financial information not to be necessarily indicative
of future operating results or future financial condition. However it is
anticipated that any disruption of services would be partial and brief, and that
there will not be a material impact on revenues or earnings.
Risks of the Company's Year 2000 Issues
- ---------------------------------------
The Company is requiring its significant systems and software vendors to
represent through a written certification that the services and products
provided are, or will be, Year 2000 compliant. Independent testing will verify
that these systems are Year 2000 compliant. However, there can be no guarantee
that the systems of other companies will be timely converted, or that a failure
to convert by another company, would not have a material adverse effect on the
Company. Although at this time it is impossible to determine the extent of these
possible adverse effects with any certainty, the Company has adopted some
contingency plans and is still in the process of developing others. See
"Contingency Plans" below. For example for potential lack of utilities supplied
by third party vendors the Company has a back-up generator in place to provide
power to its mainframe. More provisions will be made as contingency plans are
prepared.
As mentioned earlier, with the identification of the Company's A-Priority
Mission Critical systems, business risk was measured for each application,
process and vendor/customer relationship. In general, the Company believes that
the business risk associated with the A-Priority Mission Critical Systems is
low. As required, risk identified in the testing phase will be addressed in
contingency planing or by other means once testing is completed.
Contingency Plans
- -----------------
Testing on Mission Critical (A-Priority) systems will be substantially complete
by December 31, 1998. Contingency plans for the systems identified as not Year
2000 compliant are expected to be completed and presented to the Board of
Directors by June 1999.
B-Priority systems, defined as non mission critical systems requiring testing,
will be tested beginning in the first quarter of 1999 and if required
contingency plans are expected to be completed and presented to the Board of
Directors by October 1999.
26
<PAGE>
Item 3
- ------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Management's opinion there has not been a material change in the Company's
market risk profile during the three months ended September 30, 1998.
27
<PAGE>
SierraWest Bancorp
10-Q Filing
September 30, 1998
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, went to
mediation in May, 1998. The mediation has now been concluded
and has resulted in an agreement in principle as to the
resolution of this matter. This agreement in principle is
being formalized in a written settlement agreement and is also
subject to final court approval. The Bank's participation
under the agreement in principle, if fully executed, is
primarily to acquire two senior deeds of trust, substitute as
lender to Rainbow Holding Company as to this debt, and
redocument and reamortize the acquired debt. In addition, the
Bank will reschedule certain debt already held by it. The Bank
will also make a contribution to assist in remediation and
assign certain reimbursements.
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 still expected
that clean-up of the property will commence late in 1998 or in
the spring of 1999 following final settlement and the payment
of settlement amounts.
In addition, the Company is subject to certain other 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.
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.
28
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.1 - Agreement for Purchase and Sale of
Truckee, California property, dated September 3,
1998.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed for the
quarter ended September 30, 1998.
29
<PAGE>
10-Q Filing
September 30, 1998
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: November 10, 1998 /s/ William T. Fike
----------------- -----------------------------------
William T. Fike
President, Chief Executive Officer
Date: November 10, 1998 /s/ David C. Broadley
----------------- -----------------------------------
David C. Broadley
Executive Vice President, Chief Financial Officer
30
<PAGE>
Exhibit 10.1
PURCHASE AND SALE AGREEMENT
---------------------------
(10181-10185 Truckee Tahoe Airport Road, Truckee, California)
THIS PURCHASE AND SALE AGREEMENT ("Agreement") is entered
into as of September 3, 1998 by and between SIERRAWEST BANK, a
California Banking Corporation (hereinafter the "Seller"), whose
address is 10181 Truckee Tahoe Airport Road, P.O. Box 61000, Truckee,
California 96160 and CP MANAGEMENT, LLC, a California Limited Liability
Company (hereinafter the "Buyer"), whose address is 46752 Mission
Blvd., Suite E, Fremont, CA 94539. Seller and Buyer agree to
incorporate the following recitals into this Agreement:
W I T N E S S E T H:
--------------------
WHEREAS, Seller desires to sell two commercial improved real parcels
located in the Town of Truckee, County of Nevada, State of California
as commonly described as 10181 - 10185 Tahoe-Truckee Airport Road and
the 1.2 acre adjacent parcel whose assessor's parcel numbers are APN
#19-440-48 and APN 19-440-49, respectively (hereinafter collectively
the "Property") to the Buyer; and,
WHEREAS, the Buyer wishes to purchase said Property on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, Seller and the Buyer agree to the following terms
related to said sale:
1. Property Sold by Seller to the Buyer; "As Is" Condition; Transfer of
--------------------------------------------------------------------
Other Items; Inspections; Telephone System.
------------------------------------------
(A) The Property consists of: (1) two (2) improved commercial
real estate parcels and one (1) unimproved portion for a total
of approximately 3.95 acres of land, more or less, as more
particularly described in Exhibit A attached, together with
any privileges, rights, easements, appurtenances, development
rights, air rights, water and sewer capacity rights relating
to the real property (collectively, the "Land"); (2) Except as
stated below, all buildings, structures, systems, facilities,
fixtures (except bank fixtures), fences and parking areas
located on the Land, including without limitation those
certain two office buildings containing a total of
approximately 38,835 gross square feet (singly, "Building # 1"
and "Building # 2," and collectively, the "Buildings") and,
except as noted below, any and all furnishings, fixtures,
machinery, equipment, apparatus and appliances (not retained
by Seller or owned by tenants) used in connection with the
operation or occupancy of the Land (collectively, the
"Improvements"); (3) All of Seller's right, title and interest
in any and all: building warranties or guarantees; plans,
permits and approvals; maintenance and service agreements that
Buyer elects to
1
<PAGE>
assume; building insurance (if assumable); and tenant leases
associated with the Property, all of which shall be assigned
to Buyer at Closing as they relate to the Property except as
noted below as to the telephone Equipment Leases or any
warranties, guarantees or service agreements that by their
terms may not be transferred to a subsequent purchaser (which
Buyer may determine during the Due Diligence Period); (4)
Except as set forth in Paragraph 1.B below, all of Seller's
right, title and interest in and to any personal property
located within or used in connection with the Land and
Improvements, including without limitation the personal
property described in Exhibit B attached (collectively, the
"Personal Property"); and (5) all goodwill associated with the
Property, together with a non-exclusive, royalty-free
revocable license to use the name and logo of "SierraWest Bank
Business Professional Center" in connection with the Property
so long as SierraWest Bank is a tenant thereof;
(B) The Personal Property shall not include any equipment utilized
for banking purposes or functions or equipment belonging to
individual tenants of the Property and not retained by Lessor
under the applicable lease(s) or equipment associated with
Seller's computer, security and telephone systems, except as
set forth in this Agreement, and shall not include the backup
electrical generator.
(C) The Property is sold in its current "AS IS/WHERE IS" condition
with no warranties given by Seller, either express or implied,
as to the Property or its tenants; the Property's financing,
tax bills, condition, value, habitability, environmental
condition, insurance, fitness, zoning, use, ADA compliance,
utility adequacy, soils, engineering, leases/lease potential
or other matters, except as expressly provided elsewhere in
this Agreement. Buyer shall have until 5:00 p.m. on November
18, 1998 to thoroughly inspect and investigate the Property
and satisfy itself that the Property is in a condition
acceptable to Buyer and is otherwise suitable to Buyer (the
"Due Diligence Period"). This investigation may include, in
Buyer's sole discretion: a physical inspection of the
Property, including without limitation soil, geological and
other tests, engineering evaluations of the structural,
mechanical, electrical, HVAC and other systems, fixtures and
facilities which comprise the Improvements and a review of
the Plans; review of all governmental matters affecting the
Property, including without limitation zoning, environmental
and building permit and occupancy matters; review and
verification of all financial and other information provided
by Seller relating to the history, operation and performance
of the Property; review of the current or proposed leases
(collectively, the "Leases"); and review of such other matters
pertaining to an investment in the Property as Buyer
deems advisable in its sole discretion. Buyer and its
representatives shall have the right of access to the Property
during reasonable business hours and upon reasonable prior
notice to Seller (and Seller may accompany Buyer at all times)
to conduct its investigation of the physical condition of the
2
<PAGE>
Property, and Buyer shall have the right to inspect, review
and copy all files, books and records maintained by Seller or
its affiliates or agents in connection with the Property
(which right shall survive the Closing for a period of one (1)
year); provided, however, that Buyer agrees not to use any
confidential and non-public information provided by Seller to
Buyer with regard to the Property, the Property's financial
status or the Property's condition as disclosed under this
provision for anything other than its decision to purchase or
not to purchase and if Buyer elects to cancel the sale as
provided for in the Agreement and not purchase the Property
said confidential and/or nonpublic information shall be
destroyed or promptly returned to Seller. If Buyer elects not
to proceed with the purchase and notifies Seller within the
Due Diligence Period of its intent to terminate escrow, the
Buyer's earnest money deposit shall be fully refunded,
together with such interest as may accrue in escrow. Failure
to terminate the purchase within said period shall waive any
objections and the earnest money deposit shall become
immediately non-refundable, except as expressly provided
elsewhere in this Agreement. Buyer agrees to fully indemnify
and hold Seller harmless, including any and all damages (which
damages shall include, without limitation, legal costs, legal
fees and any other costs and expenses), that are caused by any
investigations, studies, surveys or tests Buyer may conduct on
or within the Property. Buyer shall take no action and/or
conduct no test that will permanently injure, destroy,
contaminate or otherwise devalue the Property in any way and
the liquidated damages provision set forth elsewhere in this
Agreement shall not act as a maximum sum due with regard to
this obligation. Notwithstanding anything to the contrary in
the preceding two sentences or elsewhere in this Agreement,
but subject to the limitations on Buyer's use of information
set forth herein, in no event shall Buyer be liable to Seller
for any diminution in the value of the Property resulting from
the information developed or properly disclosed by any
investigations, studies, surveys or tests.
(D) Within ten (10) business days after the Effective Date, Seller
shall provide Buyer with copies of: (1) any architectural,
construction and other drawings, plans and specifications for
the Improvements, including underground utilities which are in
Seller's possession (collectively, the "Plans"); (2) any
soils, structural, mechanical, hydrological, environmental,
geological or other similar reports concerning the Property
which are in Seller's possession;
(3) a rent roll ("Rent Roll") dated no earlier than the
Effective Date, including a list of all deposits paid to
Seller by tenants and a list of current tenant delinquencies;
(4) all Leases, licenses and other agreements or
correspondence with tenants relating to the use or occupancy
of any portion of the Property; (5) monthly operating
statements for the Property for the current year, and annual
operating statements for the Property for the last three (3)
full years; (6) copies of any building permits, certificates
of completion, certificates of occupancy and environmental
permits, licenses and approvals issued by any governmental
3
<PAGE>
authorities in connection with construction, operation or
occupancy of the Property; (7) all service contracts,
guarantees and warranties; and (8) such other documents and
information concerning the Property as Buyer may reasonably
request.
(E) Subject to Paragraph 5 hereinbelow, Seller shall
transfer possession and master keys, combinations and codes to
the Property at the Close of Escrow (subject to
responsibilities under the Leases already executed or to be
executed as a part of the sale). Seller shall also, at and
effective as of the Close of Escrow, assign in blanket form
all current Leases to Buyer and shall transfer all tenant
security (and other) deposits related to the Property.
(F) Seller (or its vendors) shall retain ownership of the
telephone system, telephone equipment and telephone wiring
currently installed at the Property (the "existing Executone
telephone system"). Ownership of the equipment leases (the
"Equipment Leases") related to the existing Executone
telephone system shall also be retained by Seller and shall
not be transferred to Buyer. Effective as of the Closing Date,
Seller shall release, discharge, indemnify, defend and hold
Buyer harmless from and against any claims, damages,
liabilities and costs (including without limitation reasonable
attorneys' fees and costs) arising in connection with the
existing Executone telephone system or the Equipment Leases.
Subject to applicable provisions of the various Equipment
Leases, no further renewals of said Equipment Leases will be
granted by Seller and the tenants will be required to replace
as their Equipment Leases expire the existing leased equipment
at the termination of their respective Equipment Leases. The
telephone room now utilized by Seller shall be leased to
Seller as provided in Paragraph 5 below; provided, however,
that to the extent access to portions of the Property not
leased by Seller is necessary to service other tenants
pursuant to the Equipment Leases, Buyer shall fully cooperate
in providing access thereto to Seller at all reasonable times.
2. Deed; Vesting of Title; Title; Title Insurance; Taxes; Costs of Escrow.
----------------------------------------------------------------------
(A) Seller shall convey, by appropriate Grant Deed, fee title to
the Property to the Buyer or its nominee, upon Closing of
Escrow, as that term is defined below. Buyer is generally
aware that the Property is subject to existing leases and
reciprocal easements for use, parking and sewer, among other
easements. All current real estate taxes, bonds, assessments
and special district fees shall be prorated to the Close of
Escrow based upon current available information. Buyer shall
be provided with a CLTA form of owners title policy, with
appropriate endorsements, with the cost of said policy to be
paid by Seller. Buyer may elect to procure an ALTA form of
owner's title policy; in such event, Seller shall pay the
amount that would be charged for a CLTA policy and Buyer shall
pay the
4
<PAGE>
additional premium charged for ALTA coverage. Seller shall
also be responsible for all real estate and/or transfer taxes
and one-half (1/2) of reasonable and necessary sale escrow
fees. Buyer shall be responsible for the cost of recording the
Grant Deed; any lenders policies of title insurance and all
other costs related to any financing by Buyer; and the other
one-half (1/2) of the sale escrow fees. The exceptions
contained within the CLTA or ALTA form of owners title policy
shall be approved or disapproved by Buyer as set forth in
Paragraph 2 (B).
(B) Seller shall provide the Buyer with a preliminary title report
covering the Land and Improvements, which report includes
copies of the parcel map and all underlying documents
referred to in the title report and is not over fifteen (15)
business days old. The preliminary title report shall reflect
that title to the Property is clear of financing, mechanics
and any other monetary liens (collectively, "Monetary Liens")
or involuntary liens or encumbrances except customary
conditions, utility districts, easements (including reciprocal
easements) and covenants, conditions and restrictions. The
preliminary title report shall be delivered to Buyer not
later than fifteen (15) business days after this Agreement
is fully executed and placed into escrow. The Buyer shall
have thirty (30) additional calendar days after being provided
with a copy of the preliminary title report and all underlying
documents to object to any liens or encumbrances shown
thereon. If the Buyer does not object within said period,
the condition of title shall be deemed approved. The
exceptions that are approved (or deemed approved) by Buyer are
referred to herein as the "Approved Exceptions." If title is
not acceptable to Buyer, and Buyer objects, and unless Seller
elects to remove any objectionable exception to the reasonable
satisfaction of Buyer within a period prior to the Close of
Escrow, or the parties agree otherwise with respect to the
objectionable exception(s), Buyer shall have the right to
terminate this Agreement. In such event, each party shall
have such sums or documents returned to them as required to
be placed into escrow hereunder, and the Buyer's earnest
money deposit shall be fully refunded, together with such
interest as may accrue in escrow. If Buyer fails to terminate
the Agreement within 15 days after Seller notifies Buyer that
it does not elect to remove or otherwise address the
objectionable exception, Buyer's right to terminate with
respect thereto shall expire, Buyer shall be deemed to have
waived the objection and the Approved Exceptions shall
include the theretofore objectionable exception.
(C) Seller shall cooperate with Buyer in obtaining a survey of the
Property during the Due Diligence Period. The surveyor shall
be selected jointly by Seller and Buyer within Fifteen (15)
business days of the execution of this Agreement. The
survey's cost shall be borne equally by Seller and Buyer.
The survey shall be prepared by a certified
land surveyor in accordance with the most recent American Land
Title Association standards; and shall be acceptable to the
5
<PAGE>
Title Company for the purpose of deleting any survey exception
from the title policy. Any matters or exceptions disclosed by
the survey shall be subject to the process described in
Paragraph 2.B above.
3. Purchase Price.
--------------
The Purchase Price shall be Four Million Three Hundred Sixty-Five Thousand
Dollars ($4,365,000.00). The purchase price shall be paid as follows:
(A) Buyer shall pay Fifty Thousand Dollars ($50,000.00)
earnest money along with this Agreement payable to First
American Title Company, as escrow holder; which sum shall
become immediately non-refundable, except as expressly
provided elsewhere in this Agreement, at the conclusion of the
Due Diligence Period (5:01 p.m. on November 18, 1998) and
shall be immediately released to Seller unless escrow is
terminated prior to that date and time as set forth in this
Agreement. (B) The balance of the purchase price shall be paid
in good and collected funds on or before the Close of Escrow.
4. Escrow; Closing of Escrow.
-------------------------
This Agreement shall also serve as escrow instructions (if no escrow
instructions are provided by the parties). Escrow shall be opened by the parties
by deposit of this Agreement and the related Earnest Money Deposit paid to First
American Title Company, 10833 Donner Pass Road, Suite 102, Truckee, California
96161, or such other title company to be specified by Seller, within two (2)
business days following the execution of this Agreement. The Earnest Money
Deposit shall be invested as Buyer shall designate to Escrow. Close of Escrow
shall occur at said address. Escrow shall be closed on or before December 18,
1998, unless terminated earlier hereunder or extended in writing by the parties
(the "Closing" or "Close of Escrow"). Subject to (i) the Seller Leaseback
described in Paragraph 5 hereinbelow, (ii) the Leases and (iii) the Approved
Exceptions, the Buyer shall be provided with access to and exclusive possession
of the Property upon Closing of Escrow, and risk of loss shall shift from Seller
to Buyer as of the Close of Escrow.
(A) Conditions. Buyer's obligation to close shall be subject to the
following conditions: (1) issuance of a CLTA or ALTA owner's
policy of title insurance for the Property, including such
endorsements as Buyer reasonably requires, with liability
equal to the Purchase Price, showing fee title to the Property
vested in Buyer or its nominee subject only to the Approved
Exceptions (the "Title Policy"); (2) receipt of estoppel
certificates, in form and substance acceptable to Buyer, from
each tenant under a Lease and each service provider under a
service contract that Buyer elects to assume; (3) the Property
shall be in at least as good a condition and repair as on the
Effective Date, reasonable wear and tear excepted, all
Personal Property described in 1(A) but excepting that
6
<PAGE>
property described in 1(B) shall remain located on the
Property (or have been replaced in the ordinary course of
business with other personal property of like quality), and
Seller's representations and warranties expressly set forth in
this Agreement shall be true and correct; and (4) Seller and
Buyer shall be prepared to execute and deliver to each other
the Seller Leaseback (as defined below) and other documents
required to Close the transaction. In the event any of the
conditions set forth in this Paragraph are not satisfied (or
waived by Buyer) on or before the Closing Date through no
fault of Buyer, Buyer may terminate this Agreement upon
written notice to Seller, in which case the Buyer's earnest
money deposit shall be fully refunded, together with such
interest as may accrue in escrow.
(B) Deliveries.
----------
Seller shall deliver to Buyer at Close of Escrow: (1) a duly
executed bill of sale, in form to be agreed upon by the
parties during the Due Diligence Period, conveying the
Personal Property described in Paragraph 1(A) but excepting
property described in Paragraph 1(B) to Buyer free and clear
of any liens, encumbrances or restrictions; (2) a duly
executed and acknowledged blanket assignment, in form to be
agreed upon by the parties during the Due Diligence Period,
assigning to Buyer all of Seller's interest as landlord in all
the Leases, Plans, warranties, service contracts which Buyer
has elected to assume and other intangible Personal Property;
(3) tenant notices, in form to be agreed upon by the parties
during the Due Diligence Period, signed by Seller and
addressed to each tenant of the Property; (4) the original
Leases, service contracts and estoppel certificates; (5)
Federal and California Non-foreign Certifications, on the
Title Company's standard forms, duly completed and executed by
Seller; and (6) all necessary tenant files (including
correspondence), property tax bills and all calculations used
to prepare statements of rental increases under the Leases and
statements of common area charges, insurance, property taxes
and other charges which are paid by tenants of the
Property.
(C) Prorations.
----------
All receipts and disbursements of the Property will be
prorated as of 12:01 p.m. on the Closing Date (with the
Closing Date belonging to Buyer) on the basis of a 365-day
year in accordance with the provisions of this Section 4.C.
Not less than five (5) business days prior to the Closing,
Seller shall submit to Buyer for its approval a tentative
prorations schedule showing the categories and amounts of all
prorations proposed. The parties shall agree on a final
prorations schedule prior to the Closing and shall deliver the
same to Escrow Holder. If within a reasonable period following
the Closing either party discovers an error in the prorations
statement, it shall notify the other party and the parties
shall promptly make any adjustment required.
(i) Property Rents.
--------------
Current rents under the Leases shall be apportioned as
of the Closing Date (with the Closing Date belonging to Buyer)
7
<PAGE>
on the basis of a 365-day year. With respect to any rent
arrearages collected under the Leases after Closing, Buyer
shall pay to Seller any rent actually collected which is
applicable to the period preceding the Closing Date. Buyer
shall not be obligated to take any steps to recover any rent
arrearages. Seller shall be permitted to pursue the collection
of any rent arrearages applicable to the period prior to the
Closing Date, provided that Buyer shall be at no cost or
expense in connection therewith, but Seller shall not be
permitted to exercise any legal or equitable remedies, such as
(but not limited to) eviction proceedings, in connection with
its collection efforts.
(ii) Security Deposits.
-----------------
Buyer shall be entitled to credit against the Purchase Price
for the total sum of all unapplied rental deposits, security
deposits, cleaning deposits and other deposits paid to Seller
by tenants under any Leases. Seller shall make no charge
against any tenant security deposit between the Effective Date
and the Closing Date.
(iii) Leasing Costs.
-------------
Seller shall pay as of the Closing any leasing commissions
(including without limitation any commissions due to any
property manager or third party such as locators or brokers)
and tenant improvement costs, if any, in connection with any
Lease executed on or before the Closing Date, whether or not
the tenant has taken possession of the leased premises under
the Lease.
(iv) Capital Expenditures and Accounts Payable.
-------
All improvements (including labor and material) which have
been performed or contracted for by or on behalf of Seller
prior to the Closing Date, and
all sums due for accounts payable which have been incurred
with respect to the Property prior to the Closing Date shall
be paid by Seller. Buyer shall furnish to Seller for payment
any bills for such period received after the Closing Date, and
Buyer shall have no further obligation with respect thereto.
(v) Utility Charges. All current utility charges shall be
prorated as of the Closing Date and Buyer shall obtain a final
billing therefor. All utility security deposits, if any,
shall belong to Seller and shall be promptly replaced by
Buyer.
5. Seller Leaseback; Form of Lease; Material Lease Terms.
---------------------------------------------------------
This Agreement is subject to a leaseback of a portion of the Property by Seller
containing the following material terms and in a lease form, and containing such
other reasonable and necessary terms, to be approved by Seller and Buyer during
the Due Diligence Period (the "Seller Leaseback"):
(A) Building 2.
----------
Seller will agree to lease back from Buyer
approximately Seventeen Thousand One Hundred
Forty-Seven (17,147) square feet of Building 2 of the
8
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Property at the rate of One Dollar and Thirty Cents
($1.30) per square foot for Base Rent, plus a monthly
common area expense reimbursement (the "CAM") in the
amount of Twenty Cents (20(cent)) per square foot
plus a monthly utility cost reimbursement ("Utility
Costs") in the amount of Twenty Cents (20(cent)) per
square foot. The initial term of the lease of the
Building 2 will be ten (10) years. Base Rent will
increase at the end of the first five (5) years of
the initial term by twelve (12.00%); with rental
increases thereafter at the anniversary date of the
Lease at the end of years seven (7) and nine (9) of
the initial term, calculated in accordance with the
then current year CPI, but not to exceed an increase
of four and one-half percent (4.50%) per year (on an
accumulative basis) at any adjustment date. A pro
rata share of any increases in common area expenses
("CAM") and Utility Costs may be passed through each
year to Seller (as tenant).
(B) Option(s) to Renew.
------------------
Buyer will grant to Seller two (2) additional five
year options to renew the Lease. The Base Rent for
the first two years of the renewal term shall be
determined by increasing the Base Rent previously in
effect by a percentage equal to the percentage
increase in the CPI over the previous year, but not
to exceed an increase of four and one-half percent
(4.50%) over the previous rental paid. CPI
adjustments, not to exceed an increase of four and
one-half percent (4.50%) per year (on an accumulative
basis), shall be made at the end of every two (2)
years thereafter at the anniversary date of the
renewed Lease. In addition, the Lease shall state
that a pro rata share of any increase in common area
expenses ("CAM") and utility costs may be passed
through each year as an increase to Seller (as
tenant) (if the option to renew is elected).
(C) Common Areas: Exclusivity.
---------------------------
Seller shall have the exclusive right to maintain a
receptionist in the central reception area, and to
maintain the directory located in the central
reception area, subject to compliance with such
obligations of the Buyer (as landlord under the
Leases) as Buyer may notify Seller (e.g., entering or
changing tenant names). Common areas (including
parking areas and landscaping) and the Property not
leased by Seller are to be managed by Buyer or its
agent(s). Janitorial costs of the areas leased by
Seller are to be borne by the Seller. Seller, as
tenant, shall be provided with an exclusivity clause
preventing any other financial institution or loan
production office from leasing space in the Property
during its tenancy. Buyer may, but shall not be
obligated to, maintain the name "SierraWest Bank" or
"SierraWest" in the name of the Property.
9
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(D) Use of Community Room.
---------------------
So long as Seller, as tenant, occupies at least
50% of the rentable space in the Property: (1) Seller
shall have first priority to control the scheduling
of the use of the area known as the "Community Room"
located on the first floor of Building 1; and (2)
Buyer as landlord shall ask that all requests by
other tenants of the Property and all non-tenant
requests for use of the Community Room shall be
directed to, and approved by the designated employee,
as that employee is redesignated periodically by
Seller. The use of the Community Room by other
building tenants shall be based upon availability,
and the scheduling shall be administered in a fair
and uniformly applicable manner that does not favor
or discriminate against any tenants or cause Buyer as
landlord to be in violation of any of its obligations
under any other tenant leases. Without limiting the
foregoing, other building tenants shall have priority
over non-tenant users.
(E) Assignment and Subletting.
-------------------------
Seller (as tenant) shall have the right to assign
and/or sublease all or a portion of Building 2,
subject to Buyer's prior written consent, such
consent not to be unreasonably withheld if the
proposed assignee or sublessee satisfies objective
criteria to be detailed in the Seller Leaseback.
(F) Landlord's Access to Building 2.
----------------------------------
As stated above, Seller shall promptly transfer
possession and master keys, combinations and codes to
Building 1 at the Close of Escrow (subject to
responsibilities under the leases already executed
or to be executed as a part of the sale). Seller
(as tenant) shall retain exclusive control over
access to Building 2 so long as Seller is not in
default under the Seller Leaseback; provided,
however, that: (1) Buyer, accompanied by an
authorized senior employee of Seller, shall have the
right to access Building 2 upon reasonable prior
notice (which need not be more than 24 hours) to
Seller's facility manager, as that manager may be
changed from time to time, for any purpose reasonably
related to Buyer's ownership of the Property or
performance of its obligations under the Seller
Leaseback; and (2) Buyer shall have the right to use
any and all means which it may deem proper, in its
sole discretion, to gain access to any necessary
portions of Building 2 in an emergency, or in the
event Seller is in default under the Seller
Leaseback, without any liability to Lessee (except as
to Buyer's intentional misconduct or gross
negligence).
(G) Security Systems.
-----------------
Seller shall modify the existing security system
installed on the Property, including, but not limited
to the key card entry system and alarm panels, to
separate the security systems of Building 1 and
Building 2, and Seller shall relinquish the security
system of Building 1 to Buyer at the Close of Escrow.
10
<PAGE>
Seller, as tenant shall retain exclusive control over
the existing security system installed on the
Property, including, but not limited to the key card
entry system and alarm panels, for Building 2.
(H) Parking.
-------
Seller shall retain not less than ten exclusive and
marked parking spaces in the rear (where now
designated) for its management staff and ten
exclusive and marked parking spaces for visitors in
the front.
(I) Building 1.
----------
Buyer shall also lease to Seller, under the same
terms provided in Paragraphs 5.A, B and E, the
following areas: (i) the space in
Building 1 that Seller currently uses for the vault;
and (ii) the phone room. In addition, Buyer shall
enter into a separate lease agreement with Seller for
that certain space known as Suite 406 in Building 1
consisting of +/- 377 square feet at the rate of One
Dollar and Thirty Cents ($1.30) per square foot for
Base Rent, plus a monthly common area expense
reimbursement (the "CAM") in the amount of Twenty
Cents (20(cent)) per square foot plus a monthly
utility cost reimbursement ("Utility Costs") in the
amount of Twenty Cents (20(cent)) per square foot.
The initial term of the lease of Suite 406 will be
one (1) year with a one (1) year option to renew. The
Base Rent for the phone room shall be at a reduced
rate to be determined by the parties; in
consideration, Seller's rights to the space will be
non-exclusive and Buyer will be entitled to install,
or authorize other tenants to install, other
telephone equipment in such space so long as the
installation does not interfere with Seller's use.
(J) Phone System.
-------------
Seller shall remove the existing Executone
telephone system, and return all affected of the
Property to substantially the same condition they
were in prior to installation of the existing
Executone telephone system, when Seller ceases use of
the existing Executone telephone system or when the
Seller Leaseback terminates, whichever occurs first.
6. Representations and Warranties and Covenants of Seller.
------------------------------------------------------
Seller represents, warrants and covenants as follows:
(A) Environmental Conditions. Other than routine
cleaning supplies and standard building paints and
solvents, Seller is not aware of any Hazardous
Materials present now or at any time in the past on,
under, about or affecting the Property, has no reason
to believe that any other present or former owner,
tenant, occupant or user of the Property has used,
handled, generated, produced, manufactured, treated,
stored, transported, released, discharged or disposed
of any Hazardous Material on, under or from the
11
<PAGE>
Property, and has received no notices that the
Property is subject to any current investigation,
study or remediation regarding its environmental
condition. Each Lease being transferred to Buyer
includes prohibitions on tenant use of Hazardous
Materials and Seller is not aware that any tenant has
violated this lease provision. The term "Hazardous
Materials" means and includes any substance(s) which
is/are: (i) designated, defined, classified or
regulated as a hazardous substance, hazardous
material, hazardous waste, pollutant or contaminant
under any federal, state or local statutes, rules,
regulations or other laws concerning human health or
the environment; (ii) a petroleum hydrocarbon,
including crude oil or any fraction thereof and all
petroleum products; (iii) PCBs; (iv) asbestos; (v)
flammable explosives; (vi) infectious materials;
(vii) radioactive materials; (viii) carcinogenic; or
(iv) a reproductive toxicant. Should the existence of
any Hazardous Materials be identified prior to the
Close of Escrow, even if beyond the Due Diligence
Period set forth above, and should Seller be
unwilling to agree to remediate the existence of the
Hazardous Materials prior to the Close of Escrow or
within an otherwise reasonable period, Buyer may
promptly elect to cancel escrow in which event the
Buyer's earnest money deposit shall be fully
refunded, together with such interest as may accrue
in escrow, and this Agreement shall be deemed
terminated. Should the existence of Hazardous
Materials be identified after the Close of Escrow,
Seller and Buyer shall retain any and all statutory
rights to remedy said conditions and seek whatever
affirmative relief and/or cost recovery as may be
allowed by law, regulation, ordinance or rule against
each other or against any other third party.
Seller and Buyer shall cooperate with each other in
obtaining a Phase I assessment and investigation of
the environmental condition of the Property during
the Due Diligence Period using a mutually agreeable
environmental consultant, and in obtaining any
subsequent Phase II testing or investigations that
may be recommended by the environmental consultant.
The reasonable and necessary costs of the Phase I
inspection, and any Phase II investigations that may
be conducted, shall be divided equally between Buyer
and Seller.
(B) Tenant Leases; Other Documents.
---------------------------------
Seller represents that it shall provide Buyer with a
true and complete copy of each tenant Lease. There
are no leases, subleases, occupancies or tenancies in
effect pertaining to any portion of the Property, and
no persons, tenants or entities occupy space in the
Property, except as provided in the Leases. No
brokerage commission or similar fee is due from or
12
<PAGE>
unpaid by Seller with respect to any Lease, and there
are no written or oral agreements that will obligate
Buyer, as Seller's assignee, to pay any such
commission or fee under any Lease or extension,
expansion or renewal thereof. The Leases and any
guaranties thereof are in full force and effect
(subject to the effects of insolvency or bankruptcy
laws) and are subject to no defenses, setoffs or
counterclaims for the benefit of the tenants
thereunder. To Seller's best knowledge, no tenant is
in default under any Lease, nor has Seller received
any notice from any tenant of any default by the
landlord under its Lease or of any tenant's intent to
vacate its leased premises in advance of the
scheduled term of its Lease, nor is there any fact or
condition which with notice, the passage of time, or
both, would ripen into a material default under any
of the Leases. No rents or other payments have been
collected in advance for more than one (1) month and
no rents or other deposits are held by Seller, except
the security deposits described on the rent roll and
prepaid rent for the current month. All Leases and
other documents delivered to Buyer by or on behalf of
Seller: (a) are believed to be true, correct and
complete copies of what they purport to be; (b) are
in full force and effect; (c) have not been modified,
except as set forth therein; and (d) are not believed
to omit any material information required to make the
submission thereof accurate and complete in all
material respects.
(C) Seller's Authority; Regulatory Approvals.
----------------------------------------
Seller represents that the individuals
executing this Agreement, the Seller
Leaseback and other documents relating to the
transactions contemplated by this Agreement on its
behalf have the legal authority to do so; that the
Board of Directors of Seller have authorized this
sale and leaseback; and, that no further corporate
authorization is necessary to cause the transactions
contemplated hereby to be completed. Seller does have
a responsibility to submit the proposed sale to the
Federal Reserve Bank, the Federal Deposit Insurance
Corporation and the Department of Banking of the
State of California for final approval; however,
Seller agrees to do so within fifteen (15) business
days of the opening of Escrow, if necessary, and sees
no reason why the sale will not be approved. Should
the sale not be approved by the regulators of Seller
by the end of the Due Diligence Period, the Seller
shall promptly terminate this Agreement and refund
the Buyer's earnest money deposit, together with such
interest as may accrue in escrow.
(D) Defects; Compliance.
-------------------
Seller is not aware of any material
design, construction, physical or mechanical defects
regarding the Property except as follows: (i)
snow-ice accumulation due to high snowfall levels on
roof sometimes slides into parking lot area and must
13
<PAGE>
be removed and sometimes damages exterior glass; and
(ii) water accumulation in certain elevator shafts (a
condition currently being remediated). To Seller's
knowledge, the Property, and the operation thereof,
are in compliance with all applicable laws,
ordinances, codes, resolutions, rules, regulations,
judgments, orders, covenants, conditions,
restrictions.
(E) Taxes and Assessments.
----------------------
Seller is current on its taxes, assessments and other
special districts regarding the Property or such
items will be paid at the Close of Escrow from funds
due to Seller.
(F) Utilities; Parking; Expansion.
---------------------------------
All utilities are provided within easements set forth
on the parcel map regarding the Property and are
connected to the Property with proper approvals
and/or valid permits. The Property includes all of
the parking spaces required by law with reference to
the Improvements.
(G) Maintenance of Property In Its Current Condition.
------------------------------------------------
Seller agrees to and shall maintain
the Property in its current condition
(reasonable wear and tear excepted) until the Close
of Escrow when possession and risk of loss shall pass
to Buyer; provided, however, that Seller shall
deposit the sum of Sixty Thousand Dollars
($60,000.00) into Escrow; which funds, together with
all interest accruing thereon,
shall be used for the purpose of painting the
exterior of the Buildings and for parking lot
maintenance (the "Maintenance Work"). After the Close
of Escrow, it shall be the Buyer's responsibility to
arrange for completion of the Maintenance Work. Buyer
shall submit invoices for the Maintenance Work to
Escrow and said invoices will be paid therefrom. If
the full $60,000 plus accrued interest is not used
within 9 months from the Close of Escrow, the
remaining funds will be reimbursed to Seller.
Seller's liability as to the Maintenance Work is
expressly limited to $60,000. Any sums expended in
excess of the $60,000 (plus all interest accruing
thereon) shall be the sole responsibility of the
Buyer. Seller shall not, without the specific prior
written consent of Buyer, which consent shall not be
unreasonably withheld, amend, modify, renew, extend,
terminate, declare a default under, exercise any
remedy under or accept the surrender of any Lease,
service contract or other agreement affecting the
Property that would survive the Closing Date, or
enter into any new Lease, service contract or other
agreement affecting the Property that would survive
the Closing Date. Seller shall maintain or cause to
be maintained in full force and effect full
replacement cost casualty insurance, general
liability insurance and such other insurance as is
prudent for the owner of property like the Property.
14
<PAGE>
(H) Litigation, Arbitration or Mediation.
------------------------------------
There is no known litigation, arbitration or
mediation now pending regarding the Property, its
construction or its use. Seller agrees to promptly
inform Buyer in the event that any such process is
initiated or threatened prior to the Close of Escrow.
7. Representations and Warranties of Buyer.
------------------------------------------
Buyer represents and warrants:
(A) Authority.
---------
Buyer represents that the persons
executing and delivering this Agreement, the Seller
Leaseback and other documents relating to the
transactions contemplated by this Agreement on its
behalf have the legal authority to do so and that the
Buyer's governing or managing board has approved the
execution of this Agreement and such other documents.
(B) Ability To Purchase.
--------------------
Subject to finding the Property in
acceptable condition to be purchased
during the Due Diligence Period, as well as other
conditions contained in this Agreement, Buyer has the
current ability and capacity to purchase the Property
from Seller.
8. Changed Circumstances; Indemnity.
--------------------------------
Buyer and Seller agree that each representation and warranty in
Paragraphs 6 and 7, respectively, shall not merge
with the delivery to Buyer of the Grant Deed and shall survive the Close of
Escrow. If either party becomes aware of any fact or circumstance which would
render false or misleading a representation or warranty made by such party, then
it shall immediately give written notice of such fact or circumstance to the
other party. Seller shall indemnify, defend and hold Buyer harmless from and
against any claims, liabilities, damages and costs (including without limitation
reasonable attorneys' fees and costs) accruing prior to the Closing Date that
relate in any way to the Property. Buyer shall indemnify, defend and hold Seller
harmless from and against any claims, liabilities, damages and costs (including
without limitation reasonable attorneys' fees and costs) accruing after the
Closing Date that relate in any way to the Property, except for those claims,
liabilities, damages and costs that relate in any way to the Seller Leaseback or
the premises leased by Seller.
9. Liquidated Damages.
------------------
EXCEPT AS OTHERWISE STATED HEREIN, SHOULD THE SALE CONTEMPLATED BY THIS
AGREEMENT NOT BE CONSUMMATED AFTER THE END OF THE DUE DILIGENCE PERIOD HAS MADE
THIS AGREEMENT FIRM FOR ANY REASON, THIS AGREEMENT SHALL PROMPTLY TERMINATE AND
SELLER AGREES THAT AS ITS SOLE AND ONLY REMEDY AND RECOURSE IN THE EVENT THE
TRANSACTION FAILS TO CLOSE DUE TO A DEFAULT BY BUYER, IT SHALL RETAIN THE
EARNEST MONEY DEPOSIT PLUS ANY INTEREST THEREON IF THE TRANSACTION FAILS TO
CLOSE DUE TO A DEFAULT BY BUYER, NOT AS A PENALTY BUT AS ITS LIQUIDATED DAMAGES
15
<PAGE>
DUE TO THE DIFFICULTY OR IMPRACTICALITY IN DETERMINING ACTUAL DAMAGES IN SUCH
AN EVENT. BY INITIALING IN THE SPACES BELOW, BOTH SELLER AND BUYER AGREE TO THIS
EXCLUSIVE METHOD FOR DETERMINING DAMAGES DUE TO SELLER AND AGREE THAT THIS SUM
(THE EARNEST MONEY DEPOSIT) REPRESENTS A REASONABLE ESTIMATE AS OF THE
EFFECTIVE DATE OF SELLER'S ACTUAL DAMAGES. THIS PROVISION SHALL NOT ACT TO
LIMIT DAMAGES THAT MAY BE DUE PURSUANT TO PARAGRAPH 1(C) OF THIS AGREEMENT
(DEALING WITH DAMAGE CAUSED BY TESTING AND THE INAPPROPRIATE RELEASE OF
NONPUBLIC INFORMATION).
AL DB
______ BUYER ______ SELLER
10. Miscellaneous.
-------------
(A) This Agreement shall be construed according to the laws of
the State of California. Risk of loss shall pass to the Buyer
upon Close of Escrow. This Agreement represents the entire
agreement by and between the parties as of the Effective Date
and may be modified only in writing, signed by all the parties
hereto. Any notices to either party shall be given in writing,
shall be addressed as set forth above or as either party shall
make known to the other in writing, and shall be deemed given
and received: (i) upon receipt, when personally delivered or
delivered by confirmed facsimile transmission with follow-up
hard copy delivered by other means prescribed herein; (ii) one
business day after deposit with FedEx or another reputable
overnight courier or delivery
service; or (iii) Three business days after deposit in the
United States mail, postage prepaid, registered or certified
mail, return receipt requested. This Agreement may be executed
in counterpart.
(B) Buyer and Seller acknowledge that Truckee
River Associates ("TRA") is the Seller's real estate broker
and represents Seller. Buyer acknowledges that it has had
contacts with Scardigli/Arthur and Associates ("SAA"). Seller
agrees to pay TRA a brokerage commission of One Hundred
Thirty-Five Thousand Dollars ($135,000.00) upon the Close of
Escrow and authorizes escrow to pay said sum directly to TRA
from funds obtained at the Close of Escrow. Buyer shall be
solely responsible for any payment that may be due to SAA, if
any. TRA has not independently determined and is not accepting
responsibility for any of the representations made by Seller
in this Agreement, including, but not limited to, any of the
investigations set forth in Paragraph 1, above. Each party
expressly warrants to the other that no other brokers, agents
or finders have been used with regard to this transaction and
agrees to indemnify, defend and hold the other party harmless
from any claims, damages, liabilities and costs, including
legal fees and costs, that arise out of any alleged contacts
or agreements it may have had with any other brokers,
salespersons or finders.
16
<PAGE>
(C) The terms set forth herein shall
include masculine, feminine, plural and neuter terms, where
appropriate. Time is of the essence in this Agreement. This
Agreement is binding on the heirs, assigns, representatives of
each of the parties hereto. This Agreement may not be
assigned, except as set forth in this Agreement. The parties
executing this Agreement covenant that they have the authority
to do so. Each party has had the right and ability to consult
with their own legal and tax advisor and neither party has
relied upon the advice of the other party (or the Broker) with
regard to the legal or tax effect of this Agreement.
(D) ARBITRATION OF DISPUTES.
-------------------------
Should a dispute arise over the
interpretation or enforcement of this Agreement, that dispute
shall be promptly resolved by mandatory, final and binding
arbitration before the American Arbitration Association
("AAA"). The arbitration shall be conducted according to the
commercial dispute resolution rules of the AAA and shall be
heard before a single arbitrator approved by both parties from
the panel lists of the AAA. The arbitration shall be conducted
in Sacramento, California. The arbitrator is empowered to
award such legal and equitable relief he or she may wish to
award as well as legal fees, costs and expenses to the
prevailing party. NOTICE: BY INITIALING IN THE SPACE BELOW YOU
ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS
INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION DECIDED BY
NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT
POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY
TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS
ARE SPECIFICALLY INCLUDED IN THE 'ARBITRATION OF DISPUTES'
PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER
AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE
UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.
YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE
HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT
DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION.
BUYER AJ SELLER DB
---- ----
(E) If any party wishes to participate
in a tax-free exchange as part of this transaction, the other
party shall reasonably cooperate in the effectuation thereof,
subject to the following terms and conditions: (i) the
exchange shall not cause a delay in the Closing; (ii) all
17
<PAGE>
additional costs to any party arising in connection with the
exchange (including attorneys' fees) shall be borne by the
party making the exchange; (iii) no other party shall be
required to take title to any property, or incur any
obligation or liability whatsoever, in connection with the
exchange; and (iv) the exchanging party shall indemnify,
defend and hold the other party harmless from and against any
claims, damages, liabilities or costs, including without
limitation attorneys' fees and costs, arising in connection
with the exchange.
(F) Seller, at any time before or after
Closing, shall, at its own expense, execute, acknowledge and
deliver any further deeds, assignments, conveyances and other
assurances, documents and instruments of transfer reasonably
requested by Buyer and shall take any other action consistent
with the terms of this Agreement that may reasonably be
requested by Buyer for the purpose of transferring and
confirming to Buyer, or reducing to Buyer's possession, any or
all of the Property or otherwise carrying out the terms of
this Agreement.
(G) This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective
successors and assigns. Buyer shall have the right to assign
all or any portion of its interest in this Agreement, or
substitute for itself a nominee, upon notice to Seller not
later than fourteen (14) days prior to the Closing Date.
(H) Nothing in this Agreement, express or implied, is intended to
confer any rights or remedies under or by reason of this
Agreement on any person other than the parties to it and their
respective permitted successors and assigns, nor is anything
in this Agreement intended to relieve or discharge any
obligation of any third person to any party hereto or give any
third person any right of subrogation or action against any
party to this Agreement.
11. Damage, Destruction and Condemnation.
-------------------------------------
Seller shall promptly notify Buyer in writing of any damage to the Property, and
of any taking or threatened taking of all or any portion of the Property. In the
case of a taking or threatened taking, Buyer may elect to terminate this
Agreement by notice to Seller given within thirty (30) days after receipt of
Seller's notice of such taking or threatened taking. In the case of damage to
the Property, within fifteen (15) business days after receipt of such notice,
Buyer shall determine whether a material part of the Property has been damaged.
As used herein the destruction of a "material part" of the Property shall be
deemed to mean an insured or uninsured casualty to the Property having an
estimated cost of repair which in the reasonable judgment of Buyer equals or
exceeds $100,000 or which would permit tenants of the Property occupying 25% or
more of the rentable square feet in the Property to terminate their Leases. Upon
making its determination, Buyer shall notify Seller in writing of the results of
such determination. Buyer may elect, by written notice delivered to Seller
within fifteen (15) business days after giving Seller notice of such
determination, to terminate this Agreement if a material part of the Property
18
<PAGE>
has been damaged. If Buyer does not so terminate: (a) in the case of damage to a
material part of the Property, Seller shall assign to Buyer at the Closing its
entire right to recover under any insurance policies covering such damage and
shall pay Buyer at the Closing the amount of the deductible, if any; and (b) in
the case of a threatened or actual taking, Seller shall assign to Buyer at the
Closing Seller's entire right, title and interest in the proceeds thereof. If
between the Effective Date and the Closing Date the Property suffers damage
which is not material, Seller shall repair such damage at its expense prior to
the Closing. The Closing Date shall be extended as reasonably necessary to
permit Buyer to exercise its rights (or Seller to perform its duties) under this
Paragraph 11.
IN WITNESS WHEREOF, we have executed this Agreement on the date set forth
above. SIERRAWEST BANK a California Banking Corporation, (the "Seller")
By: /s/ David Broadley
_________________________________
David Broadley
Its: Executive Vice President/Chief Financial Officer
CP MANAGEMENT, LLC,
a California Limited Liability Company, (the "Buyer")
By: /s/ A. L. Lorenzini, Jr.
________________________________________
Arthur L. Lorenzini, Jr., Managing Member
Accepted and Agreed as to Commissions Only:
TRUCKEE RIVER ASSOCIATES, INC. ("TRA")
By: /s/ Thomas Watson
______________________________
Thomas Watson
Its: Managing Partner
Dated: September 4, 1998
19
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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0
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